There's little denying the fact that it was a brutal week for anyone who owns physical gold bullion or gold mining companies.
Gold has been under pressure for a myriad of reasons including the strong rebound in U.S. markets which has wiped investor fear nearly off the radar, relatively low levels of inflation over an extended period of time, and, more recently, the Cypriot financial crisis that, as part of its deal to secure $13 billion in financing, required Cyprus to sell a portion of its bullion holdings. Simply mentioning the idea of buying gold is probably enough to send most people scurrying the other way at the moment.
Yet, I believe that now could be the perfect time to consider investing in gold – whether it be the physical asset itself or through exchange-traded funds, or ETFs, or directly in individual miners for those who are braver and more willing to take on more risk. Here are five reasons why gold looks like a screaming buy right now.
1. Follow Warren Buffett's advice
Admittedly, famed long-term investor Warren Buffett isn't a fan of gold since it offers the world no "production" so to speak. Buffett would much prefer to own companies, which grow and offer a service or product to consumers, than own an inanimate mineral like gold.
However, Buffett's investing advice to "be fearful when others are greedy, and greedy when others are fearful" perfectly sums up a great reason to buy gold right now. Gold is at levels not seen since 2011 and many brokerage firms, including Goldman Sachs, are jumping aboard the "short gold" train. Buying into a metal that's held its value through the test of time when investor sentiment is at multi-year lows could be just the recipe to finding long-term success, while also avoiding getting caught up in rampant trading and speculation.
I'd also like to mention that gold does have practical uses, especially in electronics and dentistry, so there are tangible measures of demand to base your purchasing assessments off of!
2. Record-low lending rates will spur gold buying
A very accommodative Federal Reserve is the second reason why gold remains a strong buy. The Fed has been more than willing to keep lending rates at historically low levels (0%-0.25%) through 2015 in an effort to ensure that the economy has recovered. The upside, of course, is that low lending rates encourage business and consumer borrowing which helps drive personal consumption.
The downside is that these rates also discourage saving because CDs and most bonds are yielding levels that would technically lose you money in real terms compared to inflation. With another nearly three years of low lending rates forecast, this provides the ample impetus for investors looking for a mixture of price appreciation with capital conservation to look to gold as an investment. Considering that gold has returned an average of 16.4% since 2000 and U.S. inflation has averaged about 3.6% since 1914, you can do the math on why gold could be a big winner compared to a 10-year Treasury bill yielding just over 1.7%.
3. World economies are still weak
Gold is often seen as the ultimate hedge against economic weakness. It held its value while seeing multiple other currencies devalued over the same period. In weak economic times, gold provides a potential safe haven investment when equities won't do the trick and when CDs and bonds aren't outpacing inflation rates.
Given the current state of the global economy, I'd say that gold presents a compelling case to be bought. Europe's ongoing financial crisis that's been headlined by five bailouts (Greece, Ireland, Portugal, Spain, and Cyprus), and numerous austerity packages, is likely to inhibit growth and put even the largest financial institutions under a microscope for years to come. In the U.S., the unemployment rate remains uncharacteristically high and GDP growth in the fourth quarter trickled in at just 0.4% after two upward revisions. Add to this that China's 7.7% GDP growth rate in its most recent quarter is below its 30-year historical average growth rate of 10% and you have a wall of worry that could stimulate long-term gold buying.
4. Retirement savings caps present an opportunity for upper-income earners
In the U.S., upper-income earners pay higher taxes and, as of last year, saw phase-outs in Individual Retirement Account tax deductions based on their adjusted gross income. The newly introduced 2014 budget introduced by President Obama last week may introduce yet another constraint on upper income earners that would cap their IRA and tax-advantaged retirement benefit accounts at an annuity level of $205,000 per year.
Of course there's no guarantee that the President's budget as presented will pass Congress, but it provides additional reasons for wealthier individuals to consider moving some of their assets into gold where no wealth cap or investing restrictions exist, and access to their money is just a click away.
5. Trends are your friend
Finally, two particular trends would signal that gold prices are destined to head even higher.
The first trend is that gold prices themselves have advanced in 12 straight years. While I feign to call an "uptrend" in gold prices on a year-over-year basis as conclusive evidence why gold should head even higher, it has created an expectation among long-term gold investors that gold is a safe haven investment.
Second is the trend that the U.S. is going to infinitely expand the U.S. money supply. The Fed's $85 billion monthly bond purchases has done well to keep lending rates and inflation under control, but a constantly expansive money supply is going to eventually push the inflation rate higher and provide yet another reason for investors to buy into gold, the ultimate inflation hedge.
Where to invest?
Now that you understand why I'm so excited about gold, let me share with you a few of the ways you can buy the yellow metal with varying levels of risk.
The first method is by purchasing an ETF that closely tracks the underlying price of gold. The iShares Gold Trust (NYSEMKT:IAU) and SPDR Gold Shares (NYSEMKT:GLD) are two easy ways of buying into an ETF that holds physical gold without having to go through a physical gold dealer and taking delivery of the product. Also, both ETFs are extremely liquid, which means that you can access your money through your favorite brokerage by buying or selling anytime you need. The downside, of course, is that physical gold offers no dividend yield, so it's all about the price appreciation potential here.
If you're willing to take on a bit more risk in exchange for a dividend, I'd suggest a basket ETF like the Market Vectors Gold Miners ETF (NYSEMKT:GDX) which has 31 different holdings in its portfolio and a net expense ratio of just 0.52% while yielding 1.2%. You'll get good exposure to plenty of North American gold miners as well as plenty of global gold mining leaders.
If you're willing to roll the dice even further, my suggestion would be to look at the two most cost-efficient gold miners: Yamana Gold (NYSE:AUY) and Goldcorp(NYSE:GG). Both Yamana and Goldcorp stood atop my top-performing gold miners leaderboard in the first-quarter thanks to extremely low mining costs associated with byproduct metal sales. Yamana has been particularly strong, turning in remarkable production growth, while Goldcorp offers investors one of the lowest debt-to-equity ratios in the sector thanks to its strong operating cash flow. To add, Yamana and Goldcorp both offer yields of 2% and are valued at just 10 and nine times forward earnings estimates.
Motley Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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