Wells Fargo is once again cautioning investors from buying too much gold as prices continue to trade north of $1,500 an ounce.
Gold is one of the best assets to own in terms of economic uncertainty but buying too much at high levels could lead to a lot of pain, according to the latest note by Wells Fargo head of real asset strategy John LaForge.
“Market volatility is on the rise—and as history would suggest—investors are flocking to gold … The problem is that some investors do not understand gold, which can be dangerous. Flock to gold at the wrong time, and it can be painful—possibly for years,” said LaForge.
Investors who bought gold between 2010 and 2018 either saw losses or made very little profit, he added.
“Timing is key with gold. We do believe that gold has a place in a well-diversified portfolio most of the time. As investors just witnessed, gold can offer upside and help reduce the downside during volatile times. Predicting these times is next to impossible—so owning some gold can be smart. As for today, we do recommend holding some gold, but we caution investors not to own too much,” LaForge wrote.
Wells Fargo sees gold at $1,500 as too expensive to buy, projecting the year-end price level to be $1,400-$1,500 as the economy begins to stabilize in the next 12 months. The latest year-end target is an upgrade from May’s estimates of just $1,300.
The fact that gold has moved up so much this summer, hitting fresh six-year highs in August says a lot about market sentiment, LaForge pointed out.
“Gold can be a good investment signal at times, but it has not been perfect, and it is not always understood correctly … Gold’s rally reflects mounting investor fears over: 1) collapsing global interest rates, 2) swelling amounts of global negative-yielding debt, 3) inverting yield curves and central banks that are “behind” the curves, 4) heightened equity volatility, 5) slowing global growth, 6) volatile currency exchange values, and 7) escalating global trade disputes,” he wrote.
The biggest gold drivers during the past couple of months, however, have been negative-yielding debt and inverting yield curves, added LaForge.
“The reason is that gold can become a good alternative to bonds when their yields are negative…Investors now pay to invest in German government debt. On the other hand, gold is not tied to a particular government … this eliminates the risk that a government may act irresponsibly,” he stated.
For gold to actually move towards $1,600, the market will have to see more concerns around interest rates, trade, and global economic growth, noted LaForge.
“While we do expect additional trade dispute escalation, we anticipate stabilizing economic growth in the coming year. Owning some gold in a diversified portfolio can be a good thing—we just don’t recommend owning too much at these levels,” he said.