Gold bulls have experienced a decent sized pullback over the last few months after peaking in late August. Many market participants and commentators are calling for an end to the decade long bull market in the yellow metal. I disagree and believe the long-term fundamentals that bolster the gold thesis remain intact.
While many have become bearish due to technical factors, including the spot price below its 200 day moving average, I remain bullish on the long-term gold thesis. My thesis in gold rests in debt growth and money creation not short-term technical factors.
Long-term holders including hedge fund managers Ray Dalio, Kyle Bass, and David Einhorn own gold due to sovereign debt woes. These managers invest in gold due central banker's desire to debase their currency.
Bridgewater on 2012 The world’s largest hedge fund, Bridgewater Associates run by legendary Ray Dalio is very concerned about the developed world. Dalio and Bridgewater are preparing for at least a decade of slow growth and high unemployment for the big developed economies.
According to the Wall Street Journal, Robert Prince, co-chief investment officer at Bridgewater, “describes those economies — the U.S. and Europe, in particular — as "zombies" and says they will remain that way until they work through their mountains of debt.” In addition Prince indicated that interest rates in the U.S. and Europe were likely to be locked at zero for years to come. “Mr. Prince says stocks remain vulnerable to "air pockets" from shocks, such as bad news out of Europe. But for longer-term investors looking out over the next decade, he says, equities may be a good buy.”
Bridgewater cites decades of excessive leverage as the primary culprits for today’s woes. The chart below outlines the significant growth in credit market debt over the last few decades.
Bridgewater on Gold
According to Prince and Bridgewater, “Gold prices should resume a rally amid continued printing of money by the Fed and other central banks, Mr. Prince says. Those efforts effectively devalue those countries' currencies compared with gold.”
Despite near-term volatility, due to risks of currency debasement I think investors should have some allocation to precious metals including gold and silver.
The chart below outlines the four greater than 15% declines since 2005 in GLD.
Excessive Money Printing and Inflation
My underlying premise for owning gold is excessive money printing in the developed world. The developed world has a debt problem that can only be resolved through heavy austerity measures and deflation or inflationary measures to “inflated” the debt away. Due the near-term social consequences of austerity including unemployment and a slowing economy I believe central banks will do what they can to avoid deflation.
Since President Nixon closed the gold window August 15, 1971 debt growth has gone parabolic. In the 1970s and 1980s an incremental dollar of debt produced incremental productive GDP. But over the last ten years GDP growth has not kept up with the rapid rise in credit growth, pointing to a debt saturation problem.
As world governments seek to stimulate their economies they will need to print more money to stave off a decline in credit market debt. Since 1971, real GDP increased approximately 3.3x, whereas credit market debt increased nearly 18.3x.
Gold is under owned
Despite a decade long bull market in gold, the asset class remains relatively under owned when compared to financial assets.