Seeking Alpha

The Death Of Gold: Revisited

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Includes: BAR, GLD, GTU, IAU, OUNZ, PHYS, QGLDX, SGOL
by: ChartMasterPro
ChartMasterPro
Momentum, long/short equity, short-term horizon
Summary

The secular asset trend remains in favour of soft assets such as equities.

Rising interest rates are Kryptonite to gold.

Gold reserves are no longer economically relevant for sovereign international reserves.

More nations should follow Canada and Norway's example and sell their hordes of the 'barbarous relic' in search for better returns on their sovereign capital.

Back in October 2011 I wrote my first bearish article on gold: Gold on the Verge of a Major Collapse when it was trading at $1,643 - today it's trading at $1,231, down 25.1% from the day I penned the article. And my bearish stance on gold has not changed - below I set forth my argument as to why I believe the price of gold is headed still lower.

Don't Fight the Secular Asset Trend

Since February 2013 the world economy entered a secular (long-term) trend in which soft assets such as equities tend to outperform hard assets such as gold.

The chart below shows the Gold:Dow Jones Industrial Average ratio laid over its 48 month EMA. This ratio is an excellent tool that can be used to identify which secular asset trend is dominant.

End of the Golden Era

As you can see on the chart, in May 2002 the GOLD:DJIA ratio crossed above its 48-month EMA - this signalled the beginning of out performance for hard assets such as gold and silver. From May 2002 to August 2011 Gold climbed from $300 to $1,800 - an increase of around 500%.

In February 2013, the opposite occurred: the GOLD:DJIA ratio crossed below its 48-month EMA, and since then Gold has dropped from $1,650 to $1,230, a decline of 25%.

As per the GOLD:DJIA ratio we are still firmly entrenched in the soft asset secular trend, and as long as we are, the price of Gold can only continue to fall. Only a bullish cross above the 48-month EMA would indicate that the tectonic plates of the asset market had shifted and signal the advent of a new secular market. Until then I can only remain bearish on Gold.

Above is the same GOLD:DJIA ratio chart over the SP500 - you can see that from May 2003 to February 2013 the SP500 more or less grinded sideways for ten long years as the secular asset trend was in favour of hard assets. But once the GOLD:DJIA crossed over its 48-week EMA in February 2013, signalling the advent of a soft asset secular trend, the SP500 has climbed 86%. And as long as the GOLD:DJIA ratio remains below its 48-week EMA, the SP500 will continue to trend higher.

Rising Interest Rates are Kryptonite to Gold

Higher interest rates crush the value of gold. Why would an investor want to hold an investment vehicle that pays no interest nor dividend when he/she can earn 5% or 6% annually in a US 1 Year Treasury? Answer: they wouldn't. The last time the 1-Year US Treasury yield was at 6% (October 2000), gold was trading at $275 per ounce.

The monthly chart above shows the 1-Year US Treasury yield over the price of gold. You can see that the price of gold peaked at the same time that the 1-Year US Treasury yield bottomed (August 2011). You can also see that the 1-Year US Treasury yield started to "explode" higher in December 2014, and has not looked back since then. The trend for US interest rates is UP - and inversely, the trend for gold going forward must be DOWN. Although no one can be certain of the timeline, it is highly probable that in five to seven years 1-Year US Treasury yields will be back at 6.00% and, to chagrin of a myriad of Gold Bugs out there, gold could get back to the $300 level.

Canada, eh?

The US reportedly holds 147.3 million oz troy of gold in Fort Knox - at today's spot price of $1,231/oz, that equates to a value of $181 billion.

Many traditionalists would consider such a sale of US sovereign gold as sacrosanct. But ask yourselves, what's the point of governments holding gold reserves in today's age of modern economics? When compared to both US GDP of $29.8 trillion (2018) and total US national debt of $21.2 trillion (this is a link to the US Debt Clock - if you haven't seen this, I encourage you to visit - it's both fascinating and terrifying at the same time) the $181 billion in gold is a drop in the bucket - it can't be used to pay off any significant portion of the national debt, and it can't stimulate the economy in any way as long as its sitting idly in the cold dark vaults. It is, in my opinion, a completely useless asset.

For those who believe that selling sovereign gold reserves would result in economic chaos and the devaluation of a country's currency, I point you to our neighbours to the north, Canada. In the 1960's Canada held 1,000 metric tonnes of gold (US currently holds 4,582 metric tonnes) but by March 2016 the Canadian sovereign gold vaults were empty. Zero. Nada. Null. And what has happened since then? Well, nothing. The Canadian economy did not spiral into a depression, and the value of the Canadian dollar did not collapse: the sky did not fall. In fact, on a nominal GDP basis, Canada still ranks as the 10th largest economy in the world. When asked why Canada decided to sell its gold reserves, a senior Finance Department official stated: "because it hasn't delivered a good rate of return over time and it costs money to store it." Makes sense to me.

And Norway, too

Norway is another rich nation (as per the IMF Norway is the 7th richest nation in the world) that decided that it was not worth the carrying costs to keep a sovereign gold reserve. In 2004 the country sold its gold reserves: "Norges Bank has sold the gold bars in the central bank’s gold reserves, with the exception of seven gold bars reserved for exhibition purposes." Exhibition purposes! The Norwegians clearly understand that gold is now a "barbarous relic" useful only for display purposes.

Norway also manages the worlds largest sovereign wealth fund which is now worth over $1 trillion. And can you guess how much gold the fund owns? You got it, ZERO. As of the end of 2017, the fund's assets were invested 66.6% in stocks, 30.8% in bonds, and 2.6% in real estate. The fund generated a return of 13.7% in 2017. If the largest sovereign wealth fund in the world holds no gold in its investment portfolio, why should you? Follow the smart money.

Conclusion

Those hoping or betting on gold prices going higher over the next five to six years find themselves on the wrong side of both a secular asset trend and a rising interest rates trend. Don't fight the trend. Stay long equities until the secular trend turns once again in favour of hard assets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.