Can Gold to Break Out if Rates Drop and Dollar Weakens?

• Gold plays a role in a portfolio but should not be more than 10%; stocks and bonds should be the majority
• Interest rates rising faster than in 20 years has weighed on gold recently; falling rates could boost gold if the dollar weakens
• Possible emerging markets debt crisis causing issues in US and Fed cutting rates, which would likely lift gold
• For protection, gold bullion over gold mining stocks if concerned about a market crash

As economists and market participants gather in New Orleans for the annual gold and investment conference, the precious metal’s hesitant price action over the past year has left many wondering when gold will finally break out above $2,000 per ounce and stay there. Interest rates are the key driver keeping a lid on gold for now.

Gold doesn’t pay any interest so you're up against interest-bearing investments and dividend-paying stocks that are doing much better in terms of a yield.

With the Federal Reserve aggressively raising rates faster than at any time in the past two decades, that has weighed on non-yielding assets like gold. So the only way gold will break through and stay above $2,000 is if the dollar becomes weak and the dollar is not going to become weak until interest rates start coming back down.

A More Balanced Approach

Gold should not make up more than a small portion of an investor's portfolio. Most of your money should be in the traditional stock and bond markets as long as we maintain basically a free enterprise system. There is a role for gold as part of a diversified portfolio, but should be kept at around 5% for speculative commodities like precious metals. Mining is a very tough business, it's a low-margin business so stick with businesses that work.

This view often draws pushback from the gold bulls but the stats don't lie.

Timing Cycles and Protecting Downside

Gold will warrant more attention in 2024. Commodities are cyclical and stocks and bonds are cyclical as well so you have to you have to choose the right time to buy. With inflation having surged over the past year, gold stands out as a potential hedge. This call is not for an overtly bearish view on stocks, but rather to use of gold to help smooth out risks. In a crisis scenario, you don't see that going too far because the Fed and policymakers will step in. Expect to see a mini crash but not a major crash because of the factors that are keeping it from happening.

If concerned about a significant market decline, Skousen advocates owning physical gold or gold ETFs over gold mining equities. As he warned, "If you have a stock market crash everything drops including gold stocks. But gold itself would go up and that has been the tradition in a crisis.

Rising Income Key, but Emerging Markets a Risk

Balance gold positions with dividend-paying stocks and fixed income. Look at dividend-paying stocks, rising dividends, and high dividends that have stood the test of time. Oil and gas companies are really good, private equity investments. Some dividend-paying companies actually raised their dividend during the 2008, 2009 crises so even though the stock was down 40% they raised their dividend.

There may be risks stemming from US dollar strength putting pressure on emerging markets.

Most of these emerging market debt, for example, is all in US dollars and they're paying these very high interest rates. And they're not going to be able to pay that off. So there's going to be an emerging market debt crisis. That could then spill over into issues for US banks and the broader economy. In such a scenario, the Fed would be likely to shift course. When that happens the Fed is going to cut interest rates probably pretty sharply because of the fear of contagion. Those falling rates would subsequently provide a catalyst for the gold price by weakening the dollar.

Election Year Recession Possible but Not Yet

As investors look ahead to 2024 when the US will be holding its next presidential election, thoughts turn to the possibility of a recession if the Fed’s monetary tightening sends the economy into a downturn. Such an environment may provide a tailwind for Republican electoral chances given their positioning favoring tax relief and domestic energy production. However, resilience in the economy has pushed out the recession timeline so far. 2023 has been resilient to a recession. We haven't had a recession, so far. Maybe that's because of the lockdown, after the lockdown the economy came back and it's just trying to catch up with the supply chain limitations and scarcities and shortages.

Nuclear Power’s Allure

Away from gold and further out on the risk spectrum, uranium’s powerful move over the past year as a bull market is gaining momentum. Nuclear power is coming back finally. The environmentalists recognize that it's a safe, secure way and it's much more productive than even fossil fuels and certainly much more productive than wind and solar.

The Global X Uranium ETF (URA) offers a basket approach to investing in the sector’s resurgence.

After a hesitant year for gold around the $2,000 level, there are potential 2 key elements needing to shift to drive a sustained breakout. First, the Federal Reserve will need to stop aggressively raising interest rates, which requires inflation to continue easing. Second, the US dollar would need to weaken. That may require an emerging markets debt crisis to prompt Fed rate cuts. For protection against market declines, physical gold or GLD over gold mining equities.