Special Report: Gold Outlook 2019: How to Profit From Last Year's Slide

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With a relatively strong U.S. dollar, price of gold in terms of dollars will struggle. But before we discuss the outlook for gold, some context is important...

The price of gold was below $300 per ounce in 2001. It went up to about $1,000 per ounce in 2008 and fell back to almost $700 in late 2008 with the deep recession. It then began another march upward to an eventual $1,900 in 2011 before it fell back down between $1,600 and $1,700 at the beginning of 2012 and held steady for the rest of that year. The year 2013 brought about a massive correction as gold fell from around $1,650 an ounce to under $1,100 by late 2015. But in 2016 and throughout 2017, with rising uncertainty about global economies and a British exit from the European Union, we saw a steady climb back above $1,350 per ounce. But that pattern reversed in 2018, and gold has fallen back down to around $1,200 an ounce.

From 2000 to 2012, gold ended the calendar year up from the year before. It's almost unprecedented for anything to go up for 12 straight years, even in nominal terms.

From 1981 to 2000, gold was a terrible investment, at least for people who bought and held. From 2000 until 2012, gold had been an excellent investment if you bought it and held it in 2000, despite the roller-coaster ride.

We've seen bullish times for gold over the past year, but we've yet to see the rally in gold that such economics should spark. But as uncertainty about stock markets and global tension increases, so will the demand for gold. It's not so much a question of "if" but rather of "when?" and "how much?"...

Gold in 2019

The price of gold took quite a hit in 2015. Gold investors were encouraged around the end of the year when the price rose to around $1,200. But within only a few weeks, it fell below $1,100, which hit five-year lows.

Like with other commodities, some of the hit to the dollar price of gold was a reflection of the strong U.S. dollar. For a European who owned gold, they did okay in terms of the price of gold in euros over the course of 2015.

The year 2016 proved to be a banner one for gold investors as the price rose by more than 30% in the first three quarters before it took a slight hit in early October. That drop was partially fueled by renewed Brexit fears when announcements came out that the UK would begin the process of removing itself from the EU by March 2017. But it was also fueled by investors who were concerned about the world's economic outlook flocking to the U.S. dollar as a safe haven from potential losses in equity markets. Remember, a strong U.S. dollar means lower prices for gold.

Gold continued its rally in 2017 as investors, concerned about tension between the new U.S. president and other world leaders, added the metal to their holdings. But this year, it reversed course early and fell with equities markets to start the year. It's started to see support at $1,200. But it has yet to break out again.

Before getting to predictions, let's take a brief look at the history of gold prices...

The late 1970s was good to gold investors, especially if they sold before 1980. It's easy to forget that owning some forms of physical gold was illegal from 1933 to 1974. It became legal again after the dollar was broken from its link to gold. Then-President Richard Nixon officially ended the dollar as part of the international gold standard in 1971. Other countries could no longer redeem their dollars for gold.

It's no coincidence that we saw the worst price inflation in modern U.S. history after the 1971 break from gold. The fear and inflation of the 1970s led to a bubble in the gold market. Paul Volcker came in as the chairman of the Federal Reserve and drastically tightened interest rates and slammed on the monetary brakes.

Gold briefly peaked above $800 per ounce in 1980. After that, it was two decades of a bear market for gold.

It wasn't until the beginning of the 21st century that gold saw another big bull run. Some might mark the beginning as September 11, 2001. I'd mark the beginning as when Gordon Brown, the future UK prime minister, sold about half of the UK's gold between 1999 and 2002.

Anyone who bought gold below $300 around this time has done very well, even with the bumpy ups and downs. Gold went up to $1,000 per ounce but had a significant pullback during the financial crisis of late 2008. Gold then proceeded to hit a new all-time high and hit an intraday high of a little over $1,900 in 2011. It's now trading right below $1,250.

In inflation-adjusted terms, gold has still not hit its all-time high since 1981. It's been over 35 years. To hit that high again adjusted for inflation would mean that we would have to see gold hit around $2,500. But this is a rather meaningless number because that brief high in 1980 was the peak of a major bubble.

The Uniqueness of Gold

Although gold tends to be highly correlated with silver, gold is a metal like none other. It has a long history of being used as money, a characteristic that only silver shares.

But gold is much different than silver in several ways. Gold is used for industrial purposes but to a lesser extent than silver. Gold is far less volatile than silver, which makes it better to own during a roller-coaster economy because the bumps are a bit smoother. Silver is usually better to own during bull markets, but you don't want to be stuck with silver in a bear market.

