Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19
Crude Oil Price Fails At Critical Fibonacci Level - 15th May 19
Strong Stock Market Rally Expected - 15th May 19
US China Trade Impasse Threatens US Lithium, Rare Earth Imports - 15th May 19
Gold Mind Reader's Guide to the Global Markets Galaxy: 'Surreal' - 15th May 19
Trade Wars and Other Black Swan Threats to Your Investments - 15th May 19
Our Long-Anticipated Gold Momentum Rally Begins - 15th May 19
Defense Spending Is Recession Proof - Defense Dividend Stocks - 15th May 19
US China Trade Issues Will Drive Market Trends – PART II - 14th May 19
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold - 14th May 19
Can You Afford To Ignore These Two Flawless Gold Slide Indicators? - 14th May 19
As cryptocurrency wallets become more popular, will cryptocurrencies replace traditional payments? - 14th May 19
How US Debt Will Reach $40 Trillion by 2025 - 14th May 19
Dangers Beyond a Trade War with China - 14th May 19
eBook - Greatest Tool for Trading? - 14th May 19
Classic Pitfalls for Inexperienced Traders - 14th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Gold Bears Suddenly Appear, More Emboldened than Ever

Commodities / Gold and Silver 2013 Apr 19, 2013 - 07:46 PM GMT

By: Jordan_Roy_Byrne

Commodities

Congrats to the gold bears and stock bulls! After being slaughtered for the majority of the last decade and more, they finally won a victory. Golf clap for you gentlemen. Now you can have your day in the sun once again. US stocks are at all-time highs and Gold sucks again! You won’t have to listen to your clients ***** and moan about how you ignored, avoided or were underweight the bull market of our time. Time to crow!


I awoke on Monday to a link from a subscriber. It was an editorial titled, “The Day that Gold Died.” The author cited the usual, clueless and baseless arguments both to why folks buy gold and why gold sucks as an investment. It is nothing more than a flimsy rant. He also cited a “marvelous takedown” by Barry Ritholtz, a formerly humble and generally impartial commentator who is now enjoying mainstream notoriety.

The worst and most natural, instinctive error these chaps and all gold haters make is to immediately refer to gold is an end of the world investment. This would be the most bizarre and ridiculous argument for gold. If the world ends, then how do you collect on it? If society breaks down for a period of time, then what good will Gold do for you, ahead of a farm?

Do central banks buy Gold because they think the end of the world is coming? If Gold is an “end of the world” investment, then why the hell do western central banks own the vast majority of their reserves in Gold? And why are emerging central banks buying Gold?

It’s because Gold is money and has been the only form of money to last for thousands of years. Not too long ago it was legally part of the monetary system. Since that change in 1971, the S&P 500 has advanced from 88 to 1541 while Gold has moved from $35/oz to $1395/oz (as I pen this). Even with the latest slide in Gold, it has still crushed the S&P 500 by rising 40-fold compared to just 17.5 fold for the S&P 500.

Gold’s tremendous increase in value (since its removal from the monetary system) over a long period of time shows its value as a speculation but more importantly, a currency. Though it fluctuates greatly during each cycle, over the very long-term it is the strongest reserve asset. This is why central banks buy it, hold it and accumulate it. It’s a no-brainer. Jim Grant put it best when he said gold is a hedge against monetary disorder.

Now let me get back to this supposed “marvelous takedown” from Ritholtz.

First he cites that the US$ is at a 3-year high and that Gold rallied when the buck fell from 2001-2007. First, let me note what few analysts know. When it comes to important market moves, Gold usually leads the US$. Does Ritholtz know that the US$ bottomed in late 1978 while Gold soon advanced 400% until its top in early 1980? Does he know that each of Gold’s recent major bottoms (2000, 2005, 2008) occurred before the US$ topped? The US$ is at the same level it was in late 2004 when Gold was trading below $500/oz. So should Gold be at that level? Surely, a strong US$ is a negative for Gold. However, history shows us that Gold is far more than an anti-dollar bet.

Secondly, as usual we hear this utter nonsense that Gold is a “trade”. It’s a greater fool trade as Ritholtz says. According to Ritholtz, gold trades differently than equities (citing history) because it has no fundamentals (i.e. no earnings, cash flow, etc.). What detractors of Gold should say is, because it produces nothing and is hard to value, it is never an investment and always a speculation.

Getting back to his point, can we check the charts of the last 10-15 years? Which one is a trade and which is in a bull market? There is a difference between a trade and a secular trend (i.e. a bull market). The bull market is in Gold while equities with their 15-year zigzag, clearly should have been traded back and forth.

Ritholtz totally bungles this argument. He cites history but fails to mention that Gold and equities trade inversely over long cycles. Equities were in a secular bear from 1966 to 1982 while gold stocks were in a bull from 1960 to 1980 and gold in a bull from 1969 to 1980. Then precious metals experienced a vicious bear market in the 1980s and 1990s while equities performed fantastically. Since 2000 stocks have been in a bear market and precious metals in a bull.

