No wonder gold bugs are bugging out.
After a 12-year rally came to a stark end last year with a 28% drop, gold is poised to recover nicely, given high levels of investor bearishness and a bullish supply-demand balance. That said, if stocks continue on their record run, the price of gold could slide further.
These fundamental and technical conflicts are leaving some advisers scratching their heads as they seek to counsel clients on what to do with their gold allocations.
“On a relative basis, what's good for the stock market is bad for gold and what's good for gold is bad for the stock market,” said Uri Landesman, president of the hedge fund Platinum Partners.
A December survey of InvestmentNews readers found that more than 36% of financial adviser respondents expect the price of gold to finish 2014 below $1,200 an ounce, including 13% who believe it will finish the year below $1,000. A third see gold finishing the year between $1,200 and $1,399 an ounce, 21% see it reaching between $1,400 and $1,599, and 9% expect the price to finish above $1,600.
On Friday, gold for delivery in February climbed 0.4% to $1,229.60 an ounce, heading for a weekly gain of 1.3%, the most since Oct. 25, according to Bloomberg.
With the price of gold now hovering around $1,200 an ounce following its 2013 decline, its biggest one-year drop since 1981 and the first decline since 2000, so-called gold bugs are either banking on a stock market drop or taking a much longer-term view of gold.
“It is very difficult to know where the price of gold will go from here, but right now, the bearishness toward gold is so extreme,” said Janet Briaud, president and founder of Briaud Financial Advisors.
“There is this sense that you don't need safe-haven assets, because people feel like the Fed will come in and buy more Treasury bonds if anything happens,” she added. “There really is a sense that there is no risk out there.”
That general risk-on mood in the markets is reflected by a stock market at an all-time high and a volatility index, as a measurement of investor fear, at an all-time low.
None of this is good for the price of gold, but it's not too difficult to make the case that gold is oversold — that last year's drop was overdone.
“If any fear re-enters or if there's a correction on the equity side, gold will do well,” said Scott Carter, chief executive of Lear Capital Inc., which sells physical metals to affluent investors. He backed that up by pointing out that there should be a lot more fear in the stock market than is currently being expressed by investors.
“I don't believe the underlying economy is performing as well as we're reading in the headlines,” Mr. Carter said. “I think unemployment numbers are manufactured, and I expect some downward adjustments on the GDP data.”
Add to that the fact that worldwide demand for physical gold is up 25%, and the upward pressure on the price of gold just seems too real to ignore, he said.
“I think in 2014, the price of gold will start to reflect more of the physical appetite for gold and less on the paper contracts that don't have a physical-delivery component,” he said. “Right now, the cost to get gold out of the ground is around $1,250 an ounce, and I would probably see gold valued at between $1,400 and $1,450 by the end of the year.”
Even though most advisers use gold inside client portfolios as a means of hedging, it is important to remain somewhat strategic and mindful of price directions.
“I think gold could get as low as $1,000 before it starts turning around,” Ms. Briaud said. “The level of bullishness for gold now is under 10%, but at some point, you have to expect the price to start evening out.”
Ms. Briaud typically advises her clients to maintain an allocation to gold of between 5% and 10%, and she said she is currently advising them to be at the lower end of that range.
“Clients are definitely frustrated about the price of their gold positions, but this is normal behavior,” she said. “Everyone says they're a long-term investor, but they really only want to be in the asset class that's doing well, and that's why you get market bubbles and you get big drops that keep dropping.”
BEYOND THE HORIZON
Clearly, riding the waves of any market cycle is easier said than done, which is why some investors have pushed their outlooks to just beyond the horizon.
“My personal portfolio is heavily over-allocated to gold bullion, and most of my clients have at least 10% in bullion,” said Vern Sumnicht, CEO and chief investment officer of iSectors, an investment manager that provides advisers with proprietary asset allocation models based on exchange-traded funds.
“In the shorter term, the price could drop below its June low of $1,180, at which point I'd be looking for it to go down to the $950 level. But on the other hand, I think the price has to go to $1,500 before I'd be comfortable saying it's going a lot higher,” he said. “I'm normally a fundamental analyst, but with gold, you have to also get technical.”
Like most true believers in gold, Mr. Sumnicht can't ignore the larger picture of a massively lopsided U.S. balance sheet.
“I don't think gold is a bad buying opportunity right now, but if it went below $1,180, I'd wait for the $950 level and then I'd double up on it, and that's exactly what I've been advising my clients to do,” he said. “The price is certainly going higher in the long run, so you can't go wrong buying it at this level, and my clients all understand the issue that printing money causes inflation and it may take years to manifest, but they all know it will happen.”