Some people like to call gold ‘real money’ and believe it is good insurance for your future. They also often believe that fiat money is bound to fail, as it has every other time in recorded history. Dailyreckoning.com says the following:
“The history of fiat money, to put it kindly, has been one of failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.”
I don’t doubt the validity of that statement but are today’s fiat currencies around the world likely to fail? Sure, in places like Venezuela, but the USD, Euro, Yen, etc aren’t going anywhere anytime soon if ever. And gold as a currency isn’t going anywhere either but is it really a good investment or insurance?
Here’s a comment I came across in SA: “I hold "Cash" in the form of real money. In 1971 Nixon set the price of gold at $31/oz, today it's around $1,200, so in 45 years the price has gone up 3,158%. If you bought the stock market in 1971, when the Dow was around $900 you realized a very impressive gain but well short of gold and what it buys you now in 2017.”
My math says $31 to $1,200 is a gain of 3,771% but who’s going to quibble over the difference in those returns. The S&P 500 has gone from 92.15 to start the year in 1971 to today’s value of 2700 for a gain of 2,835%. The DJIA has gone from 839 to start the year in 1971 to today’s value of 25,000 for a gain of 2,880%. So, gold is indeed the winner and it’s not unreasonable to assume a similar result will occur 30, 40 or 50 years in the future, but why would you use a ‘buy and hold’ strategy for the next 30 to 50 years?
In the past, our investment choices were limited. I mean, those of ‘Joe Public’. Today, in many developing countries, gold is still the best means to save your wealth. For most people however, times have changed and continue to change and the options with online trading, ETFs (long and short), etc, make past investment strategies archaic.
Going forward, I recommend keeping two important factors in mind. One, don’t stay on the train when it’s going the wrong direction. Get off. Sell your shares (or gold or whatever), take the loss and keep your capital safe. Advocates for holding gold will say that’s what gold provides is insurance but I disagree, as you’ll soon see. Two, don’t leave your capital sitting in a dead investment. Look for something that is appreciating in value and switch to it. A third point that is also important, is don’t be afraid to ‘get on late’, which is distinctly different from chasing a runaway or fomo (fear of missing out).
With these points in mind, let’s take a closer look at the returns for gold and the markets since 1971. Here’s a look at gold.
It’s pretty clear that there were 2 big moves up in gold and the rest of the time it’s been a dead investment. It also looks completely possible that we may have another sideways market for 20 years. Of course, hindsight makes it pretty easy to pick the lows and the highs but ‘getting on board’ when momentum changes isn’t really that difficult. Neither is getting off and locking in gains when it gets ridiculously high. Picking the top is actually much more difficult, but it shouldn’t really matter when you’re selling for a big gain.
Starting again, buying gold at $31 in 1971 and holding to the high range in 1974 of $188 locked in a gain of 506%. Buying off the low more than a year later at $112 helped you avoid a -40% drop and you’re back in at a discount for the big run up to $850 in January, 1980 for a tidy gain of 659%. Getting off that rocket near the top helped you avoid a hard drop of -64% back to $300. If you could trade like you can today, you would have gotten long for some of the bounces from there, but for simplicity, let’s say you stayed out of gold till it bottomed out in 2001 at $260 and then road it up to the high of $1900 in 2011 for another solid return of 630%. Now, that’s an accumulated total return of 33,447% which is enormously better than any of the returns listed above, and you only bought and sold 3 times.
Clearly, the key is to sell high and be patient to re-buy low. It’s not rocket science, but it can be very, very difficult to control one’s emotions and make the right decisions.
Now, let’s take a look at the S&P following the same strategy, ie. sell at the highs and re-buy at the lows. To start, we’ll buy the market near the low in 1970 at 72 and then sell at the high of 120 to start 1973 for a gain of 66%. A year and a half later you got long again at 65, thus avoiding a complete loss of all your initial gains. You then remained long for over 5 years and sold in December 1980 at 140 for a gain of 115%. You went long again in August 1982 on a sharp move higher in the markets and could have stayed long till August 1987, selling at 320 as it fell back from highs for a tidy gain of 178%. Staying long for a drop of -28% over 3 months was perhaps necessary back in 1987, but not anymore. Simply sell and wait for the markets to hit bottom. You can see the remaining gains to date below for a total return of 51,875% since 1970.
I’m not going to complain about an accumulated total return of 33,447% with gold, or an accumulated total return of 51,875% in the S&P. I’ll take either one, so now let’s make a plan for doing that over the next 40 years.
Clearly, caution is advised for being long the markets now. Perhaps there will be a turn higher as there was in 2016, but that was largely sparked by Trump being elected and that rally may have run its course. Following the strategy of selling on sharp drops, you would be out of the market with your gains locked in and sitting on cash. Putting it back into the market here doesn’t look like a smart bet. Better to wait for the markets to settle down and establish a longer-term direction.
Of course, we no longer have to wait and only play longer term moves, so you can easily buy low and sell high on a daily and weekly basis, but that’s only for people who are interested in trading. The concepts I’m presenting is for long-term investors who only want to change course a few times over many years.
So how about gold from the current levels?
I don’t see a clear potential for a long trend higher so I’d be long with a small position from the sharp low in August this year and be sitting on it till there’s another sharp move in either direction.
How about oil and energy ETFs? Crude oil doesn't look enticing.
We might get a bounce to 60 from here but we could also go to 40, so I’m not willing to place a major bet either way. Looking at Vanguard's Energy ETF (VDE), I don’t see a reason to be long (or short) it either.
It more than doubled in value from the lows in 2009, but since then it’s been a dog and is there really any foreseeable reason for it to go up? Is the price of oil ever likely to go to $100 again? People were talking about it recently as it pushed up to $76, but the fact of the matter is, the world is awash in oil. There’s more oil than we’ll ever use so supply and demand says that the price won’t likely go higher. Sure, OPEC can limit production and now even the government of Alberta has taken action to limit production, but these actions aren’t the basis of a long-term market rally.
How about bitcoin?
Here’s another perfect example of getting on the wave when it’s rolling higher and getting off at the peak, and staying out. I can’t emphasize that enough. Stay out from major peaks. You could have re-bought low the following month from the peaks and sold it again, but again, that’s for people who want to trade and are able to. We’re simply looking for long-term moves and positions to take.
The one opportunity that I see at the moment is natural gas. Here’s a monthly view of natural gas prices.
I think the recent move to 4.60 (and higher) is ridiculous and am going short. Just imagine the short move in 2008!
The recent move was largely due to a ‘short squeeze’ combined with low storage levels and cold weather. A lot of big hedge funds were long oil and short NG, and as oil plunged in price and NG moved higher, they were finally forced to liquidate and some of them even went bust, with investments of over a billion dollars. Caution is still necessary as the price of NG could go to $5 and higher, mainly due to low storage levels compared to the 5 year average, combined with cold weather, but I believe that the price will drop, as it did with oil, simply because there’s an enormous amount of excess production. This wouldn’t be a long-term trade but it’s the only one I see as a good place to currently put my money.
How about China? It doesn’t look overly promising at the moment either, but could make a sharp reversal when the trade wars end.
Given the huge potential moves in gold, it will always attract a lot of attention. The enormous move in NUGT (a 3x leverage ETF of gold miners) is still a recent memory and grabbing a gain of 970% in 6 months is very appealing but it’s really not advised for regular investors.
In conclusion, for longer-term investors, I would recommend being in cash or half invested in gold and the markets but with stops to get out on any sharp move lower. If you want a little excitement, try some DGAZ to short natural gas but caution is advised there and I’ll write my thoughts about it soon. GLTA.