“I’m not a gold buyer — it costs 4% to own it. It could easily go to $5,000, $10,000 in environments like this. This is one of the few times in my life it’s semi-rational to have some in your portfolio.”
Jamie Dimon, CEO of JPMorgan Chase
Jamie Dimon touting gold?
The cynic might assume that JPMorgan was launching a gold fund to get in on the action. Or maybe Dimon is simply capable of seeing the obvious. The Fed is slashing rates at a time when inflation is still running hot and central banks are looking to hedge their exposure to the dollar with alternatives.
Dimon’s comments would have sounded outlandish a year ago. But from today’s prices, a move to $5,000 per ounce would represent only a 19% move from today’s prices. And a move to $10,000 would be a little more of a stretch at 138%. But wouldn’t be out of line with the last bull market in the yellow metal. Between the 1999 lows and the 2011 highs, gold rose over 600%. A similar move starting from the 2015 lows would put gold well north of $7,000.
Of course, we’re in a very different environment today. Back in 1999, Uncle Sam wasn’t $37 trillion in debt and a $2 trillion budget deficit would have been considered utterly absurd. And the US wasn’t embroiled in a destructive trade war that actively incentivizes foreigners to invest elsewhere.
This doesn’t guarantee a bigger bull market in gold than the 2010s. But it suggests that a move to $10,000 or even higher wouldn’t be crazy.
The Biggest Single Argument for Gold
You know the macro arguments for gold: debt, deficits, governmental mismanagement, a submissive Federal Reserve… the list goes on.
But remember, prices are ultimately driven by nothing more than supply and demand. So, let’s look at where the demand is coming from today.
Anecdotally, how many people do you know who own significant amounts of gold or are actively buying it?
I could probably count the people I know on one hand. And that includes both professionals and mom-and-pop investors. Gold still has yet to really stir the imaginations of investors.
So…
Who’s buying it then?
Virtually all of the buying is coming from central banks.
For the first time in nearly 30 years, central banks now own more gold than US Treasuries. Since 2022, they’ve been buying over 1,000 tons of gold per year. And there is no indication that they plan to stop any time soon.
From the Financial Times this morning:
Following Russia’s invasion of Ukraine their central bank was sanctioned and its reserves frozen. European leaders are still chatting about whether they can be seized within the current legal architecture. And so it doesn’t take a genius to see that even a shiny pet rock looks a safer bet than electronic IOUs controlled by your enemies/ frenemies.
While my sympathies will always be with Ukraine and I support efforts to hold Russia accountable… the Western world has now just given Russia, China and every other rival power every possible incentive to pull the ripcord and get as much of their wealth as possible out of the dollar-based system.
The bull market in gold will end when your friends and neighbors at the backyard barbecue start bragging about how much money they’ve made in gold. The retail buying hasn’t even started yet. Most investors are still obsessed with AI stocks, and gold isn’t even on their radar.
So… how do you play this?
As much as I like gold in this environment, we should remember that the barbarous relic can be wildly volatile. In a “normal” base case scenario, I’d argue that keeping 5% to 10% of your portfolio in gold and precious metals is a reasonable allocation. I think it makes sense to go a little higher than that today, but I probably wouldn’t recommend more than 15%. That’s aggressive but not unreasonable, particularly if the rest of your portfolio is fairly conservative.
If you have more than that today, you might want to consider rebalancing. And if you still have yet to add gold to your portfolio… I really don’t know what you’re waiting for.
Charles Lewis Sizemore, CFA
PS - If you’re thoroughly overwhelmed with this market, let’s talk. I’m happy to take a look at your portfolio and offer suggestions. Please reach out to my office, and we can schedule a call.
I’m not sure why I’m getting this newsletter through Substack. I’m a paid subscriber and usually comes via email to me.