Why MarketWatch’s “Seven Reasons To Sell Gold Now” Aren’t Good Reasons At All

October 2, 2017

Last week, MarketWatch ran an article written by InvestorPlace editor Jeff Reeves and titled, “Seven Reasons to Sell Gold Now.”

It offered the usual cookie-cutter reasons that gold supposedly is not a good investment right now: lack of inflation, tighter monetary policy in the US, and a “risk-on” market environment, just to mention a few.

All in all, I think the article missed the mark, so here’s a rebuttal for each argument.

1. Charts look positive

Reeves claims in his article that the gold price charts “look ugly.” His reasoning is that “the charts show a breakdown as gold has been stuck in a near-constant decline for the past two weeks after peaking at $1,350 or so in early September.”

I beg to differ. While charts can be interpreted in various ways, based on the time frames selected and the message that’s being relayed, gold charts do not look ugly.  

Technical analysts typically use chart time frames ranging from six months to three years, and most have turned decidedly more bullish. You can clearly see this in the one-year chart.

Source: Hard Assets Alliance

Notice the series of higher highs gold has made since the January level of $1,130. Each move higher has been met with a subsequent decline, but each decline has been smaller than the up-move.

These “two steps forward, one step back” increases are a bullish signal and show a healthy market advance.

Additionally, despite the recent pullback, gold is trading above its 50-day and 200-day moving averages, both of which are critical support levels and indicators of a positive trend.

2. Inflation does matter—but in the context of interest rates

Reeves states in his article, “It’s clear that gold prices are not getting a tailwind from inflationary pressures.”

Pigeon-holing gold as an inflation hedge is a common mistake investors and analysts make. Yes, gold has done and can do very well during times of higher inflation, but the actual driver is real interest rates.

As you can see in the chart below, gold has steadily marched higher while the real rate on the 10-year Treasury has moved largely sideways in the past year.

Click to enlarge

3. The Fed has been tightening policy for almost two years

“It’s hard to imagine gold finding a footing,” Reeves writes, “as the dollar stays strong and tight monetary policy keeps inflation well in hand.”

But that’s not what we’re seeing.

During this cycle of monetary tightening, the fed funds rate—the rate controlled by the Fed to influence borrowing costs—has been raised four times.

  • December 2015: raised by 25 basis points
  • December 2016: raised by 25 basis points
  • March 2017: raised by 25 basis points
  • June 2017: raised by 25 basis points

Since this time, gold has rallied almost 25% from $1,050/oz. to $1,300.

Longer-term rates, often used to gauge investors’ expectations for inflation and economic growth, remain mostly unchanged from two years ago.

All the while, stock markets have continued to make record highs, but are still underperforming gold since December 2015.

Furthermore, Reeves states that gold will struggle as the US dollar remains strong amid tighter monetary policy.

The US dollar has declined more than 10% against major currencies this year—despite two rate hikes and the Fed’s announcement that it plans to reduce its massive balance sheet.

I think this provides a solid case for higher gold prices.

4. Price targets?

Reeves points out that while Goldman Sachs is bullish on gold, “its three-month target of $1,260 and its 12-month target of $1,250 are below where gold currently trades.”

Price targets are just that: targets.

For almost any investment, they are generally worth about as much as the virtual paper they’re written on.

At least stocks have fundamentals like revenue, earnings, and multiples you can build a price target around. Commodities, on the other hand, are known for wild and unpredictable moves, rendering price targets mostly useless.

You can find, or pay for, forecasts to substantiate almost any investment thesis, so this is probably the weakest argument to not purchase gold right now. In fact, taking a contrarian view to major Wall Street firms is often a recipe for success.

I suggest you do a quick search of gold price forecasts from the past few years. You’ll find projections from well-known and respected analysts ranging from $10,000 to $700 per ounce.

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Pure gold is non-toxic when ingested.