Before getting into the meat of this post covering the last ten years of ‘Flights to Safety’ and gold as a flight-to-safety asset, I need to take back all the nice things I said about Barron’s last week because they went back to the dark side this week (“The Dow Celebrates Five Weeks of Futility” and “The Trade War Takes an Ominous New Turn”). It is obvious to me that Randall Forsyth’s title “Trade War Takes an Ominous New Turn” is specifically designed to get your attention in a negative way (OMINOUS … if it bleeds, it leads). It insinuates that the possibility of an economic slowdown, maybe even a recession, is being enhanced without a mention of the fact that recessions are normal and could be expected after the prolonged recovery we’ve seen in the past ten years.
- “Whatever the factors at work, the U.S. economy is slowing. The Atlanta Federal Reserve Bank’s GDPNow model estimates the economy is growing at a 1.3% annual rate in the current quarter, down from the 3.2% initial estimate for the first quarter, which was flattered by an array of idiosyncratic factors. The Weekly Leading Index of the Economic Cycle Research Institute has also effectively slowed to a stall.”
BTW, this type of article has been a hallmark of Forsyth’s commentary for as long as I have been posting (6+ years) … (“What planet does Randall Forsyth come from?” February 3, 2014 ).
Then there was Ben Levisohn’s contribution on the Dow celebrating 5 weeks of futility where he points to more ominous signs of a weakening economy … “the price of copper–seen as a proxy for manufacturing activity–has slumped 8.9% during the past four weeks, its worst drop since July 2018.” Also cited was the 7.7% drop in the price of crude oil last week. In my opinion this continues to be more a sign of oversupply in the case of both commodities than weakening demand (a harbinger of weaker economic times).
“And then there’s the U.S. Treasury market. Despite the talk of China dumping its holdings of U.S. government debt, investors were scooping up Treasuries as if they couldn’t get enough—another sign of a potential slowdown. Prices jumped, while yields on 10-year notes finished the week at 2.327%, barely off their lowest level since 2017. As if that weren’t bad enough, 10-year yields finished the week below three-month yields, creating yet another yield-curve inversion.” (Ben Levisohn) My take on this is that the run to the ten-year Treasury had much less to do with presaging a recession and more to do, again, with fear and a flight to safety.
Flights to safety have been a feature of this secular bull market
This is a very good indication that the ‘wall of worry’ remains intact, and that extreme negativity about stocks rules the day. Negative sentiment is a resounding positive for the long-term health of our market. May I remind you of all the iterations of fear that spiked bond prices emanating from fear of the Eurozone imploding as a result of Brexit or the economic travails of the PIGS (Portugal, Italy, Greece and Spain). When the PIGS squealed our equity markets would routinely take a header while scared investors would run to the safety of the 10-year US Treasury. The same thing happened with the taper of Quantitative Easing, the normalization of the Fed funds rate and the withdrawal of QE. Remember past government shutdowns and the sequester … the same thing happened. It happened recently in November of 2018. The ten-year yield peaked at 3.24% on aggressive Fed speak about raising interest rates. It immediately reversed on fears this would cause recession. The subsequent flight to safety brought the yield down to 2.56%. The most recent trade war rhetoric took that yield all the way down to 2.31%, almost a full point below the November 2018 high. For those worried about the most recent yield inversion as a signal of bad things to come I would suggest it is much more about fear and an emotional flight to safety.
Gold is considered a flight-to-safety asset
It also has been considered and hyped by some as a good safe haven asset that should be a part of every portfolio. As a flight-to-safety asset, investors still buy it. Gold jumped about 1% on the news of renewed trade hostilities between the US and China. As to its value as a good safe haven asset that should be held in long-term portfolios, I strongly disagree. I also would say those media outlets that run advertising soliciting their viewers and listeners to buy gold for its strong investment characteristics are doing a grave disservice.
A little history might be might be helpful in making my case. During my career gold hit its first peak in 1980 at $843 per ounce (it had been pegged at $35 per ounce until 1970) with the next peak coming in 2011 at $1896 per ounce, up 224% in 31 years. During that same period the S&P 500 went from 140 to 1364, up 974%. Today gold is $1284 per ounce and the S&P 500 stands at 2826 … gold up 152% from 1980, the S&P up 2019% (over a 39 year period). Gold has not been a good deal recently nor has it been a good deal over the very long term. At the very best gold has been a trade for very sophisticated investors.
The Wharton School’s Professor Jeremy Siegel did a study on gold prices from the earliest days of our republic (1802 to 2012). A dollar invested in gold from 1802 through 2012 would have been worth $4.52 (adjusted for inflation) in 2012. The same dollar invested in stocks would have been worth $704,999.00.
So, despite the siren calls of what appear to be totally uninformed or willfully misrepresenting segments of the of media (talking heads or pundits) gold is a trade at best. It definitely does not glitter as a long-term investment vehicle. The Bard of Stratford-upon-Avon had it right.
What’s your take?
P.S. I am not certain why the SEC, CFTC and SIFMA do not clamp regulations on what appears to be very misleading advertising on the part of those in the gold-as-an-intvestment trade. It is definitely needed.
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.