What may be the biggest difference between the two metals is that gold is owned by central banks. We don't hear about central banks holding silver reserves. It's possible, but we don't know of this being the case.

Central banks holding gold reserves were actually a bearish factor for gold in the 1980s and 1990s. It seemed that the big players were more likely to be selling than buying. We have seen the winds change here over the last decade. Maybe the biggest difference is China because the Chinese central bank seems to be continuing to accumulate gold reserves.

I don't know if we can count on this to continue. But I also don't envision any major selling of gold by central banks around the world. If anything, China is putting something of a floor on the gold price by buying more on price dips.

In terms of owning gold, there are really two purposes. One purpose is as an insurance policy. Gold is a hedge against money depreciation and fear and global instability. It's always good to have some gold holdings in your portfolio. I recommend around 20%.

These holdings should reflect the price of gold. You shouldn't substitute gold stocks as part of your core holdings.

The second purpose for owning gold is like any other investment. It's to make a profit. That's where the predictions come in...

The 2019 Roller Coaster

It's impossible to make predictions with any certainty or accuracy in regard to timing. Still, we can do our best to see what the likely scenarios are and whether it makes sense as a speculation in terms of risk versus reward.

In late 2008, we saw gold fall with the economy. In a deep recession, there's a high demand for money. People look to move to cash. Despite the fear, some gold investors sold. But it wasn't long lasting because the Fed's "quantitative easing" quickly pushed gold prices back up.

Although another recession is somewhat likely in the near future, I'm not scared about owning gold. At the beginning of 2016, stock investors were given a bit of a scare when markets sold off because the fear of rate increases drove down equities. But the key here is that gold prices actually went up almost as drastically as stock prices went down. And as the markets recovered, gold continued to hold its elevated price level, even moving up a little over the course of the year.

So, weakness in the economy isn't scaring me right now in terms of owning gold. It's possible that the U.S. dollar could strengthen even more, but how far will it really go? This is more of a reflection of the weakness of the other major currencies and non-gold investors looking to the U.S. dollar as a safe haven.

The only problem for gold right now is that many investors aren't that interested in owning it. There will always be gold bugs who like gold. There will always be a tiny percentage of people who will own it no matter what. But on the whole, investors aren't excited about gold right now.

If you have 20% of your portfolio in gold-related investments as I recommend, you really don't need to change a thing. If you're looking for short-term profits, you'll have to pick your buying spots.

Gold will have several support levels in 2018. The first will be at around $1,200. If gold breaks through this level to the downside, we should expect it to continue to slide to the next support at $1,100.

If gold goes below $1,100, you should definitely be buying if you're looking at buying at all. In fact, anything near that mark should be a buy. I'm expecting a range of $1,100 to $1,300 in 2019.

This is based on the potential for a recession or further market weakness. Investors tend to turn to cash in those times to give them the power to buy stocks that have dropped.

Central banks and investment banks alike have continued their gold-buying activities and are purchasing large amounts of gold bullion. Leading hedge funds are endorsing gold as a core investment and are exiting stocks. As long as global economic uncertainty persists, we'll continue to see interest in gold as a safe haven. And as with any commodity, increased interest will translate to increased prices.

But if things change quickly, the strategy might need to be changed, too.

A weak economy may ultimately mean higher gold prices. If there's enough weakness to get the Fed to start another round of quantitative easing (QE) — money creation — or reduce interest rates, this is when investors will need to become buyers. It won't be so much of a bet for gold as it will be a bet against the dollar.

If we do hit a point of the Fed making an announcement of more QE or lower rates, you should get into your speculations at that point, regardless of the price. A new QE announcement or a return to zero interest rate policy would spark a massive bull run in gold. If you want to speculate, you should consider putting equal amounts into silver and gold. But your core gold holdings should stay there, but this does not include silver. Silver isn't a core holding unless you want a small token amount. Silver should be mostly for speculation.

Before this is all over, we'll see another bubble in gold. We may still reach that 1980 all-time high adjusted for inflation. But it won't happen in 2019. This year, 2019, will be the one to watch for buying opportunities at support levels below $1,200.

The years 2016 and 2001 were the years we may look back on and wish we'd bought more gold when it was so low. But 2019 will likely give gold investors a chance to buy while the metal is cheap, too.
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