Gold exchange traded products, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU), have recently been struggling. On the bright side, the yellow metal’s recent slide may have brought about more attractive valuations.
Given the heightened uncertainty and potential for further risks ahead, investors may look to alternative assets, like gold, to help smooth out swings in a traditional portfolio of stocks and bonds.
“Although commodities are notoriously difficult to value, there are ways to tease out an approximate range,” said BlackRock. “As it applies to gold, one measure I’ve found useful is the ratio of the price of gold to the U.S. money supply, measured by M2, which includes cash as well as things like money market funds, savings deposits and the like. The logic is that over the long term the price of gold should move with the change in the supply of money.”
Long-Term Case for Gold
The strengthening U.S. economy is translating to a stronger dollar, which is often a problem for gold. Gold, like other commodities, is denominated in dollars, meaning it has an inverse relationship to the U.S. currency. Still, there are compelling long-term catalysts for gold.
“Gold’s value has risen, fallen and risen again, but over a multi-decade period gold and M2 have tended to move together. In other words, changes in gold prices have equaled changes in the money supply, with the ratio tending to revert to one. We can think if this as the long-term equilibrium,” according to BlackRock.
Related: Why Investors Should Be Looking at Gold ETFs
Some gold market observers believe the yellow can firm up and trend higher next year as the dollar retreats. At least one gold bull believes bullion could return to $1,400 for the first time since 2013. The current environment, characterized by economic growth and heightened inflation expectations, provides an ideal backdrop for investors to consider the benefits of real assets.
U.S. inflation is still low by historical levels, but at 2.9% U.S. headline inflation is at its highest level since 2012. This supports the notion that gold looks relatively cheap. Based on this relationship, gold is approximately 10% undervalued,” said BlackRock.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.