There is a reason for this long-term cyclicality. Stocks begin a bear market at times of major economic excess. Naturally, the economy corrects the excesses while at the same time, government increases its spending and the Fed cuts rates to soften the impact of long-term recessionary forces. Furthermore, real interest rates are typically negative to ensure more money comes out of cash and fixed income. Stocks struggle through these periods and hard assets (especially precious metals) perform well. Ultimately, the private sector is able to work through the problems and high commodity prices induce greater supply, which quells future inflation and results in an extended bear market.

This entire argument between stock bulls and gold bugs ultimately comes down to one thing. Has the secular tide shifted? Was this the major top in Gold on par with 1980?

Let’s compare some performance numbers. In the previous bull market, Gold gained about 25-fold. In this one, its gained nearly 7.5-fold. In the final 12 months of the previous bull market, Gold gained 282%. The 12 months before the 2011 peak, Gold gained about 55%. The last three years of each? It’s 577% (1977-1980) and 156% (2008-2011).

Gold corrected about 45% after its peak at the end of 1974. In the 13 months leading up to that peak, Gold gained 116% versus 59% for this bull market. In the 24 months leading up to that top Gold gained about 200% versus about 100% for this bull market.

In terms of the numbers, the most recent top in Gold comes nowhere close to the bubble peak of 1980 nor is it close to the peak in 1974 which was followed by a 45% downturn. Calling Gold a bubble just proves you don’t know what you’re talking about.

Furthermore, we’ve noted that the Barron’s Gold Mining Index, which was in a bull market from 1960 to 1980, experienced two substantial downturns of 61% (1968-1969) and 68% (1972-1974) before rising about 7-fold from 1976 to 1980. The HUI Gold Bugs Index declined about 71% in 2008 and as of yesterday was down about 60% since its 2011 peak.

History argues that equities will remain in a secular bear market. The three previous secular bear markets lasted 20, 13 and 16 years. The shortest commodity bull market, the last one, is 13 years long. It is highly unlikely that the commodity bull market ended in 2011 at 12 years old. The shortest bull market is not likely to be followed by an even shorter one. Furthermore, its highly unlikely the bear market in equities ended at 9 years when the others range from 13 to 20 years. Moreover, valuations at the 2009 bottom did not come close to where they were in 1921, 1942, 1946 or 1982.

Also, consider the Gold versus the S&P 500 ratio. It peaked in 1942 at 4.3 and in 1980 at 5.8. In 2011 it peaked at 1.7. Judging from history that was nowhere close to bubble territory.

Meanwhile, the macro backdrop remains extremely supportive of precious metals. Real interest rates are negative and will remain so for years as governments try to “QE” their way through the coming sovereign debt crisis. Do stock bulls honestly think governments will be able to continue to print money to buy their own bonds and stocks will go up 10% a year, there will be no inflation and commodities will decline? (Barry, isn’t this the recency effect you speak of?) This reminds me of the folk who denied the housing bubble or thought we weren’t in a recession in spring 2008. What happens when governments and central banks lose control of the bond markets and interest rates start rising? I’ll tell you what, they’ll print more and more to try to reverse it and rates will still go up.

This is why Kyle Bass and John Paulson aren’t selling. They made assloads of money betting against something that was inevitable and patiently waited. In the meantime, reporters and bloggers can poke fun at them saying the “trade” hasn’t worked or has gone wrong. These folks were never invested in precious metals to begin with and they either can’t see the world beyond a few days or fail to understand the bulletproof case for precious metals.

It’s true that many gold bugs deserve the recent ridicule. When you constantly promote wild conspiracy theories or blame manipulation for your large losses, you lose respect and credibility and you taint gold as an investment. It just makes us look worse.

The stock bulls and gold haters have won the battle but not the war. Sorry guys but your victory lap is premature. Next time you may want to do some real research before writing about Gold unless you just want to do a hit piece or take a victory lap. Precious metals are likely to strongly outperform stocks in the next three to four years. Both are nearing cyclical turning points. Once Gold goes parabolic, that is the signal to abandon ship and get back into stocks.

A sharp rally in the precious metals complex is days or hours away but look for a base building process to follow. Right now the complex is a strong buy. We’ve kept at least 40% cash over the past several months and have scaled in, albeit early. Now is the time to put money to work more aggressively than normal.

If you'd be interested in professional guidance in this endeavor, then we invite you to learn more about our service.

Good Luck!

Email: Jordan@TheDailyGold.com
Service Link: http://thedailygold.com/premium

Bio: Jordan Roy-Byrne, CMT  is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2013 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor.  Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.

Jordan Roy-Byrne 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