Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money

67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

  • Columnists

Mish Schneider The most unpopular long position in the world!

Pretty much everyone I read or talk to about gold thinks it is crazy to be bullish the yellow metal.

And they cite reasons.

  1. People buy gold as a hedge against scary things.
  2. Gold has no intrinsic value.
  3. Interest rates are going up.
  4. There will be deflation not inflation.
  5. Millennials aren’t catching gold fever.

Let us pick apart these arguments against gold.

1. A hedge against scary things – Lots of scary things are going on at the moment, depending on where you look. True, COVID-19 is receding from our minds as some economies begin to stage recoveries. Yet, recently, North Korea fired off a couple of missiles. China, America's strongest competitor, is increasingly mistrusted by most G20 countries. US efforts to enlist allies, vaccine diplomacy, and climate tech competition will further complicate US-China relations.

The forthcoming departure of Angela Merkel, one of Europe's most important leaders, drives the continent's top risk. In the US, many still lack confidence in the integrity of the last election and Biden remains unproven.

Yet another scary thing is that low oil prices keep pressure on the Middle East, especially Iran which gets 90% of its revenue from oil. Gold still serves as safe haven in case any of these issues become bigger.

 

2. Gold has no intrinsic value – while it is true that you can’t eat gold (aside from flakes) and there are limited industrial uses, gold as currency and store of value has a long history and isn’t going away anytime soon. Gold has also been a good investment, even in recent times. Had you bought gold anywhere between 2015 and 2019, gold has held its value, trading 60% higher to date.

 

3. Interest rates are going up — Governments and central banks around the world have borrowed huge amounts of money to revive the economy. No one really knows how we get out of this. Crushing debt loads and rising interest payments could lead to political instability and chaos, which could see gold’s value increase. Interest rates remain historically low. Inflation is a real concern as demand surges post-COVID-19 while supply is limited. The Central Banks remain accommodative and even with the slight rise in short-term yields, the rates sit near 40-year lows. 40 years ago, gold woke up big time!

 

4. Deflationists beware. For the record, I am of the mindset we are not heading towards deflation or simple inflation, rather I see stagflation. Inflation, after dropping to near-zero in the first half of 2020, moved back up to 1.5% by December. If we assume that both profits and wages will improve by 5-10% in 2021 and Fed injections continue to rise, then yes, US inflation of goods and services will rise. But it’s only projected to move to around 3% by the end of 2021.

What can the Banks do to sustain a strong pace of growth in GDP? Infrastructure? The political climate in the US won’t lend itself well to massive bi-partisan spending projects and the Democrats only have razor thin majorities. The $3trn spending and infrastructure package likely has little chance of passing in its current form. However, demand/supply of raw materials is skewed in favour of inflation. Put low supply and a stagnating economy together and you have the 1970’s all over again. Good for gold.

 

5. As for millennials, they prefer bitcoin as their alternative asset to hedge against pretty much everything. Yet the Gen Z’ers like to find instruments that are heavily shorted and undervalued. My guess is that if gold catches fire, every generation will jump on board.

Here is where we buck the doomsayers. We believe gold has found a bottom at around $1700 an ounce. We believe that, with bonds no longer safe, equities highly volatile and an economy that could roar back to pre-COVID-19 levels but may stagnate and have trouble beyond there, it could be a good time for gold. We also believe that the money supply, accommodative Central Bank policy and increasing debt along with raw material shortages will create inflation. Also good for gold.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

  • Includes free newsletter updates, unsubscribe anytime. Privacy policy

MarketGauge

Free ebook

Tricks of the trade: 7 interviews with the world’s top traders

Get it now

Related articles