Gold as an investment: not straight forward. It was the original money, valued for its rare, precious and indestructible qualities. Fiat money then took over, but convertible to gold. Now, fiat money is purely a game of confidence, and gold floats freely. Gold is a non-yielding, non-productive asset so comes into favour (jewellery demand aside) only under specific conditions, namely when real interest rates are negative (which can be under inflation or deflation), when fiat money is being diluted (such as by policies of inflation or money-printing), when debt is growing significantly (as this is money borrowed from the future) or when other assets are in decline (which chiefly occurs due to demographic trends).
Right now, real interest rates are borderline negative, public debt is at record levels, QE has been rolled out across the developed world and demographics are united negative (i.e. pro gold) in the major nations. So why isn’t gold going up?
By demographics and solar cycles, gold should be in a secular bull from 2000 through to circa 2025, the next solar max.
Therefore, gold’s bear market from 2011 to 2015 would be a cyclical bear within an ongoing secular bull, similar to as occurred in the mid-70s. Gold has been making a long basing, as evidenced in the TSI below, over the same period that stocks have been making a topping mania. When stocks start to fall in earnest, then I expect gold to take off, in a new cyclical bull within an ongoing secular bull.
A bear market in equities would, through the wealth effect, tip the fragile economy into a deflationary recession, which should then result in negative real rates, additional fiat dilution by central banks, rising nominal debt levels and cash-flow looking for a safe haven. All favourable for gold.
However, contrast that with the common perception currently, which is that we are in a young secular bull in equities, with the economy early in the cycle and about to start growing strongly, and a trend of increasingly positive real rates ahead. Once this perception is revealed to be a misunderstanding, then the narrow interest in gold will become much broader.
A near term look at gold technicals suggests one more washout to the downside may be needed, as evidenced here in the gold put/call. The short interest is already at contrarian levels.
Source: The Daily Gold / CFTC
I would see this as fitting with a last rally back up in equities into the mid-July new moon (to a lower high), which was predicted by CPCE and Vix/Vxv as highlighted two posts back. I therefore lightened up my equities shorts and gold longs after this week’s full moon. Earnings season starts next week and properly gets going the week after. With a predicted 4.5% yoy drop in both earnings and sales for Q2, this provides a backdrop for stocks to topple over from that second week in July, and in turn gold to finally wake up. I believe that point will mark the definitive trend change in both and currently see that as the point of max attack.
Gold miners sit between the two asset classes: as both equities and tied to gold. In the last 4 years they have very much sided with the latter, declining in the face of a rising stock market. But notably they have performed much worse than gold, as shown in GDX:GLD below.
However, the major miners have been diluting their shares, making them not the bargain they initially seem.
Additionally, there is a question mark over how they might perform under sharp stock market falls. With few historic reference points, we can at best draw on the 1929 experience whereby the gold miners didn’t escape the initial falls but broke away later once the stocks bear was more clearly cemented. For these reasons, I stick with gold itself as the pure play and will pass on the miners.