By Jack Sparrow
There are three mentalities for those with an interest in gold:
- the trading view
- the long-term investment view
- the religious view
Traders see gold (and all precious metals) as vehicles to go long or short depending on the opportunity set, nothing more.
Long term investors are a bit more emotionally committed — they have a thesis involving runaway inflation, government corruption and Central Bank themed moral decay (though admittedly some of the value-minded just like the intrinsic value of gold stocks).
Those in the third category — what we’re tongue in cheek calling the religious category — see gold as not just a trading vehicle, or even a long-term investment, but a form of capitalist religion.
For true believers, gold ownership is a sort of transcendental societal salve: A form of redemption and shelter and cure for all our accumulated ills. For these folks, gold is something to hoard and never let go — or at least, not until the armageddon smoke has cleared and an ounce of gold is worth more than the Dow (perhaps crossing around 7,000 or so).
As traders, all we pretty much know is that gold looks absolutely terrible right now (if you are long).
First the chart:
And then the fundamental realities:
- Gold has consistently traded more as a speculative vehicle than a risk hedge. There is an argument that gold is a useful hedge for one’s portfolio — a way to protect against certain types of risk, like inflation and currency debasement risk. This argument is invalidated by the price action. Gold has not traded like a hedge, but rather a speculative plaything linked to visions of $5,000 per ounce (secondarily the same idea with silver). What kind of hedge gets the stuffing kicked out of it along with all other risk assets when there is a “risk off” meltdown?
- To the extent that there is inflation, it is benefiting gas prices and Facebook shares more than gold. Inflation does not show up in the same form over various cycles. Sometimes it juices paper asset prices, or consumable commodities with real demand like oil, even as official inflation indicators are held flat by stagnant or falling wages. Is the Fed creating inflation on the sly? Quite possibly. But that inflation is showing up in favored areas of the equity market, and real cost centers like food and gas, as opposed to PMs.
- If we see full-on global slowdown, precious metals will get hammered. Again, what kind of hedge is so failure-prone under hedge-worthy circumstances? If China truly does experience a “hard landing,” the shock of global growth deceleration, plus a sharply rising $US dollar, could cause gold to fall further, to the tune of hundreds of dollars per ounce.
- If the U.S. recovery stalls out, will gold really benefit? Societe Generale (SocGen) has come out with a new argument that gold will see a “sharp rally” if U.S. GDP severely disappoints to the downside. Maybe so, SocGen, maybe so. But that sounds like a sucker’s bet and a bagholder’s rationale to yours truly.
- The long-term monetary velocity arguments are suspect too. There is an argument that true global recovery is what will finally send gold over the moon, as monetary velocity increases faster than CBs (central banks) dare to withdraw their support. But if this happens, wouldn’t it make more sense for investors to salivate over, say, railroads or coal producers or other participants in the global growth paradigm?
- Gold’s super-heavy retail participation could turn from a blessing to a curse. The big gold ETF, GLD, is pegged as the best thing to ever happen to the yellow metal. At nearly $70 billion, GLD has brought in tens of billions worth of “little guy” investor participation. But what happens if those little guys are forced to puke up their positions in a bear market movement?
We are not gold perma-bears. If anything we have made more on the long side of gold and gold stocks than the short. And if the charts and macro view tell us to buy gold and gold stocks again in future, we certainly will. A trade is a trade.
From a trading point of view right NOW, though, precious metals are clearly a sell (if not an outright short). As are gold stocks. (Seen a weekly GDX chart? Woof!)
And from an investment point of view, the macro value is dubious (unless you are waiting for a total Europe meltdown, war with Iran, or some other apocalyptic event).
Fade the hype, or at least sidestep it. And be wary of the potential retail deluge if small invesetors finally get sick of “Waiting for Godot” -- I mean Gold.
Disclosure: As active traders, authors may have positions long or short in any securities mentioned. Full disclaimer can be found here.