Avoid A ‘Lost Decade’ By Investing In Gold (NYSEARCA:GLD)

When looking at my personal portfolio it consists of different asset classes – real estate, stocks, and gold (to clarify, real estate is only the house I am living in as I don’t assume real estate being a good investment). And although I have covered gold from time to time, I mostly focus on stocks when writing on Seeking Alpha. There are many reasons for this focus. First, with tens of thousands of different stocks there is a lot more to say about stocks than about gold. Second, I think equities are the best investment and when bought at the right time generate the highest return.

I would like to make the case for investing in gold or gold ETFS like the SPDR Gold Shares ETF (NYSEARCA:GLD) once again. It seems to be the time to get very cautious about stocks – but we can stay bullish on gold.

Timing And The Big Picture

For me personally, gold is probably one of the best investments in my lifetime – mostly because I bought gold at the right time. This was not my brilliance, but rather luck on my end and maybe the brilliance of my uncle who was responsible for a larger part of the investments in gold – due the encouragement to buy as well as gold being a gift. I was still a kid (or teenager) at this point and didn’t really understand much about investing.

I bought my gold mostly during the late 1990s before gold started its bull market that took the gold price from $250 to $1,900. And the following sentence probably won’t surprise you: Timing matters for almost every investment – when you bought and sold an investment can decide whether you made money or not. This is true for stocks, and it is true for gold. When you bought gold in 2011 (and probably many people did as gold was hyped at that point) you did not make much money until now. It was not enough to beat inflation and compared to the stock market it was a lousy investment.

The reason why gold would have been a lousy investment in 2011 is quite simple. In 2011 another major correction for gold began that lasted until 2016. Since then, we are in the next upward wave (in my opinion) but so far, we are “only” slightly above the 2011 highs.

Investments in Comparison

I mentioned above that I mostly cover equities, but of course we should compare different asset classes and aside from investing in different assets for diversification we also must make decisions what asset class could be the best to invest. By the way, I would not invest in real estate as I don’t think it is a good investment. There might be times when we can also think about investing in real estate but considering housing prices right now (despite corrections we saw already) I don’t think real estate is a good investment.

When comparing gold to equities, we must point out that equities are most likely the better investment over the long run. When looking back at the last 51 years – since January 1973 as we had the gold standard before – gold almost matched the performance of the S&P 500. While the S&P 500 increased about 3,900%, gold increased about 3,050%.

However, comparing the performance of the S&P 500 to gold over such a long timeframe is misleading. The S&P 500 is not including dividends and over such a long timeframe excluding dividends is disturbing the picture in an extreme way. Instead, we should compare the performance of gold to the Wilshire Large Cap Index, which is a total return index (assuming the dividends are reinvested right away).

Over the long run, gold is the second-best asset class in my opinion. It can’t match the performance of equities but is clearly outperforming real estate. Investing in bonds could be similar lucrative, however I don’t know enough about investing in bonds to make qualified statements at this point.

Breaking Out

But right now, I would see gold as the better investment for several reasons. The first reason can be found by looking at the chart. From 2016 till mid-2020 the gold price almost doubled again and climbed from about $1,050 to $2,075. Following this upward wave, during which gold surpassed its previous all-time high, we saw another correction which is lasting for 3.5 years already.

Until this day we are still in this corrective pattern and although gold has tried several times to surpass the highs around $2,080 it failed do to so every single time. In the last few weeks gold tried to break out again and failed again. Nevertheless, I am confident that gold might be able to break out in the next few weeks and continue its bullish path towards new all-time highs.

When looking at the chart of GLD the picture is very similar. GLD is trading at the 2011 highs (while gold could already move past the 2011 highs) and since 2020 GLD tried several times to break out and right now we see the fourth attempt of the ETF to move above the range of $185-190.

Mid-Term Targets

For the short term, I am expecting gold to push higher in the coming months and overcome the current resistance level between $2,000 and $2,100. We can also try to be a little more specific about targets for gold in the coming quarters and years.

I am certainly no expert on technical analysis and Elliott Wave Theory, and it seems more difficult for gold to see the big picture as gold was pegged to the U.S. dollar for a long time and until the gold standard was abandoned in 1973, we have no price signals. Nevertheless, in my opinion we saw a major top in gold in January 1980 and the completion of a 5-wave bull market that was followed by a correction lasting for about 20 years.

