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3 Reasons Why the Price of Gold is Going Higher
Submitted by Justin Hayek on August 6th, 2019Gold is testing multi-year highs after making an incredible move in the last year, up nearly US $300 / oz (~25%).
Though this move caught many off guard and you may feel as though you've 'missed the boat' on a good trade, I believe gold has more potential upside. Here are 3 reasons why I believe the price of gold is going higher:
1. The US dollar is going lower
A lower US dollar bods well for gold. Quite simply, over the long term gold and the USD move inverse to one another. The chart below implies a strong historical relationship. Agreeing then that this inverse relationship holds true. Why might the USD go lower?
Gold Vs Trade Weighted USD Index
source: Board of Governors of the Federal Reserve System (US), Trade Weighted U.S. Dollar Index: Broad, Goods [DTWEXB], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTWEXB, August 7, 2019
...because the US Central Bank is lowering interest rates.
There are many factors which influence foreign currency, see graphic below. However a key driver in exchange rates and what's changed recently, and benefited gold, is a pivot in the US Central Bank's intentional path of raising rates to potentially lowering rates. Lower US interest rates, relative to other countries', makes it less attractive for investors to buy/hold US dollars. Which leads to sellers of US dollars and therefore lower USD relative to other currencies.
Influence of Interest Rates on Exchange Rates
source: https://www.visualcapitalist.com/6-factors-that-influence-exchange-rates/
Recent example of the historical relationship between lower US interest rates and lower US dollars was a notable uptick in the price of gold starting in late May-early June when the US Central Bank began talking down the need for more rate increases. See excerpt below from the US Federal Reserve's minutes of committee meeting from June 2019:
"...market participants reportedly viewed communications by Federal Reserve officials as signaling a greater likelihood of a cut in the target range for the federal funds rate later in the year. The expected path of the federal funds rate embedded in futures prices shifted down significantly over the period."
The fundamentals are looking favourable for lower USD and higher gold prices but what has put the spotlight back onto gold and made investors aware is...
2. Influencers are making generalists aware of need for gold as an investment
Sometimes it takes a little while for the general market to catch on to something. What helps speed up the process of awareness is an influencer. Namely, someone who the market follows closely, is highly regarded and successful. Someone perhaps like a manager for the world's largest hedge fund. That person is Ray Dalio of Bridgewater Associates ($150 billion of assets under management).
On 17 July 2019, Ray Dalio penned an article on LinkedIn (full article here) outlining his investment thesis on why investors should consider exposure to gold in their portfolios. The article had a noticeable impact on both the price of gold and gold stocks. Easy to spot when Dalio's article went live.
source: kitco.com
Though what Dalio outlined in his article may not have been surprising or new to most proponents of gold, it did resonate with generalist investors who have no or little exposure to the yellow metal. What Dalio's article did do was generate awareness or at least hypothesis on the need for gold as an investment.
3. Gold is cheap relative to the stock market
US equities are expensive relative to gold. Since coming off the gold standard in 1933, the ratio of the S&P 500 index relative to the price of gold, has only ever been higher once in history (1995-2005). The ratio is high compared to the historic average
S&P 500 Index / Gold Ratio
source: https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart
And though one could (try to) argue that the ratio could in fact go higher and gold become cheaper, based on the two previous points mentioned the likelyhood of this happening seems low.
The three reasons above all point to why I believe gold should be headed higher in the medium to long term. I and clients have invested in and adding exposure to gold and other precious metals equities. Should the thesis above play out as expected, we hope to be significant benefactors on the price of gold and other precious metals moving higher.
If you want to connect or for more information on my investment advisor service and how I can help you investing in the precious metals sector, visit my website: https://www.justinhayek.ca/investment-advisory-service