Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21
Scan Computers - How to Test New Systems CPU, GPU and Hard Drive Stability With Free Software - 4th Jun 21
Hedge Funds Getting Bullish on Gold - 4th Jun 21
THERE ARE NO SOLUTIONS When the Media is the VIRUS - 4th Jun 21
Investors Who Blindly Trust the ‘Experts’ Will Get Left Behind - 4th Jun 21
US Stock Market Indexes Consolidate Into Flagging Pattern – Watch For Aggressive Trending Soon - 4th Jun 21
Microsoft (MSFT) Stock Trend Analysis - 3rd Jun 21
No More Market Bloodbath – Beyond Cryptos - 3rd Jun 21
Bank run, or run from the banks? - 3rd Jun 21
This Chart Shows When Gold Stocks Will Explode - 3rd Jun 21
The Meaning Behind Gold’s Triple Top - 2nd Jun 21
Stock Market Breakout Or Breakdown – What Does The Next Big Trend Look Like? - 2nd Jun 21
Biden’s Alternate Inflation Universe - 2nd Jun 21
What You Should Know Before Buying Car Insurance - 2nd Jun 21
Amazon (AMZN) Stock Summer Prime Day Discount Sale - 1st Jun 21
Gold Investor's Survival Guide - 1st Jun 21
Silver and Copper to Benefit from Global Electrification Push - 1st Jun 21
Will Gold Shine Under Bidenomics? - 1st Jun 21
Stock Market Buy the Dip, Again?! - 1st Jun 21
Stock Market Consolidation Ahead - 1st Jun 21
Stock Market Summer Correction Review, Crypto CRASH, Bitcoin Bear Market Initial Targets - 31st May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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