Economic analysts reckon that we are at a point in the gold market cycle where the yellow metal will outperform stocks in the near future. Over the last five years, gold has outperformed by over 50% and nominal returns on bonds are lower now than they were five years ago. Equity valuations are also higher today compared to previous years. Many gold dealers and other gold players watch not only the gold market but also the bond market. The bond market helps determine the price of gold by valuing fiat currencies, mainly the US dollar. It also can determine when a recession is due.
The Global bond market has dominated the attention of investors and financial market commentators with yields of some government bonds dropping to record lows. Australian 10-year government bonds dropped to all-time lows of 1.75%. However, with the U.S hogging all the attention, because of what economists refer to as the yield curve being inverted for the first time since the start of the Global Financial Crisis of 2008.
What is this yield-curve that all investment gurus are going on about? If you are new to the technical aspects of investing in gold all you need to know about this yield-curve inversion that everyone seems to be worried about. It is simply something that occurs when short term government bonds have higher returns than long term bonds. Right now, it seems the 2 year and the 10-year government bonds are the ones that are inverted.
Typically, long term bonds have a higher yield than short term bonds because investors need to be compensated for taking on greater risk by taking out a long term bond. They have to forego a lot of opportunity costs that happen through the bond period. It takes them longer to get their money back than it takes short term bond holders. Yield curve inversions aren’t normal in financial markets so when they do, it means something is seriously wrong somewhere and it is an omen of difficult years to come. Some analysts will jump on this and tell you how this is the best time to buy gold because yield curves are harbingers of recessions. If this is the case, we could see the price of gold trading at almost $2,400 per oz. in the next 5 years based on the current price that is just below $1,300 per ounce.
Is this a sure thing? Will gold outperform the stock market? No one can really guarantee that this will happen. Gold dealers might try to sell you on the idea that we are on the cusp of something monumental in the gold market, this could be the case or not. Gold did not outperform stocks when the yield curve inverted in 1988, in fact the inversion was more favourable to the stock market. If anything this period should give investors some time to pause and consider their options. They can be prudent about their investments and use gold to hedge or they may hope for a different outcome than what everyone is fearful of. So, is this the right time to start looking for gold dealers to buy or sell your gold? This could be the beginning of the rise of the gold price or it can be as good as it will ever get. The point is if you need the money, the gold industry still needs your gold to supplement the demand.