Has Gold Lost Its Mojo?

This week, the mailbag included questions on the gold price, the state of the market, and new sanctions on Russia.

Here are a few:

Q: Should gold investors be worried about the recent drop in price? – Sally R.

No. The price drop has more to do with some profit-taking by investors, which is normal with such a surge in gold in recent months. Also, there was caution in advance of the latest CPI report on inflation that could impact gold prices if a reading came in higher than expected. That didn’t happen. The CPI report showed a 3.0% rate that was lower than expected. This is good news for gold investors. It shows the Fed will continue its rate cutting cycle next week and for the December meeting. These rate cuts will support higher gold prices. Nothing has changed in my analysis of why gold prices have surged. Central bank buying continues, output is flat, and geopolitical risks are still present. Importantly, think of gold as an “everything hedge”. The vectors of uncertainty are everywhere. These include tariffs, tax policy, the War in Ukraine, the rise of China, a likely recession, even left-wing violence. It’s difficult to forecast how any one of these situations will turn out, let alone all of them and their complex interactions. Stocks and bonds can be volatile as a result. Gold is the one safe haven asset that powers through them all and offers investors some peace of mind. I expect the bull market in gold to continue to new highs.

Q: I’m worried about my investment portfolio as markets have looked shaky lately. Could we be looking at a correction soon in stocks as you have warned? Jim T.

A: We are most definitely in a bubble. That part is easy to see. The difficult part is predicting when that bubble will burst. One factor to keep an eye on is bank lending. How much are banks lending out? If banks don’t want to lend and creditworthy clients don’t want to borrow, then the economy falls into a deflationary spiral or depression. In these conditions, today’s stock market could fall to an extent we haven’t seen since 2000 (down 80%) or 1929 (down 83%). Stock market crashes can be far more damaging to investors than even recessions because they are almost impossible to predict and huge losses happen quickly. The solution is real diversification and a kind of all-weather portfolio. That means gold, silver, cash, private equity and real estate along with your stocks and high-quality bonds. React quickly when trouble starts and move away from the worst affected assets. Don’t tell yourself the market is wrong. The market is never right or wrong. It just is what it is. Some assets in that model portfolio may be hurt in a panic, but others will perform brilliantly. Most importantly, you’ll live to fight another day.

Q: Will President Trump’s new sanctions on Russia’s two biggest oil producers make a difference for negotiations in the Ukraine War? – Nigel S.

A: No. Sanctions won’t work. The Europeans have had 18 rounds of economic sanctions and none of them have worked. The sanctions put on by the U.S. haven’t worked either. Russia got through the entire Cold War with almost no commerce with the United States. The fact is, Russia has not missed a shipment of oil. All the oil that Europe doesn’t want to buy, they’re shipping to China and India. India’s running refineries. They’re buying Russian oil. China is selling refined product. China needs all the energy they can get. Trump’s foreign policy has been a disaster. Russia should be a natural ally of the West to line up against China. Instead, by fighting Russia, we’re driven Russia and China closer together. Everything about this is counterproductive and will fail. Sanctions only work if you have a small to mid-sized power with a low reserve position, meaning hard currency, and no friends. So that could be Iran. Iran is about the biggest country where they actually did work. But when you’re Russia, nobody else is joining in the sanctions. Brazil, China, India, Malaysia, and many other countries, none of these countries have joined the sanctions. Russia’s not isolated. They might be isolated from France and Germany, and the U.S. to some extent, but not the rest of the world. And they have huge reserve positions. They were very smart. They put over 25% of the reserves in physical gold bullion, which you cannot seize or freeze. These reserve positions are being bolstered by the higher price of gold, and they have a ton of trading partners. So, this will all fail, and why anyone in the White House think otherwise is a mystery to me.