Gold Investment Fundamentals and the Transfer of Capital

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 |  Includes: DGL, GDX, GLD, IAU
by: Chris Vermeulen

The secular bull market in gold investments corresponds directly to the secular bear market in financials. We explain below why this trend will continue and why a short-term buying opportunity in gold presents itself.

Central Banks are in all sorts of a pickle. 

With overwhelming evidence that the global economy is slumping badly:

  • UK retail sales see worst slump in 20 Years
  • Business confidence in Germany is at lowest level in 2 years
  • New Zealand's Central Bank cutting interest rates saying slowing economic growth will curb inflation.
  • Japanese exports decreasing YoY, and imports climbing on record oil prices.
  • US unemployment at 4-year highs 

The knee jerk reaction by central banks is to man the printing presses and hit the accelerator. And whilst this medicine has worked well over the last 25 years, Central Banks are now hitting a brick wall that they haven’t encountered since pre-Keynesian 1930s.

Freshly minted fiat currency is falling into the hands of a crippled banking sector with little capital, ability or desire to carry out the multiplier effect and make loans to real people in the real economy. In a debt laden global economy with no reverse gear this headwind is possibly the biggest threat the Federal Reserve and its ilk aka the establishment have ever faced in carrying out monetary policy 

Gold investors are well aware of the risks inherent in the current financial system. 

The beauty of capitalism and the associated free movement of capital is that smaller more focused entities; a.k.a hedge and private equity funds can and are rapidly moving into long held banking preserves.

  • Direct lending to mid and small cap entities is now a well worn hedge fund territory.
  • Extracting value through shareholder activism.
  • A much larger pool of capital available for short selling.
  • Private equity funds increase investment time horizons.

Highly secretive and operating out of non-transparent domiciles these entities are by and large out of the reach of the central banking system. 

Point #2 – Hedge funds and private equity funds do not benefit from Fed handouts and would be better served by a currency that acts as a stable store of wealth – gold.

The transfer of the financial system is akin to the explosion of information on the internet. The players that used to have a monopoly on information become less effective. There will be winners and there will be losers. But right now a bet on gold investments like gold stocks and gold ETFs is a bet against the Establishment and the out-dated mega-banking system.

Slower growth will continue to cause problems for financials as bad debts soar, and as a result gold investments will continue to propel higher in its multi-year secular trend.

Figure 1 -  Gold bull market (NYSEARCA:GLD) accelerating as financial fears grow bottom (Gold Miners ETF (NYSEARCA:GDX) outperforming Financial ETF (XLD))

Short-Term Opportunity

The above trend stretched too far technically over the last 3-months and there has had a rapid reversal over the last 2 weeks. This is a technical pullback only and the above fundamentals have not changed. There’s more to come in this fundamental story and Gold investments (we use the Gold ETF (GLD) ) and we could be getting close to another buying point for gold soon.

Gold Investment via GLD - $85 is strong support as a confluence of lateral support (green) and the 50-week Moving Average converge. Its just a matter of time before we have another entry point to add to our positions and or make another profitable gold investment.