Why Jeffrey Gundlach Sees Huge Upside in Gold

By chrisplinwood on 12:03 PM in In the News

Why Jeffrey Gundlach Sees Huge Upside in Gold

Jeffrey Gundlach sees upside potential in gold prices as negative-yielding debt rises worldwide.
Gundlach sees gold rising to $1,600–$1,700 per ounce after breaching $1,400.

Gold tops $1,500 per ounce

Bond King Jeffrey Gundlach is positive on gold’s prospects going forward. Before we discuss his views on the precious metal, let’s dive into gold’s recent price performance.

Gold prices topped $1,500 per ounce yesterday. It was the first time since April 2013 that the precious metal had crossed this important psychological level. Gold rose to its highest level in six years yesterday amid rising US-China trade tensions and sinking bond yields.

Another important point to note here is that with yesterday’s gain, gold’s YTD (year-to-date) return has surpassed that of the S&P 500 (SPY). While the SPDR Gold Shares (GLD) has returned 16.3% as of August 7, SPY has risen 15.2%.

Bond yields sink and gold soars as recession fears rise

We highlighted in Bond Yields Sink, Gold ETFs Soar on Rising Recession Fears that yesterday, due to rising recession fears on escalating trade tensions, investors sought the safety of Treasury bonds. This flight to bonds led to their yields sinking. The US Treasury’s ten-year bond yield (IEF) slumped to below 1.6%, and its premium over the two-year security hit 7.4 basis points, the lowest level since 2007. Gold was another safe-haven for investors, who pushed its value up by more than 1.5% on the day.

Gold ETFs’ YTD performances

The VanEck Vectors Gold Miners ETF (GDX), the proxy for the performances of senior and intermediate gold miners, rose more than 2.0% yesterday, bringing its YTD gain to 39%. The gains of the much more leveraged Direxion Daily Gold Miners Index Bull 3X Shares ETF (NUGT) and Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (JNUG) were even more dramatic at 123.2% and 107.4%, respectively.

Gold has doubled its gains

Gold prices are doubling due to trade war tensions. Firstly, uncertainty due to the trade conflict is driving investors to gold. Secondly, as the trade war rages on, the economic growth outlook is weakening. This scenario makes a strong case for the Fed to be more aggressive with rate cuts. Lower rates increase gold’s attractiveness versus other assets, as it doesn’t yield anything in terms of regular income.

The rise in negative-yielding debt and the case for stronger gold prices

Citing Deutsche Bank (DB), CNBC reported that there’s $15 trillion worth of government bonds with negative rates worldwide. This number has tripled since October 2018. Such a scenario makes gold valuable to a number of investors. In this context, Gundlach, who is the CEO of DoubleLine, said during an interview with Yahoo Finance on August 6 that gold has much more room to rise: “At this point, I think the way to think about it is, as long as the volume of negative interest rate bonds outstanding increases, it’s quite likely that gold moves higher in a similar vein.”

Gundlach: Gold to rise on rising negative-yielding debt

Gundlach believes that the US bond market is being dragged to lower yields due to weak economic data and negative yields in various parts of the developed world. There’s been a direct correlation between negative-yielding debt and the dollar price for gold. As debt starts yielding negative, investors rush to assets with higher yields than bonds. Gundlach said, “With the yield of 0, gold has a higher yield than bonds. And if you store the gold, you now have a lower cost of carry on gold than you have on 10-year bunds.”

Gundlach’s bullish thesis on gold

In June 2018, Gundlach mentioned that investing in gold was a no-brainer. He believed that it was only a matter of time before gold broke out. During DoubleLine’s investor webcast on June 13, Gundlach reiterated his bullish call saying, “I am certainly long gold.” His call on gold was based on his expectation that the US dollar would finish lower this year.

Gundlach: Gold’s potential upside

During his latest interview with Yahoo Finance, Gundlach seemed upbeat about the potential upside for gold. He said, “[If] this pace of negative-yielding bonds continues with this kind of linear track, then gold should go another 20% higher, if that happens. So, the initial target for gold was $1,400. We finally took that out. Now, I think the target is probably something in the $1,600 to $1,700 category. As long as the trends that are behind all this continue.”

Another upside for gold could come from the fact that the gold demand in the US is still very slow. Gundlach mentioned that US investors usually get involved in these types of things once the move is largely over. That’s what happened in 2011 when gold surged to $1,900 per ounce, and he believes it could happen again—especially if “interest rates are manipulated down.”

Other hedge fund managers recommend gold too

Gundlach isn’t the only prominent investor that’s turned around on gold. In Dalio’s Answer to the End of the Lower-Rate Era Is Gold, we discussed how Ray Dalio recommends gold because it’s both risk-reducing and return-enhancing.

Stanley Druckenmiller is also positive on gold. After a May 5 tweet by President Donald Trump increased US-China trade tensions, Druckenmiller dumped his other investments and piled into Treasuries. He also likes gold in this environment.

Paul Tudor Jones recently forecast that gold could hit $1,700 soon if it were to hit $1,400. Now that the precious metal has crossed $1,500, such upside potential could be a real possibility.

In Why Mobius Says Investors Should Allocate at Least 10% to Gold, we wrote about why Mark Mobius was suggesting gold to investors.

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