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Gold has long been a disaster hedge. In 2009, during the height of the global financial crisis, the price of gold rose 24% on the year as credit markets seized up and investors sought safe-haven assets to shore up their losses. In January, following the U.S. killing of a top Iranian military commander, the price of gold surged to a 6-year high as investors feared a disastrous armed conflict between Tehran and Washington.
Buying physical gold bullion isn’t the only way to gain exposure to the yellow metal. Gold stocks and exchange-traded funds (ETFs) are intrinsically tethered to the price of physical gold but have the benefit of greater liquidity, divisibility, and can lead to investment income. Gold stocks are shares of companies with a stake in gold mines, gold-selling, or gold mining operations. Gold ETFs are a diversified basket of all three.
Months into the Covid-19 pandemic, is it wise to invest in gold or a tax-advantaged gold IRA? Let’s take a look.
Gold: The Top Performing Asset during Covid-19?
In August, the price of gold broke through critical resistance points to reach an all-time high of $2,074.88 per troy ounce.
There are several contributing factors behind gold’s recent surge. Rising U.S.-Chinese tensions and the delayed review of the Phase One trade deal between the two nations has caused uncertainty and distrust in the long-term viability of U.S. supply chains. More than that, a decline in federal interest rates and a depreciation of the U.S. dollar have driven investors to reliable stores of value such as gold.
Above all, the economic uncertainty surrounding the Covid-19 pandemic and the possibility of future business closures and lockdowns has sparked panic among investors. During the initial phase of lockdowns in March 2020, the Dow Jones plunged 26%. While panicked investors bailed out of equities, they turned to cash, with over $136 billion in major assets liquidated during a one-week span in March.
If there are more waves of lockdowns ahead, we likely won’t see investors dashing to cash. Instead, it’s more likely that we’ll see a gold rush. At the time of writing, gold, as indexed by the SPDR Gold Trust (GLD) is up 27.74% on the year. Gold bullion opened the year at $1,520.55 and recently reached a high of $2,074—a 28% rally.
Meanwhile, analysts predict a fall in the value of the U.S. dollar in the latter half of 2020 driven by aggressive monetary easing policies. Mathieu Savary, a strategist from BCA research, predicts the dollar to trade for the euro at $1.15 by year-end compared to the present value of $1.08. Other analysts are even more bearish, with Thomas Flury of UBS Wealth Management predicting that the dollar will trade against the British sterling at $1.40, up from $1.24 presently.
Major financial players are taking long positions on gold and gold stocks. Bridgewater Associates, Ray Dalio’s hedge fund, recently invested $400 million in diversified gold stocks and gold ETFs. Warren Buffet’s fund, Berkshire Hathaway, recently increased their holdings in one of the world’s top gold miners, Barrick Gold Corp.
Of course, these purchases say nothing about the funds’ view toward gold or gold stocks as assets. They do, however, shed light on gold’s utility as a diversifier in one’s portfolio and the potential upside of gold in the weeks and months ahead.
I cannot speculate on the probability of a future public health crisis and subsequent economic shutdown. However, investing in gold stocks and bullion will likely help shield your portfolio in the event of a worsening national public health situation.
The Bottom Line
There’s no denying the precarious irrationality of the stock market. For instance, Tesla, Inc. (TSLA) is currently trading at over 12 times its price-savings ratio. A record-breaking 78% of fund managers think that the U.S. equities market is inflated and due for a sharp correction.
Trust in the U.S. dollar as a reserve currency is beginning to dwindle, and the stability of the global financial system is at its lowest point in years. Long seen as the king of currencies, the U.S. dollar may take a big hit in the months ahead due to recovery policies from both the Federal Reserve and D.C.
With few reliable options to turn to, gold bullion and gold stock prices are primed to surge in the event of another round of nationwide lockdowns due to a second or third wave of the Covid-19 virus. As investor confidence in the dollar decreases, we’re more likely to see money managers safeguard their wealth in gold bullion and gold stocks.
For centuries, gold has hedged against disaster and provided resilience to negative economic events. Gold thrives during uncertain times. To optimize one’s portfolio, one would do well to buy gold stocks or IRA-approved gold bullion. These assets may be among the few positive performers if subsequent waves of the Covid-19 virus force lockdowns, stay-at-homes orders, or the closure of businesses.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.