Uncertainty has long been the default outlook of investors. The present, however, represents both uncertainty and volatility not commonly seen in the markets. COVID-19 cases continue to climb, geopolitical events develop on an hourly basis, and markets are wavering. These factors, which are likely to remain in flux over the next six months, have investors confused. In times like these, it is often useful to examine the most influential characteristics of the present to understand the future.
When it comes to the future of gold in H2 of 2020 investors must consider how competing assets are poised to perform because gold performance is driven, in part, by the relative attractiveness of fixed-income instruments and equities.
For example, consider one of the most popular fixed-income securities, the U.S. Treasury. Today, benchmark 10-year Treasuries offer a slim yield of only 0.621%. At this level, Treasuries are not far from their all-time low of 0.569%. As a result, investors, even those seeking safety, have little reason to seek out this kind of fixed-income solution. Moreover, as Barron’s recently reported, “in real terms, the Treasury inflation-protected securities 10-year yield has fallen to negative 0.81%, a hair from its nadir of negative 0.85% reached on Dec. 5, 2012.”
This under-performance might prompt investors to look elsewhere, like stocks. However, there are emergent problems here as well. While equities appear to be a rare bright spot for investors today a deeper analysis reveals problems. Some have touted the resilience of the S&P 500 which is about flat for the year. This performance, while not remarkable, does seem to indicate the market has held its value despite a crippling pandemic. The problem is that the index’s ability to retain its strength appears dependent on high valuations. At the moment, S&P 500 valuations, as measured by price to earnings ratios, are nearing levels seen during the dot-com bubble. For many investors it is worrying that a flat YTD performance demands such high prices.
The potential price appreciation of gold in H2 of 2020, however, is not entirely reliant on the dimming prospects among equities and fixed-income investments. Gold has proven it can command higher prices based on its own merits. That is, gold outperformed all major assets in the first six months of the year. The NASDAQ, US cash, EAFE stocks, oil, and EM stocks all under-performed in comparison to a 16.8% gain in US-dollar terms in the value of gold during H1 of 2020.
As the future unfolds gold continues to be an attractive investment for several reasons. First, the problems plaguing fixed-income and equities are unlikely to abate in the next six months. They are systemic. Second, positive price momentum seen in the first half of the year appears supportive of continued growth. Third, the pervasive sense of heightened uncertainty as seen by a volatility index that is running approximately double what it was pre-pandemic, indicates that other investors will support gold’s upward trajectory as more flock to the safe haven investment.