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Can the Rally in Gold Continue?

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Gold has joined U.S. Treasuries as a favored safe haven asset as the U.S.-China trade war intensifies, fears of a global recession grow and a no-deal Brexit threatens. Whether its rally will continue will likely depend those factors and the direction of global interest rates.

Gold futures ended Friday near a six-year high at $1,508 per ounce, capping a 3.5% gain for the week, the biggest weekly gain since June, even though it has inched lower for the day.

“Gold seems to be that place to go,” said John LaForge, head of real asset strategy for Wells Fargo Investment Institute. “There are very few safe haven assets” and “the main driver now is the negative yields of bonds.”

LaForge explained that the “long-term knock on gold” has been the cost to hold or store it but negative yields in European and Japan and low yields in the U.S. eliminates or reduces that cost. 

Gold is often considered a hedge against rising inflation but lately it has rallied in an environment where inflation is low or deflation dominates.

“Gold is the chameleon of the asset world,” said LaForge.

He doesn’t expect gold will gain much more from here without a recession and currently favors silver and palladium over gold because they haven’t rallied as much. Platinum, which traditionally trades at a premium to gold, is now trading at a 50% discount to gold and silver is trading at close to a 90% discount, well above the historical 50-60% discount.

“As gold gets pricier and pricier, look around for alternatives,” said LaForge.

But Nicholas Colas, co-founder of DataTrek, expects gold will continue to gain in the second half of the year because central banks, which bought a record amount in the second quarter, will continue buying and because of its “theoretical hedge against uncertainty.”

Gold is one way for non-U.S. central banks to maintain dollar exposure (the yellow metal’s global reference price is in U.S. currency) without helping America fund its $1 trillion/year deficit,” Colas wrote in his latest market commentary.

Analysts at Goldman Sachs predict that gold prices could reach $1,600 an ounce over the next six months — a level Citibank analysts target in the next 12 months — and Bank of America Merrill Lynch analysts are looking for $2,000 in two years.

“No one can accurately predict where gold might go from here, but it does look like many investors who are cautious about global growth have been directing money into this area,” wrote  J.J. Kinahan, chief market strategist at TD Ameritrade, in a recent commentary.

Even Russ Koesterich, who prefers Treasuries to gold as a safe haven investment, recommends  “some gold “ in investor portfolios because “its volatility can work in your favor during risk-off periods.” 

He added in a recent market commentary that “the challenge for gold” is not just the direction of interest rates but the direction of the U.S. dollar (gold is priced in dollars). “To the extent the dollar rises on trade frictions, this is likely to undermine its efficacy as a hedge.”

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