Fisher Investments Editorial Staff
Commodities

Blinded by Shiny Objects?

By, 01/26/2015
Ratings534.14151

Gold and silver are up a wee bit off their November 2014 bear market lows, and here is what some people have to say about it:

There’s a competitive currency devaluation coming. … Gold is your natural hedge against that.”

Gold, traditionally seen as maintaining its value against floating currencies, has prospered with markets on edge as central banks have attempted to deal with deflation in the wake of falling oil prices.”

These gains come at a time when other commodity prices continue to fall. So far in 2015, gold and silver are not commodities; they are once again acting like currencies, hard currencies.”

There is more. This. And this. And this, this and this. All saying gold and silver will be money-making magic because of euroland quantitative easing, global currency swings, inflation (?) and recent past performance. Please do yourself a favor and don’t get sucked in—none of that makes gold or silver smashing investments.

As we’ve written before, gold and silver aren’t inflation hedges, stores of value or imbued with magical properties. They are commodities. Like all commodities, they trade on supply and demand and are subject to sharp, sentiment-driven swings. Both have also been in bear markets since 2011, defying the many who’ve called for near-term rebounds along the way, for all the same reasons we hear about today. Maybe it’s different this time! But maybe not. Those words are dangerous, as a wise man once said.

Exhibit 1: Gold and Silver’s Bouncy Bear Market

Source: FactSet, as of 1/23/2015. Gold and Silver daily London fix prices, 12/31/2009 – 1/22/2015.

Plus, all those factors we are told will buoy gold and silver now were in place while those shiny metals got pounded. Quantitative easing? The Fed, BoE and BoJ all increased their balance sheets between gold and silver’s 2011 peaks and their latest lows. Central banks were buying more assets and adding more bank reserves then than they will looking forward, based on the BoJ’s and ECB’s current plans. Inflation? Higher globally when gold and silver were plunging than it is today. Competitive currency devaluations, more colorfully known as currency wars? Supposedly happening since roughly 2010, at least according to some. If that confluence of factors didn’t trigger a golden age for precious metals in 2012, 2013 or 2014, why would it suddenly start now?

Look, we aren’t forecasting a precious metals swan dive. Commodities markets aren’t our forte, and sentiment plays too big a role. But physical demand fundamentals haven’t much changed since 2011, and mining output has risen each year.[i] For comparison, gold mining output fell during much of gold’s pre-2008 bull market. Those factoids wouldn’t seem to square with a massively bullish forecast, leaving sentiment as the swing factor. Are investors’ emotional whims really concrete enough to stake your portfolio’s future on?

There will be a time when precious metals and all commodities are back in favor—cycles always turn. But it’s important to be bullish for the right reasons, not because of past price movement or mythology. History has repeatedly proven gold is not a reliable hedge against rising prices, currency swings, slow economic growth or recession. Ditto for silver. Yet these are the reasons headlines are hog-wild for gold and silver now. In our view, those reasons simply aren’t good enough to base an investment thesis on.

Beyond that, we think there is just little reason to own gold and silver in a growth-oriented portfolio. To do well over time, you must be an extraordinary market timer—most of gold’s long-term gains came during very brief windows (the late 70s and the 2000s). Stocks rise far more often—over 70% of all calendar years since 1928—and move on more predictable forces. When commodities’ time comes again, Materials and Energy stocks will be a fine way to capitalize, as they have been before. The time isn’t here yet! But keep that little nugget in mind.

 

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[i] Through 2013. 2014 totals aren’t in yet.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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