Disseminated on behalf of Barrick Gold Corporation (BC)

Can Gold Hedge Your Investment Portfolio in 2023?



Every investor has an opportunity to wipe the slate clean and start from scratch in 2023.



If you had a good year or broke even in 2022, congrats you crushed it! 2022 was one of the most challenging years on record. If you didn’t do so well, don’t worry you’re not alone. Accept your results, and learn from your mistakes, everyone is starting from zero now just like you.



So where are we making money this year? I’m no gold bug, but in my opinion 2023 is shaping up like it may be a big year for the yellow metal. Most major analysts agree that 2023 is going to be a challenging one for most asset markets.



With the Fed and international central banks chugging along with their interest rate hikes, a recession, and higher interest rates are likely on the horizon. Inflation is still stubbornly high as well.



I agree with most analysts on the outlook and expect to see another challenging year.



Gold finished 2022 nearly unchanged, with the SPDR Gold Trust (



GLD



) down just 0.8%. Yet from November to year end it moved 200 points off its lows and has entered 2023 with considerable relative strength and a strong trend on multiple time frames. I think this strong trend will soon become a persistent trend.




Why Gold?




Gold is something of an enigmatic asset and can evoke very broad and extreme reactions from different investors. To someone like Warren Buffett, a business analyst and owner, there is no position for gold in his portfolio.



From Buffett’s perspective, there is no point. It has no earnings, produces nothing, and only changes value in nominal terms. Buffett invests in businesses with sound business models, and considerable free cash flow. If he is feeling risk adverse, he would rather hold cash or short-term US Treasuries.



On the other side of the spectrum, you have gold bugs like Peter Schiff, who believe there is a financial Armageddon coming. He thinks you should hold outsized positions in physical gold to hedge in the event of a major economic, currency, or political crisis. That gold will be the only haven, as it has been used as a form of currency and store of value for thousands of years.



Then somewhere in the middle you have an investor like Ray Dalio. As a macro trader, and founder of Bridgewater Associates one of the largest hedge fund in the world he helps manage huge sums for sovereign wealth funds, and pensions.



Dalio’s mandate is to achieve adequate returns, with limited downside risk so that these institutions can predictably fund their activities. Ideally, he wants to do well when broad markets are not. He pragmatically believes gold plays a role in portfolios, as its low and negative correlation to traditional asset markets will improve his risk adjusted returns during the most challenging years.



For a very risk averse investor, a permanent portfolio allocation of 5-20% to gold should reduce the volatility of a portfolio vs. holding just bonds and equities. On the other hand, an active investor or trader, with a higher tolerance for risk may enter gold and related financial products speculatively with a stop-loss to mitigate risk.




How to Invest?



In addition to the GLD



ETF some other forms of gold exposure can be achieved by buying the stocks of individual gold mining companies, or a gold mining ETF. Buying the mining ETF or individual names will come with more volatility and risk than directly buying exposure to just the commodity.



GDX



is the popular mining ETF, and the largest components are Newmont Corp (



NEM



) and Barrick Gold Corp (



GOLD



).



GDX is one of the most popular ways to get involved in gold investing. By investing in this product, you are going to really juice up the returns if there is a big bull market in gold.



Newmont and Barrick Gold both earn Zacks Rank #3 (Holds) and have seen their stock prices charge higher in the last few weeks. Barrick Gold is part of the Mining – Gold industry that ranks in the top 30% of over 250 Zacks industries, with a 2.2% dividend yield (think they might have raised recently too)



Newmont’s Mining is also in top third of all the Zacks industries. Plus, NEM’s 4.4% dividend yield is rather enticing. Both Newmont and Barrick Gold also sport very impressive balance sheets that will come in handy during the ongoing economic turbulence.



Something worth considering is that these gold stocks will have a great deal of influence from macro factors, rather than business fundamentals. They are of course still important and worth digging deeper into finding appealing businesses even within an industry such as gold will further improve your downside risk, and upside returns.




Why so Bullish?




There are several fundamental factors underlying a bullish view on gold. First, while we have begun to see inflation ease, it has only been ever so slightly. There have so far only been two CPI prints where the rate of inflation has increased less than expected. Only the very early signs of slowing inflation.



Running above 7%, and core inflation at 6% both remain well above the Fed’s target of 2%. Second, with regards to Federal Reserve policy, there is still a lack of clarity on future policy. Interest rates are the guiding feature of modern capital markets, and regimes like this can lead to uncertainty and high volatility, which is when gold really shines.



Third, according to the IMF central banks have purchased more than 600 tons of gold in 2022, which is more than any time in the last 55 years.




Convincing Technical Setup




Lastly, there is a decisive long-term technical chart pattern on the gold chart. The well-known cup and handle pattern has been built on the 20yr, monthly candle chart with some well-defined risk points. A close below last year’s low should invalidate the setup, while a breakout above 2000 can launch the price to ~$2400.

Tradingview


Image Source: Tradingview




What can Go Wrong?




Of course, no trade is a guarantee and while price alone may invalidate the trade, what else might go wrong? Inflation can surprise to the downside, tensions between Russia and Ukraine can ease (one can only hope), and general market uncertainty may subside. Additionally, it should be noted that periods of high interest rates are generally not great for the prospect of higher gold prices. Although, if it coincides with periods of high uncertainty, gold can remain bid.



Gold is a very interesting asset and can be caught up in many different dogmas and narratives. I think when looked at pragmatically, it can be a valuable addition to some investor’s portfolios.






Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in futures that are mentioned in this material.









Disclosure: Performance information for Zacks’ portfolios and strategies are available at:



https://www.zacks.com/performance/






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