And therefore since 1999 (or 2001) a new major 5-wave bull market began with the first upward wave taking gold to about $1,900 in 2011. The second wave was the correction that followed after 2011 and now we are in the third wave – another bullish upward wave. To determine potential targets for gold, we can use Fibonacci extensions. Based on these extensions a first potential target for gold is around $2,950 where we can find the 1.618 extension.

There is reason to be more optimistic than just expecting the third wave to reach $2,950. Further potential targets are the 2.618 extension, which would lead to a gold price around $4,600 and in an optimistic (but not unlikely) scenario the gold price could reach $7,300 before we maybe see the next correction. To be clear, these are not targets for the next few quarters or years – we are rather talking about 5 to 10 years before gold could climb so high.

And while I like to present these targets for GLD as well, the limited data being available for GLD is making it difficult to draw the same Fibonacci extension lines (the bottom in 1999 or 2001 is missing). Nevertheless, we know that the high in 2011 was $186 and we can try to calculate these targets, which will be more or less around these levels:

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Outperformance in Recessions

When expecting another depression, one should look at the performance of gold during previous depressions and as gold is existing for several millennia this should not be so difficult. However, the gold price was pegged to the USD in the years during the Great Depression (until 1932) and without gold trading freely it is almost impossible to say how gold would have behaved during this depression. And for other depressions before the Great Depression in the United States I could not find economic data.

However, after the Bretton Woods system ended in 1971 and the world got rid of the gold standard, the precious metal is now trading freely on international financial markets, and we can at least look at the performance during recessions in the last 5 decades.

When looking at the performance during recessions, I don’t see much correlation between gold and a recession. Nevertheless, we can state that gold outperformed the S&P 500 in every recession aside from 1981. By the way – as we are already talking about correlations – I don’t see a strong correlation between gold and inflation either. Of course, this is just one example, but in the last 3.5 years inflation has been rather high and yet gold has been caught in a corrective sideway range.

I neither see a correlation between gold and inflation nor a correlation between a recession and gold. Nevertheless, we can state that gold was a solid investment during past recessions and gold usually outperformed during recessions – even if it was only a slight outperformance.

Crisis Protection

Up until now it did not really matter if you are holding gold as some ETF like the SPDR Gold Shares ETF or in physical form – but now it is important to hold gold in physical form. And so far, we rather talked about investing – now the tone is getting a little darker.

When looking at the theory, Ray Dalio presented in his book Principles for dealing with the changing world order there are three “cycles” that seem to come to an end which is rather spelling doom for the globe. Not only does the long-term debt cycle seem close to completion, but the world is rather shifting from its internal and external order towards disorder on every level.

External disorder between states is usually leading to conflicts – and in the worst case these are armed conflicts. And when looking at 2022, we see the highest number of deaths in state-based conflicts for several decades. We don’t have any reliable numbers for 2023 (and these numbers are always estimates) and although the numbers of deaths might be lower than in 2022 it would still be higher than any number in the last three decades.

A second problem is countries shifting from internal order to disorder. And this is especially visible in the United States right now as disunity between the political groups is obvious with Democrats and Republicans seeming irreconcilable at this point. This is not only true for the leading politicians but also for voters and supporters.

And finally, the long-term debt cycle is coming to an end. This is most visible by the federal funds rate being zero for a long time – indicating that the Fed is not able to stimulate the economy by “normal” monetary policy tools anymore.

Another strong hint for us being close to the end of a long-term cycle is the stock market (and several other assets) trading for high valuation multiples. In The Effects Of Low Interest Rates I explained why elevated asset prices are also a result of low interest rates. When looking at the CAPE ratio (probably the best metric to measure valuation), the U.S. stock market is trading for more than 30 times earnings – and aside from the Dotcom bubble, we haven’t seen such high valuation multiples since the last depression.

And while I don’t want to spell doom and gloom here, there is little reason to be optimistic. Looking back in history, times of the world shifting towards disorder and the long-term debt cycle ending – making deleveraging necessary – was not a great time to be alive. And in times of hot wars, civil wars, and all in all hostile environments it might not be the worst idea to hold gold.

Of course, we should not forget other potential scenarios like the Executive Order 6102. This order limited the ownership of gold in the United States and such a scenario could happen again – especially as such drastic measures are typical for the phase in which the world is in tumult.

Bottom Line

Despite the risk of holding gold can be prohibited again, I think a lot of reasons are speaking for holding gold at this point. And while it is certainly not the best long-term investment when holding for decades or century, it could be one of the best assets to hold for the next decade.