10/2019 KIPLINGER’S PERSONAL FINANCE 33ISTOCKPHOTO.COM
GOLD, WHICH DID LITTLE EXCEPT
glitter for most of the past
five years, has seen price
gains this year that rival
Standard & Poor’s 500-
stock index. Gold began
the year at $ 1,279 an ounce,
and it is currently trading
at $1,498, a 17.1% gain. The
S&P 500 is up just a shade
more. (Returns and other
data are through August 9.)
Gold is trading at its high-
est price since April 2013.
The price could continue
to rise if stock market vola-
tility and global growth
concerns persist, says
Wells Fargo strategist John
LaForge. Or it might need
to rest before rising again.
Nonetheless, says Joe Fos-
ter, portfolio manager at the
VanEck funds, “If a reces-
sion is on the horizon, then
gold could hit new highs.”
If you’re thinking of
chasing the rally in gold,
be sure you’re buying for
the right reasons. Specula-
tors in gold are often disap-
pointed, but the metal does
have some uses, in small
amounts, as a portfolio di-
versifier, an inf lation hedge
and insurance against fi-
nancial catastrophe.
Gold has been used as
money since King Croesus
of Lydia minted the first
gold coins in the sixth cen-
tury B.C. But no countrymakes gold coins for circu-
lation anymore. Although
jewelry is now the primary
use for the metal, investor
demand is what drives the
price of gold, and fear is
what drives investor de-
mand—fear of inf lation,
war, a government coup
or some apocalyptic event.You don’t need a catastro-
phe for gold to rise in price.
Gold rose from $712 per
ounce in October 2008 to
more than $1,800 an ounce
in August 2011 as the U.S.
reeled and recovered from
the largest recession—and
bear market in stocks—
since the Great Depression.Investors have some
reason to worry about inf la-
tion, which is one reason
gold has been rising. True,
inf lation has been tame.
The Consumer Price Index,
the government’s main
measure of inf lation, gained
just 1.6% in the 12 months
that ended in June; the
Federal Reserve’s preferred
inf lation yardstick gained
just 1.4% in the same period,
well below the Fed’s 2%
target rate. Nevertheless,
inf lation is typically the
hallmark of a period of easy
money—low interest rates
from the Federal Reserve
and low tax rates from the
government. Right now, we
have both.The price of easy money. The
Fed cut its key federal funds
rate by a quarter of a per-
centage point in July, the
first rate cut since 2008.
Kiplinger expects two more
rate cuts this year. The tax
reform passed in 2017 is es-
timated to pump more than
$1 trillion into the economy
over the next 10 years. At
least in theory, such eco-
nomic stimulus in an ex-
panding economy could lead
to rising prices, the result
of too much money chasing
too few goods and services.
Typically, lower U.S.
interest rates also bring
down the value of the dollar
on the world currency
exchanges, and that, too,
is positive for gold, which
is often viewed as an alter-
native currency. Money
follows yields, such as
those from Treasury bills,
and when U.S. yields fall,
money goes to other mar-
kets, denominated in otherGo for the Gold?
Stock market volatility has given investors gold fever. If you chase
the rally, don’t overdo it. BY JOHN WAGGONERPROSPECTING