In Gold We Trust
    Category: Column By : Rainer Michael Preis Read : 812 Date : Thursday, August 11, 2016 - 08:20:26

    On the back of the U.S. dollar it says “In God We Trust.” For the smart money, however, increasingly it is “in gold we trust.” Gold’s blistering start to 2016 may be just the beginning and bullion may prove to be this year’s best performing asset as central banks embark ever more on unconventional monetary stimulus. Gold year-to-date has outperformed all paper currencies. Gold is a currency with no central bank, so if you simply want to sell paper currencies, the easiest way is to buy gold and gold mining stocks.

    Gold is the ultimate beneficiary when central banks ultimately run out of ammunition and more stimulus and negative interest rates increasingly become counterproductive, as Japan under Abenomics is showing us. Evidence is the yen-gold correlation, which has surged to its highest level since 1978 amid the global scramble for capital preservation haven assets following negative interest rates in Japan and Europe and the U.K. vote to leave the European Union.

    Gold and gold mining stocks worldwide are now the best performing asset class this year. Gold has outperformed the S&P 500 by a wide margin of 26% this year as the S&P 500 has risen 2% year-to-date and gold 28%. In the S&P500 index the best performing stocks among 500 U.S. large cap stocks is Newmont Mining, with a gain of 130% so far this  year. In the U.K. equity market, all top three best performing stocks are gold and mining stocks: Fresnillo is up 183%, Anglo American 143% and Rand Gold Resources 134%. In China, where the Shanghai Composite Index is the fifth worst performing market in the world, falling 18% year-to-date, but the two best performing stocks are Shandong Gold Mining, up 132%, and Zhongjin Gold Corp, up 57%. In Indonesia, gold play Antam has risen 127% and Singapore listed GNMC Goldmine is up 208% so far this year.

    Investors and indeed banks now seem to take notice and recently have upgraded their gold and precious metals forecasts. Many mainstream banks until recently were neutral if not underweight gold but now it seems there is shift in the narrative and target prices are upgraded. A strategic asset allocation of at least 15% to the gold theme make sense if capital preservation in a negative interest rate world is the mandate.

    How high can gold prices go? If the U.S., the Eurozone and Chinese central banks were to agree on a gold standard using M1 as the money supply and a 40% gold backing, the implied gold price would be about $10,000 an ounce. If the same central banks used M2 as money supply with 100% gold backing, the implied price is about $50,000 an ounce. Many investors potentially have too little allocation to gold and gold mining companies. If absolute returns and market price action so far this year are any indication, it seems the smart money is trusting in gold.