Thanks to a volatile first quarter, the yellow metal seems to be winning back some fans. After a disastrous 2013, the gold ETF (GLD) is enjoying a high single-digit gain this year. But the case for gold is far from certain.
Most gold bugs foresee a scenario where the economy is far weaker than the consensus viewpoint. As a result, a dovish Fed will be forced to keep rates as low as possible to avoid a double-dip recession. In this scenario, gold will become a store of value, winning back investors with its role as the ultimate non-fiat portfolio holding.
I’ve written about gold several times, and it certainly makes sense that the precious metal can gain ground if rates head lower. But so will Treasuries. In fact, long-dated bonds (TLT) has kept up with gold during most of the bull market periods for the metal, and with the added benefit of providing income. If interest rates are really going lower, doesn’t it make sense to simply buy some fixed income?
How likely is it that rates are heading lower? Putting aside idiosyncratic political uncertainties, I’d say it is unlikely that the cost of money will be cheaper a year from now. And since lower rates is the only likely bullish scenario for the yellow metal, it’s time to find other alternatives.