Money managers no longer hate gold, saying it’s undervalued

(February 15, 2017 - by Brett Arends)

The last two times in 10 years that money managers thought gold was cheap, the yellow metal subsequently jumped in price

The world’s biggest and most powerful money managers usually hate gold.

But not today.

The latest survey of nearly 200 money managers worldwide, controlling more than half a trillion dollars in investment assets, shows a sudden and rare burst of bullishness about the yellow metal.

They’re worried about inflation, stagflation and global protectionism, and they think gold is the best insurance against all three.

And at less than $1,300 an ounce, they also think, for only the third time in a decade, that it is undervalued.

Make of that what you will.

Under Trump, gold is an insurance policy rather than an investment mainstay.

This is the surprising and remarkable takeaway from the latest Bank of America Merrill Lynch monthly global fund manager survey. The survey is a key indicator each month of mainstream opinion among those who run the world’s investments. BofA surveyed 175 money managers with $543 billion in assets under management.

By a net margin of 15%, opinion among money managers is that gold is undervalued. That ties the record set in January 2009.

Money managers often argue that gold is overvalued, uninteresting or both. That goes right back to 2004, when I first suggested Merrill Lynch start asking about the metal in its monthly surveys.

Only three times in the past 10 years has a majority believed gold was cheap. After the past two times — January 2009 and January 2015 — gold subsequently shot up in price. This is surely more than coincidence.

Mainstream financial opinion hates gold. It generates no cash flow, so it is impossible to value. Indeed, you could argue that according to standard financial theory, it is pretty much valueless. Meanwhile, many of gold’s strongest adherents rely on a variety of questionable arguments to make their case, including the circular one that “it’s money because it’s money.”

Agnostics, on the other hand, have the advantage that we can stay flexible. Gold has a number of unconventional appeals. It’s the only currency not controlled by central bankers or politicians, and it has a reasonable track record of zigging when stocks and bonds are zagging.

The latest survey opinion is of more than passing interest. These guys typically do not hold gold in their portfolios. Indeed, to buy some, most of them will have to go through investment committees, which takes weeks or months. But if they are interested, and they stay interested, that will presumably drive more demand for gold as an investment in the months ahead.

This gold call is the downside of what Bank of America Merrill Lynch calls the “Icarus” trade — after the figure in Greek mythology who plunged to his death after flying too close to the sun.

The stock market has been booming since the week before the presidential election. And right now momentum, technical indicators and investment opinion all point to further gains for stocks. Merrill says money managers are starting to talk about a global economic “boom,” corporate executives are talking optimistically on conference calls, and growth and inflation expectations worldwide are being penciled upwards. The 50-day moving average on the S&P 500 Index SPX, +0.25%  of stocks is well above the 200-day moving average, and actually the gap is widening.

All of this is a good argument for being bullish on stocks, especially if you are a momentum trader. BofA sees another 10% gain on the market before the run ends.

But risks remain, including valuation, inflation, rising interest rates and global trade conflict. (President Donald Trump said during the campaign that financial assets were in a “big fat bubble,” which presumably means it’s even bigger and fatter now.) The biggest risk is that Trump’s mercantilist policies will introduce a beggar-thy-neighbor round of reprisals elsewhere. The rise in the U.S. dollar since the election is already a negative for the United States, as it hurts exports and drives up the cost of imports. In a mercantilist world, every country wants a cheaper currency. But currencies are a zero-sum game. The one that can’t be devalued by central bank activity is gold.

The second biggest is surely uncertainty itself. You do not have to be a critic of the current president to accept that he introduces a massive amount of uncertainty into governance and policy. (His biggest supporters like him pretty much for that reason.)

In this scenario gold is an insurance policy rather than an investment mainstay. So-called “gold bugs” typically hold a lot of their portfolio in the metal, sometimes a third or more. Professional money managers typically hold nothing. Holding 5% or 10% of your portfolio in gold doesn’t seem unreasonable.