Nothing goes straight up forever…
That’s an important concept for investors to remember with precious metals right now.
From mid-November through mid-February, gold rallied about 12%… rising from around $1,200 per ounce to almost $1,350 per ounce. And silver – gold’s more volatile cousin – climbed roughly 16%… jumping from around $14 per ounce to nearly $16.20 per ounce.
Gold proved its value as a “safe haven” when stocks suffered their worst December since the Great Depression.
And even after that, the precious metal continued to rise… It gained around 5% through the first six and a half weeks of this year.
But then, the impressive rally petered out…
Since peaking on February 20, gold has given back roughly 5% of its value. It trades at around $1,280 per ounce today. Meanwhile, silver is down about 8%.
We’ve been down this road before with precious metals…
Sure, we would have loved if gold had taken off, gone to the moon, and never looked back. But that just doesn’t happen. Nothing goes straight up forever.
Gold will likely see a lot more ups and downs as the next precious metals bull market swings into full gear. But that doesn’t mean it won’t come.
I believe we’ll see a huge rally as investors once again flock to this safe-haven asset… And it could happen relatively soon.
Let me explain…
If you own gold today, you’re probably frustrated. You could be concerned about a bigger pullback. You might even wonder if you should keep holding it.
These worries make sense. For one thing, the Federal Reserve has taken a more “dovish” tone on interest rates. Fed Chairman Jerome Powell and others have signaled that we likely won’t see any rate hikes this year.
These so-called “easy money” policies typically provide tailwinds for precious metals over the long term. But after three years of quantitative tightening – and the market’s volatility at the end of last year – the shift in rhetoric from the Fed boosted investors’ confidence in the near term.
Investors breathed a big sigh of relief and jumped back into stocks. In turn, they shifted their money away from safe havens like gold…
We recently saw four straight months of inflows into gold-backed exchange-traded funds (ETFs). However, according to the World Gold Council – a nonprofit organization that tracks worldwide gold demand – investors pulled $1.3 billion out of these ETFs in February. And as of the end of last month, gold-backed ETFs are sitting at net outflows for this year.
But here’s the thing. If you’re frustrated with the lack of action in gold, think about why we want to own the metal in the first place…
It serves as portfolio insurance for the next economic crisis.
Around the globe, geopolitical turmoil is only getting worse. The European Union is still struggling to stay together amid all the “Brexit” controversy. In France, the violent “Yellow Vest” protests carry on as people push back against suffocating taxes. And the rise of populism remains a hot topic in many countries… It isn’t going to quiet down anytime soon.
Plus, North Korea still looms as a potential nuclear threat. And the crisis in Venezuela seems to be nearing a boiling point, with a regime change likely coming in the near future.
Here in the U.S., the political divide keeps widening as we inch closer to the presidential election in 2020. And just when the stock market finally touched new all-time highs, renewed fears of a trade war between the U.S. and China have cooled down investor appetite for more gains.
Meanwhile, the world continues to spend with no restraint…
The total amount of worldwide debt is approaching a mind-boggling $250 trillion. (That’s $250,000,000,000,000.) That’s more than three times the size of the global economy.
And remember, this debt didn’t build up during a recession. It grew that massive during more than a decade of easy money policies. It’s clear that much of this debt will never be repaid.
Finally, we recently received another signal that the clock is ticking on this bull market…
Last week, for the second time this year, the yield on the benchmark 10-year U.S. Treasury note fell below the yield on the three-month U.S. Treasury bills. Inversion hadn’t happened with this particular yield curve since back in 2006 and 2007… shortly before the Great Recession.
In fact, each of the last six times that this yield has inverted – dating back to 1958 – a recession followed within 18 months. Of course, that doesn’t mean it’ll happen again… But based on history, it likely means we’re in the final stages of this historic bull market.
Soon enough, investors will start to worry in earnest about the long-term health of the economy…
And as we’ve seen, when investors start to get worried, they often turn to safe havens like gold. By owning at least some of your overall portfolio in gold, you can rest easier at night.
So if you’ve been frustrated with gold lately – don’t be. Lower gold prices are giving us a contrarian opportunity today. Breaks in the action like this give us a chance to assemble our portfolio of eventual winners in the gold and silver space at cheaper prices.
Just remember to build your positions slowly. If the prices of gold and silver take off in the coming months, don’t get greedy. Be patient and wait for “down” days to buy. They will come.
And if you’re already holding precious metals stocks, remember to follow two important rules to protect yourself… Pay close attention to your position sizing, and mind your trailing stops.
Good investing,
Bill Shaw
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Source: Daily Wealth