Gold Is Safer Than The Stock Market And Treasury Bonds Right Now
My perspective on the direction of the broader stock markets for the rest of 2019 and 2020 can be summed up as "volatile and unpredictable", a short-term trader's market.
The potential news catalysts for the stock market are equally volatile and unpredictable, from Fed rate cut decisions to the twists and turns in the US-China trade dispute.
For my money, gold is not only a better but also a safer investment than the stock market right now, looking out over at least a 12-month or 24-month perspective.
Right now, gold is a rare kind of asset which can gain in value whether the economy does well or poorly, whether the news is good or bad, whether financial markets go up or down.
As for gold vs. Treasury bonds, think about their value in terms of the true underlying assets involved: owning actual gold vs. holding actual Treasury bonds to maturity.
The past 9 months in the broader stock market (SPY) (QQQ) have been volatile above anything else: A sharp downturn in the fall and winter of 2018, followed by a sharp recovery in early 2019. A brief sharp downturn in May, then a (brief?) sharp recovery in June.
This is a short-term trader's market, not a long-term investor's market. Most of the big market moves are driven by algos and leveraged short-term traders who hold their positions for only about a week or so. It is an "efficient" market for them, but not for the rest of us.
My perspective on the direction of the broader stock markets for the rest of 2019 and 2020 can be summed up as "volatile and unpredictable". There will be sharp down moves and there will be sharp up moves. I have seen very well-respected market analysts also predict both of these things, but in opposite orders:
Steve Sjuggerud of Stansberry Research still expects a huge "Melt Up" stock market rally, followed by a "Melt Down" crash. (See my article last fall disputing his "Melt Up" thesis.) Seeking Alpha's astute sentiment and chart analyst Avi Gilburt rather expects a significant downward move first, followed by a huge stock market rally after that. (As always, Gilburt's analysis is probabilistic, and you need to read the article to grasp the nuances.)
I rather agree with Avi Gilburt in this situation, but depending on the extent and duration of the market moves, both gentlemen may well claim to be correct based on the same facts and market movements: Let's say the S&P 500 declines to 2,200, then rallies to 3,500, then crashes steeply downward again from there. Gilburt will rightly point to the first decline and following rally as a confirmation and validation of his "down then up" market perspective. But Sjuggerud could dismiss the first decline as a "temporary correction", just like the one we had at the end of 2018, and point only to the following rally and crash as a confirmation and validation of his "up then down" market perspective. It all depends on what you define as a significant move and what you dismiss as insignificant noise to be ignored.
The potential news catalysts for the stock market are equally volatile and unpredictable. It is truly shocking how the Fed shifted within a few months from two years of raising interest rates to expectations of cutting interest rates multiple times. As I write, we are all awaiting the Fed's June rate decision, statement, and press conference. Fed rate cuts are now fully expected by the market in July, September, and possibly more beyond that.
At the same time, the trade dispute between the US and China continues to go back and forth in the news. Right now, all eyes are on the G-20 summit, and whether or not Trump and Xi will make a trade deal there. It is most likely that this one meeting will not be the last word, nor the last zig or zag in this long-running trade dispute. Each zig and each zag could come at any time and could move stock markets in either direction. Like I said, it's a trader's market, not an investor's market.
Gold Is Safer Than The Stock Market Right Now
For my money, gold is not only a better but also a safer investment than the stock market right now, looking out over at least a 12-month or 24-month perspective, and probably beyond that as well.
Most importantly, gold (GLD) (PHYS) (GDX) (GDXJ) has two distinctly different potential bullish catalysts, two different ways to outperform and make big gains in the months ahead:
1) Fed rate cuts, by lowering nominal interest rates, also drive down real interest rates as well: interest rates minus inflation. When rates go down, inflation doesn't have to soar for this to happen, it just has to hold up better than rates do.
Importantly, this catalyst can boost the gold price no matter which direction the stock market goes. Gold often rallies together with stocks in such a market environment.
2) Gold's value as a safe haven asset will attract a bid if and when negative economic and financial news and stock market declines scare and shake investor's confidence and send them rushing to safety.
This dual two-pronged potential makes gold extremely valuable in periods such as the one we are heading into right now. It is very nice to have an asset like gold right now which can gain in value whether the economy does well or poorly, whether news is good or bad, whether financial markets go up or down.
Gold vs. Treasury Bonds
It is natural to wonder about Treasury bonds (IEF) (TLT) in a financial environment such as the one we are in right now. Of course, bonds have performed very, very well as Fed interest rate expectations have been completely turned on their head from last fall to right now, and interest rates have fallen as a result.
But the question today is, what will bonds do next?
I am not bearish on Treasury bonds, not at all. The short-term and perhaps even medium-term perspective for bond prices is likely to continue higher, as Fed and global central bank rate cuts and monetary policy easing drive interest rates lower.
But it is also fair to ask, just how low can interest rates possibly go? The Fed can keep cutting US interest rates, yes. But much of those cuts have been baked into the price of Treasury bonds already by now. And looking at Europe, interest rates on government bonds have once again fallen back down to almost absurd negative yields, even on bonds with durations as long as 10 years, not just in Switzerland and Germany now, but even in France, Sweden, and other places as well.
(By the way, the last time we had such an extreme negative yield situation in Europe was early 2016 - and that was also right before the massive gold rally that year.)
The point is, right now, bond yields are at a relatively low point, which means bond prices are at a relatively high point. This raises the risk of a corrective move downward in bonds (with yields bouncing back up), and it also limits the potential upside in bonds since so much of the gains have already been baked into current bond prices by now.
I also find it very helpful and revealing to think about the value of gold vs. Treasury bonds in terms of the true underlying assets involved, rather than simply as trading vehicles on exchanges with prices that go up and down.
That is, consider the underlying value of the actual gold itself, as well as the underlying value of actual Treasury bonds themselves - not trading them, but owning the bonds and holding them for their entire duration to maturity.
Put it this way: Imagine that after you bought gold or bonds today, you were for some reason unable to trade them for a prolonged period of time. (Who knows when, how, or why this could happen, but you never know if it could happen.) If you came back in the year 2030, which would you rather have: an ounce of gold that you bought for about $1,350 today or your $1,350 cash principal back, plus 10 years of about 2% interest payments on your 10-year bond? Which do you think will be more valuable in the year 2030, an ounce of gold or about $1,650 cash?
I will take the ounce of gold in 2030 over $1,650 cash in 2030. If you agree, that means the underlying value of the gold is greater than the underlying value of the Treasury bond.
Sure, you could make money on Treasury bonds in a different way, by buying and selling and trading them over much shorter time periods, a few months or a year or two. But they are just "trading sardines" like this. Their actual value is more accurately calculated as interest payments over the duration period of the bond, plus the principal returned to you at the time of maturity.
As you can see, the true value of Treasury bonds depends upon inflation, and a medium-term or long-term Treasury bond is only a truly good value if you believe that the rate of inflation will remain very low from now until the year 2030 or 2040 or 2050. I do not believe inflation will remain low for such an extended period of time, so I cannot see the inherent value of these bonds as being so very great.
For my money, I will take gold right now as both a better and a safer investment over either the stock market or Treasury bonds.
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Disclosure: I am/we are long PHYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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