Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Gold Three Steps Forward, Two Steps Back

Commodities / Gold and Silver 2014 Nov 13, 2014 - 06:35 PM GMT

By: John_Mauldin

Commodities

Jared Dillian writes: I have been a gold bull, unrelentingly, since 2005. It has been quite an adventure.

Nine years ago, I was 31—still pretty young. I hadn’t read enough Austrian economics to even understand why I should like gold, but I did nonetheless. Besides, it was going up. And coincidentally, the folks at State Street had just come out with GLD, the SPDR Gold Shares ETF, and I was a market maker in it. Without GLD to invest in, I wonder if I would have had the inclination to learn about investing in gold futures or physical gold.


I also noticed that politics were starting to move left, deficits were getting larger, and the Fed had committed a policy error post-tech bubble in leaving rates at 1% for so long. 2005 was late enough to recognize that we were blowing a big housing bubble and monetary policy had certainly played a role in it.

Gold turned out to be a pretty good trade. I owned GLD up until the financial crisis, and I bought more on the 30% correction in 2008—with veins popping out of my neck because I knew that quantitative easing was on the way. It was by far the biggest position in my portfolio.

The narrative that developed at that time—“The US is printing money; we are going to end up like Weimar Germany, in hyperinflation”—made sense to me. It made sense to a lot of people. It has not come to pass, for some reasons we understand (it takes years to work off deflationary forces) and some we don’t.

That’s not to say that Milton Friedman’s quantity theory of money has been discredited. Money velocity has plummeted and keeps plummeting, for some reasons we understand and some we don’t.

Suffice it to say, the last three years have been very painful as an owner of gold.

Why You Should Own Gold Anyway

A lot of folks think that the price of gold correlates with the Federal Reserve balance sheet, and I think that’s partially true, but it’s not the whole story. I think it also correlates with the budget deficit.

When gold was at its highs, our deficit was at clearly unsustainable levels, over 10% of GDP. That’s at about the level that certain European countries started getting margin calls. There was this idea that our deficit would continue to grow, resulting in an oversupply of bonds and failed Treasury auctions, and that the Fed would have to directly monetize the deficit. Not unreasonable.

Then a miracle occurred: the deficit started going down.

It went down because we raised taxes, a lot, and became very efficient at collecting them. Also, after a period of years, the economy did start to recover, resulting in more revenues for the government. Our deficit went from $1.8 trillion down to $450 billion, about 3% of GDP, which is eminently manageable.

But I would argue that nothing has really changed in policymakers’ attitudes towards spending, that the federal fisc has been rescued by the happy accident of aggressive revenue collection and decent economic growth. I think discretionary spending has been momentarily constrained by political forces, but the long-term outlook for debt and deficits is pretty bad.

People talk about Social Security and Medicare being unfunded liabilities, that they are demographic time bombs, but we just added another one: Obamacare. If you paid any attention at all to what was going on in 2010 when it was passed, it allegedly had a cost of $1 trillion over 10 years. But that is only because it collects taxes for the first 10 years and spends for six.

On a going concern basis, it is, well, not a going concern.

And if we have learned anything from Medicare, which was projected to cost $9 billion by 1990 but ended up costing $67 billion, it is likely to get more, not less, expensive.

I am pretty pessimistic about the deficit, no matter which party is in charge. That debt monetization scenario I described is definitely within our future—it is only a matter of when.

Are People Too Emotional About Gold?

Practically speaking, I’ve given back most of my gains on gold. In fact, I was so sure that gold wouldn’t trade below 1,150 that I sold an (imaginary) one-touch to my clients at that price, which is basically a digital option that pays out when the barrier is touched.

The payoff is that I am forced to eat haggis, which, according to Wikipedia, “is a savoury pudding containing sheep’s pluck (heart, liver and lungs); minced with onion, oatmeal, suet, spices, and salt, mixed with stock, and traditionally encased in the animal’s stomach and simmered for approximately three hours.”

I ordered a can of it from Amazon, but it only comes in packages of three, so I will be eating a lot of haggis.

Gold is a very dangerous trade, because it plays into people’s core beliefs and how they perceive the world around them. If you are conservative/libertarian and you like hard money and hate the Fed, chances are you are bullish on gold. If you are a Keynesian/liberal and you like fiat money, chances are you are bearish on gold.

But most people aren’t bullish on, say, Yelp, because they are politically aligned one way or another. They evaluate Yelp on its investment merits. But people get emotionally attached to gold, or repulsed by it.

For example, Euro Pacific Capital CEO Peter Schiff is probably not going to change his mind on gold, no matter how low it goes. Neither is Barry Ritholtz, founder of Ritholtz Wealth Management. He will not change his mind on gold, no matter how high it goes. They may say they have intellectual flexibility, but they don’t.

Gold isn’t like oil. You might be bearish on oil at 140 and bullish at 70, but people generally don’t do that with gold. The people who were bearish on it for a decade never changed their minds, not even when it went up almost 1,000%, and the gold bulls (myself included) are still pounding the table after a very large and painful correction.

No White Flags in Sight

It will be interesting to see how long this correction lasts, because corrections usually last until nearly everyone capitulates and sells. But with gold, nobody is capitulating anytime soon. There is a lot of gold that people are unwilling to sell at any price.

One of my clients told me that he has owned the Market Vectors Gold Miners ETF (GDX) since $57/share and still owns it (presently about $18). Then you have all the physical buyers—what, are they going to take their gold out of the safe and put it in a box and ship it off to the bullion dealer so they can realize a capital loss? Never. They would rather die and just bequeath it to their children.

So it’s going to be interesting to see what constitutes capitulation in precious metals. All the hedge funds that were screwing around with it are already out of the trade and have been for a while.

It’s funny—not only do people not sell on the way down, they actually buy more. The US Mint recently ran out of silver Eagles, because at $16 an ounce, people are stocking up. And every time gold has broken some level of technical support, the physical buyers have come in and have vacuumed up all the coins until the premiums blew out and the mints screamed, “uncle.”

This is either going to end very badly, or it’s going to end… great. It does kind of remind me of equities in the ‘90s. If you recall, stocks were a religion back then. Just buy the index fund and dollar-cost average. Stocks go up forever. And if it goes down, buy even more. A pretty nasty bear market in gold has not disabused people of these habits.

Besides. Go back to the ‘70s—you had a 50% correction on the way to $800 an ounce. We could easily have another 50% correction and still be in a bull market. And what if we do get inflation? Pandemonium.

It’s funny, because as you look around the stock market for bargains, there are none. Newmont Mining, one of the largest gold producers in the world, has a smaller market cap than travel review website TripAdvisor. I take this as a sign.

(Disclosure: I’m long the gold and silver ETFs GLD, SLV, GDX, SIL, and I own both physical gold and silver, and I’m also short TRIP.)


Jared Dillian

The article The 10th Man: Three Steps Forward, Two Steps Back was originally published at mauldineconomics.com.
John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules