Savers beware: U.S. “real” yields are at a new low. And while that’s bad for cash, it’s the recipe for a gold bull market.
The “real” yield is the U.S. 10-Year Bond yield minus inflation. So how much would your money be worth in 10 years invested in a U.S. bond?
Turns out, you’d lose money, -0.6% to be exact.
As Bloomberg’s John Authers wrote:
On their face, negative real yields imply great bearishness about the future of the economy. They also act as a great prop for gold, whose greatest disadvantage as a financial asset is that it pays no income. When safe assets like Treasuries effectively pay a negative return, gold therefore becomes that much more attractive.
I remember receiving a $50 savings bond for winning a poster contest in the fourth grade. Today, by the time I went to cash it in, it would only buy me $49.40 worth of stuff.
That may not seem like a big deal, but it forces large, long-term investors like pension funds and endowments to seek riskier holdings. In the past, they could use long-term bonds to back stock some of their risk. But when the real yield is negative, it forces them to take on even more risk to make up the difference.
That’s why gold looks like a fantastic position today. It stands to benefit as the dollar continues to languish.
The Gold Bull Market Is On
If you look at a simple, two-year chart of gold, you can see it’s in a bull market:
On the back of these historically low yields, the gold price is near a nine-year high. However, what few investors realize is that the gold price actually beat the S&P 500 over the past three years.
And it will do so again in 2020.
If you bought an ounce of gold in June 2017 and an equivalent amount of the S&P 500, you would be up 40% on your gold position and just 27% on your S&P 500 position. Similarly, if you invested in both on Jan. 1, 2020, you are up 15% in gold and down 4% in the S&P 500.
That’s just the metal price, not mining companies.
And in gold, you ignore company risk. You ignore political risk. You ignore most of the stock market noise. That makes it more like insurance than an investment.
That said, some folks would look at the chart and decide that they “missed the move.” They wouldn’t buy because they weren’t in at the very beginning of the gold bull market.
But that’s foolish. This is an uptrend that has legs. The U.S. Federal Reserve plans to hold interest rates near zero through 2022. That means the “real” rate isn’t going to recover for at least two years.
The price of gold will eclipse its 2011 high, possibly by the end of 2020. Imagine how high it could go over the next two years…
So, if you don’t own gold right now, you haven’t missed anything yet.
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