The Long Case for Gold

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Includes: DBP, DBS, DGL, GDX, GLD, IAU, SLV, XME
by: Toro

I am bullish on gold long-term. One of the reasons I'm bullish is because if China's rate of gold consumption were to match Hong Kong's, the demand from China alone would be in excess of all the gold supplied to the world in a year and more. Of course, gold demand is partly a function of wealth, and since Hong Kong is many times richer than China, it is unlikely demand for gold from China will match Hong Kong's for several decades, if ever. However, there will be a bid underneath the gold market as long as China keeps expanding.

I do wonder, though, if we'll see a pullback in the near term. It seems there is persistent selling at $700, and perhaps gold is getting a little tired. We'll see. I do own gold (and silver) stocks, and will be looking to add on pull-backs.

I haven't done a round-up on gold for awhile, so here are snippets from a couple of articles I have been compiling over the past few months.

Is Gordon Brown, the soon-to-be UK Prime Minister, the least astute gold trader on the planet?

GATHERED around a table in one of the Bank of England’s grand meeting rooms, the select group of Britain’s top gold traders could not believe what they were being told.

Gordon Brown had decided to sell off more than half of the country’s centuries-old gold reserves and the chancellor was intending to announce his plan later that day.

It was May 1999 and the gold price had stagnated for much of the decade. The traders present — including senior executives from at least two big investment banks — warned that Brown, who was not at the meeting, could barely have chosen a worse moment.

In the room, just behind the governor’s main office, they cautioned that gold traditionally moved in decades-long cycles and that the price was likely to increase. They added that even if the sale were to go ahead, the timings and amounts should not be announced, as the gold price would plunge.

“The timing of the decision was ludicrous. We told them you are going to push the gold price down before you sell,” said Peter Fava, then head of precious metal dealing at HSBC who was present at the meeting. “We thought it was a disastrous decision; we couldn’t understand it. We brought up a lot of potential problems at the meeting." ...

According to other sources, however, Bank of England officials told those present they had “little say” about what was going to happen and that they were “doing what they were told”. This was a decision made by Brown and his inner circle, who appeared uninterested in their expert advice. ...

The price of gold has almost trebled and the loss to the taxpayer has been calculated by one leading firm of accountants at more than £2 billion. The decision to sell 400 tons of gold is seen in City circles as a financial bungle on the scale of the Tories’ “Black Wednesday” that cost the taxpayer £3.3 billion, according to Treasury estimates. ...

I am of the strong opinion that this bull market is at least partially due to the creation of excess liquidity around the world. If liquidity dries up and financial markets collapse, so will gold. Howard Simons at RealMoney ($) agrees.

One of the reasons why certain truths are held to be self-evident is that no one likes to check whether they are evident in fact. And nowhere are shoot-from-the-lip assertions as common as they are in gold. If we accept my longstanding premise that gold is understood best as a religion and not as a market, then everything falls into place.

Religions make assertions as a matter of faith; certain religions add the sanction of eternal damnation as a negative incentive. Gold's aficionados also make assertions as a matter of faith; their negative sanction is eternal annoyance: One day, gold will enter a bull market to end all bull markets, and you will have to listen to me forever and ever and ever!

One of these gold-aficionado assertions ... is that gold is nothing less than the antifinancial asset. When paper fails, when trouble looms, when that fan is turned on and begins blowing all manner of stuff in your general direction, gold will provide salvation. ...

Let's take a look at the comparative histories of gold and the S&P 500 since 1975; this starting date was chosen to coincide with the introduction of gold futures in the U.S. Lost in the collective memory is the fact that it was illegal for Americans to own gold except as art, jewelry or dental work between 1933 and 1974. ...

First, while the inflationary late 1970s were a terrific time to own gold, the stock market of that time simply stagnated in nominal terms; it did not return to medieval levels. Second, while gold collapsed in the early 1980s under the weight of Paul Volcker's tight credit policies, stocks struggled against these very same policies. Third, the 1985-1987 bull market in stocks was accompanied by a rise in gold prices. Fourth, the 1987 stock market crash preceded the start of gold's long decline into 2001, not a flight into gold. Fifth, while gold began its bull market in 2001 while stocks were in the midst of their worst bear market since the Great Depression, the rally in gold did not pick up speed until the equity bear market ended. Gold and stocks have been in parallel bull markets since early 2003.

I am a gold bull but I am not a gold bug. Gold is a religion to the gold bugs, an irrational and conspiratorial world where economic collapse is just around the corner, propped up only by the corrupt government and its puppet masters - Wall Street and the banks - at the expense of everyone else. It's amazing how much paranoid nonsense there is floating around the Internet on the gold markets

However, despite my aversion to the most rabid gold bugs, I am not going to turn my back on a good opportunity! You don't have to be an uber-bear to like gold now!

Fortunately, spring represents the gold market's annual ebb. So I'll be lined up there with the oil sheiks and the Chinese bankers, waiting for a dip to buy.

By [Citigroup's analyst John] Hill's reckoning, that's a step up from the "canned food and crossbows crowd" gold used to attract. The metal remains a good hedge against a crisis, financial or otherwise. But now its outlook looks bright even if the world doesn't go to hell. "The economy's growing great, the Dow's at a record, interest rates are low, the dollar's strong and gold's doing great," says Hill. "And that's a good thing. It's healthy for the asset that you don't have to be some gloom-and-doomer wacko to like it."

The recent run up hasn't been accompanied by the market timers who track gold. That's always a good thing, in my opinion.

This piece is a month old, but it demonstrates how wrong experts can be in financial markets when they are all on the same side of the trade.

Consider the latest readings from the Hulbert Gold Newsletter Sentiment Index [HGNSI], which reflects the average recommended exposure to the gold market among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Tuesday's close, the HGNSI stood at 0%, which means that the average gold timing newsletter now has no exposure to the gold market whatsoever.

Leaning against such extreme sentiment will usually be more profitable than not.