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<\/p>\nAmid the intense rise in commodities over the last few months, gold has underperformed dramatically. Since August of 2020, copper, platinum, and palladium are up 48%, 32%, and 10% respectively, while gold actually dropped 10%.<\/p>\n
Gold is widely considered as a hedge against inflation. But, even though the market is starting to wake up to the reality of rising inflation, gold hasn’t been able to find a bid.<\/p>\n
Inflation and rising interest rates go hand in hand… Yet, rising interest rates have a negative effect on gold prices. This has been the single most important factor in keeping gold down since its high in early August.<\/p>\n
Take a look at this chart of gold versus 30-year Treasury Inflation Protected Securities (TIPS)… A widely used proxy for real time inflation expectations. <\/p>\n
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My personal preference for using the 30-year TIPS instead of the usual two- or 10-year is because gold is more sensitive to rates in the backend of the curve – and those rates are better indicators of the underlying health of the economy. The chart above shows that near-perfect negative relationship between interest rates and gold… So owning gold as an inflation hedge doesn’t make much sense… But owning gold as a hedge against a weakening dollar, does. <\/p>\n
There are dual forces at play when it comes to gold. The dollar plays just as crucial of a role as interest rates.<\/p>\n
You see, while rates have been rising, the dollar has been weak.<\/p>\n
And, historically, gold and the dollar have been negatively correlated. Gold tends to rise as the dollar declines. This is one reason many gold bulls are calling gold undervalued.<\/p>\n
Over the last 10 years, for example, monthly returns in the dollar above 1% would translate to 1.6% losses for gold. And on the flip side, when the dollar would fall more than 1%, gold would rise by 2%. Currently, the dollar index is at a three-year low with investor consensus leaning even more negative on its prospects.<\/p>\n
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These two market forces dominate gold prices interchangeably and, to a large part, that’s driven by market sentiment. Is that sentiment about to change? Based on gold’s recovery the last few days, it just may have.<\/p>\n
Gold recently found major support at the 50% retracement level of its 2020 range… And, unlike the last time it bounced from there, key fundamental and sentiment indicators are making it look attractive.<\/p>\n
Whether you’re looking at the historic relationship gold has with the dollar, or just a good low-risk technical set up in prices, gold has upside.<\/p>\n
Betting on gold’s upside from current levels would be a good way to take advantage of a rare confluence where both gold and the dollar are cheap. The risk becomes an implicit bet that interest rates reverse course.<\/p>\n
That might be difficult with commodities blazing forward… A $1.9T stimulus bill around the corner… And the economy growing rapidly from the last round of easy money.<\/p>\n
Given the setup, it seems the market has established a floor for gold prices, which means these prices will not remain where they are for long.<\/p>\n
There are a few different options for gold exposure. The simplest way is to own the SPDR Gold Trust ETF<\/a> (GLD). Mining ETF’s are a great way to pick up dividend income while getting gold exposure. VanEck Vectors Gold Miners (GDX) has the extra benefit of having foreign-owned miners in its portfolio, which is a boost for performance during a weak dollar environment.<\/p>\n