“Money is gold, and nothing else” — J.P. Morgan

 

During 1Q 2016 the price of gold advanced from $1,061 to $1,233 per ounce, a run of 16%. Beginning in January, foreign central banks employed even more aggressive monetary policies, with the Bank of Japan following Europe’s lead in implementing negative interest rate policy (NIRP). Meanwhile the European Central Bank (ECB) increased QE and in a surprising twist, announced that European corporate bonds will now be eligible for purchase. We believe that increasingly adventurous global monetary policy is bullish for gold.

Until recently, gold has been extremely out of favor as an investment, losing 42% of its value from the 2011 peak to the recent trough in December 2015.[1]The chart below compares the three year spread on returns of gold and cash[2], which as we know currently yields nothing. This chart dates back 20 years, and as you can see gold recently bounced from an extreme low. Valuations are still attractive, and the metal still has plenty of upside to revert back to the long run historical average. In extreme reversals there is also the possibility of overshooting the mean, as evidenced by periods from 2006 – 2012.

2016.05.12 Gold pic1

Next consider the spread on the NYSE Arca Gold Miners Index to the metal itself, shown in the chart below. Again, the spread is at an all- time wide going back to the inception of the Index in 2004. As you can see, gold mining stocks as a group are trading on par with 2008 lows, even though gold is trading ~$500 an ounce higher.  Add to this backdrop, demand from China, India and other emerging market central banks and NIRP, which effectively eliminates the carry cost to owning gold, and you can see why the thesis is so compelling.

2016.05.12 Gold pic2

At FinTrust our mission is to “Deliver Financial Peace of mind with unequaled confidence and conviction.” It is our job to evaluate holdings and opportunities, while ensuring that portfolios are tailored to meet unique financial planning needs, objectives, constraints and attitudes. Our process seeks to optimize market data, client data and product data to develop a custom implementation plan. Call us at 864-288-2849 for more information.

Sincerely,

Cliff Hodge, CFA

Portfolio Manager

FinTrust Investment Advisors

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[1] Source: Morningstar Direct
[2] The Citigroup 3 month Treasury Bill Index is used as a proxy for cash.
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