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Everyone who regularly reads my work knows that I love buying dividend stocks. Moreover, dividend stock prices have recently fallen quite substantially, providing investors with a substantial opportunity to grow their passive income streams and set themselves up for substantial long-term total returns. However, dividend stocks are not the only asset class that has gone on sale recently.
Gold (NYSEARCA:GLD) prices have also dipped significantly over the past few weeks, providing investors with what I believe to be an incredible opportunity to buy the most attractive risk-adjusted investment right now at a cheaper price:
In this article, I will discuss seven reasons why I would pick gold over any other asset right now if I could only own one.
#1. Gold Outperforms After Rate-Hiking Cycles End
If recent history is any guide, gold tends to significantly outperform in periods immediately following the conclusion of a Federal Reserve rate hiking cycle.
As the chart below illustrates, when the Fed peaked and then cut its rate in the first decade of this century, gold went on a massive run. Then again, at the end of the second decade of the 21st century, the Fed peaked and slashed rates, sending gold soaring once again. Now, it appears that the Fed has peaked once again, creating a highly likely scenario for gold to soar to new heights:
#2. Central Banks Are Buying Gold Hand-Over-Fist
Another major bullish indicator for gold is the fact that global central bankers can’t seem to buy it fast enough. The World Gold Council recently reported that it expects global gold demand to hit yet another record this year largely due to central bank buying. As chief market strategist at the World Gold Council Joseph Cavatoni recently remarked:
The landscape is appropriate for emerging central banks to continue to be net buyers
#3. Gold Is A Phenomenal Safe-Haven
Gold is a proven safe-haven asset and as a result demand for it tends to soar during periods of geopolitical and/or macroeconomic uncertainty. In 2023, for example, the World Gold Council reported that gold demand hit record highs as the world grew increasingly uneasy about geopolitical risks and conflicts in East Asia, Eastern Europe, and the Middle East. Moreover, weakness in the Chinese economy and ongoing concerns of a recession elsewhere further increased demand for the security of gold.
Given China’s massive military build-up and the CCP’s growing desperation to distract from its country’s economic malaise, an invasion of Taiwan could happen at any time and is an increasingly probable scenario at some point this decade. A recent survey of U.S. and Taiwanese foreign policy experts revealed that a significant majority of both groups believe that a Taiwan Strait crisis is either likely or very likely to take place this year. Such a scenario would undoubtedly send gold soaring higher while the stock market would very likely fall sharply on such terrifying news.
#4. Gold Outperforms During Periods Of Economic Weakness
Another reason I am so bullish on gold right now is because it tends to outperform the stock market during periods of economic weakness. There have been eight recessions over the half-century and 75% of the time in those scenarios, gold has outperformed the S&P 500 (SPY).
The only two times it didn’t outperform were in 1981 and 1990. In 1981 gold faced headwinds from very aggressive rate hikes after gold had already gone on an epic bull run higher – making it very different from the current situation – and 1990 was only a mild recession and in an environment where global central banks were selling gold on the net, creating a major headwind to the price. Once again, this is very different from the scenario, as we previously pointed out in this article.
As a result, given that leading recession indicators such as the Yield Curve Inversion model are pointing to a very high chance of recession in the near term, gold’s prospects of outperforming the market look quite high right now.
#5. Gold Looks Undervalued
Gold appears even more likely to outperform the market right now because – relative to SPY – it looks quite undervalued. The S&P 500 to Gold ratio shows that gold is at one of its cheapest prices relative to the stock market in history:
S&P 500 to Gold Ratio (macrotrends.net)
#6. The Dollar Reserve System Is Dying
The increasing ascendancy of BRICS and China’s and Russia’s coordinated efforts to de-dollarize the world economic system are accelerating the decline of the global Dollar reserve system. While unlikely to vanish anytime in the immediate future, there are very real symptoms that the current global monetary system is in terminal decline. Perhaps the biggest sign of this is the increasingly frequent headlines of countries making trade agreements with each other that sidestep the use of U.S. Dollars altogether. For example, last month it was reported that nearly 20 countries agreed to abandon the dollar in global trade amongst themselves in 2024. If this trend continues to pick up steam, gold will undoubtedly rise against the U.S. Dollar.
#7. All Fiat Currencies Inevitably Go To Zero
Warren Buffett’s mentor Benjamin Graham is credited with observing:
In the short run, the market is a voting machine, but in the long run, it is a weighing machine
This principle also applies to mediums of exchange, and – as history has shown time and again – all fiat currencies eventually get assigned their true intrinsic value: worthless. As the chart below illustrates, since the late 1970s, the U.S. Dollar has been well on its way to experiencing the same fate, as gold’s price in U.S. Dollars has increased by nearly 800% over those four and a half decades:
Given the runaway deficit spending by the U.S. government with no end in sight, it is a highly likely bet that, over the long term, the U.S. Dollar will continue to decline in value relative to gold at a fairly brisk pace until the day comes when the U.S. Dollar finally ceases to exist as an accepted medium of exchange. This makes gold – and not U.S. Treasuries (TLT) – the ultimate low-risk long-term investment.
Investor Takeaway
For these seven reasons, I believe that gold is a phenomenal long-term investment right now. While dividend stocks also look really attractive right now – and I continue to buy them too – there are several scenarios (such as a severe recession and/or a Chinese invasion of Taiwan) in which dividend stocks could still disappoint moving forward. However, with gold, it is hard to imagine a realistic scenario where it does not continue to rise – and likely will do so at a strong clip – over the next 3-5 years.
As far as how to best invest in the metal, I employ a diversified approach that includes physical, undervalued blue-chip dividend-paying miners (GDX) like Barrick Gold (GOLD) and Newmont (NEM), and ETFs such as GLD.
I like GLD in particular, because it offers options trades with relatively low bid-ask spreads. As a result, I can sell puts and layer into a new position at prices lower than today’s and hold my cash in short-term treasuries (SGOV) while waiting for the put option to expire, thereby earning a 5%+ yield on my cash in addition to the put premium.
