Gold has become the ugly duckling during this bull market for stocks and bonds. However, that is not going to last.
Gold will eventually come back in fashion and when it does, how high could it really go?
The question begs your rapt attention as the possibility of Britain leaving the EC has suddenly unleashed a plethora of new positive fundamentals for the yellow metal.
It turns out that gold is THE deflationary asset to own. Who knew?
I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them down to historic levels across all asset classes.
But now that much of the world already has or is about to have negative interest rates, a bizarre new kind of mathematics applies to gold ownership.
Gold’s problem used to be that it yielded absolutely nothing, cost you money to store, and carried hefty transactions costs. That asset class didn’t fit anywhere in a yield-obsessed universe.
Now we have a horse of a different color.
Europeans wishing to put money in a bank have to pay for the privilege to do so. Place €1 million on deposit on an overnight account, and you will have only 996,000 Euros in a year. You just lost 40 basis points on your -0.40% negative interest rate.
With gold, you still earn zero, an extravagant return in this upside down world. All of a sudden, zero is a win.
For the first time in human history, that gives you a 40 basis point yield advantage over Euros. Similar numbers now apply to Japanese yen deposits as well.
As a result, the numbers are so compelling that it has sparked a new gold fever among hedge funds and European and Japanese individuals alike.
Websites purveying investment grade coins and bars crashed multiple times last week, due to overwhelming demand (I occasionally have the same problem). Some retailers have run out of stock.
And last week, the fever went pandemic as silver rocketed 14.28%, and others like Platinum (PPLT) and Palladium (PALL) were also frenetically bid.
So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.
Since it peaked in the summer of 2011, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it. It faced a perfect storm.
Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant.
The biggest buyers of gold in the world, the Indians, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.
You could also blame the China slowdown for declining interest in the yellow metal which is now in its fifth year of falling economic growth.
Chart gold against the Shanghai index and the similarity is striking until negative interest rates became widespread in 2016.
The brief bid gold caught in 2015 over war fears in Syria, Ukraine, and then Iraq was worth an impressive $160 rise.
That is when the diplomats got involved and hostilities were at least delayed causing gold to roll over like the Bismarck.
In the meantime, the gold supply/demand balance was changing dramatically.
While no one was looking, the average price of gold production soared from $5 in 1920 to $1,300 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.
It’s almost as if the gold mining industry is the only one in the world which sees real inflation since costs soared at a 15% annual rate for the past five years.
This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher risk, more expensive parts of the world to find the stuff.
You know those tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.
Barrack Gold (ABX) didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.
What this means is that when the spot price of gold fell below the cost of production, miners will simply shout down their most marginal facilities, drying up supply. That has recently been happening on a large scale.
Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate as older mines carry costs that go all the way down to $600 an ounce.
No one is going to want to supply the sparkly stuff at a loss. That should prevent gold from falling dramatically.
I am constantly barraged with emails from gold bugs whom passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).
They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices similar to what we saw from 1972 to 1979 when it leaped from $32 to $950.
So when the chart below popped up in my inbox showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using.
To match the gain seen since the 1936 monetary value peak of $35 an ounce, when the money supply was collapsing during the Great Depression, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low. That would take our barbarous relic friend up to $8,400 an ounce.
To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.
Have I gotten you interested yet?
I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $2,300/ounce long-term prediction positively wimp-like by comparison.
The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own krugerands in 1979, was triggered by a number of one-off events that will never be repeated.
Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.
South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.
But then again, I could be wrong.
In the end, gold may have to wait for a return of inflation to resume its push to new highs. The previous bear market in gold lasted 18 years, from 1980 to 1998, so don’t hold your breath.
What should we look for? The surprise that your friends get out of the blue pay increase, the largest component of the inflation calculation.
This is happening now in technology, but nowhere else. When I visit open houses in my neighborhood in San Francisco, half the visitors are thirtysomethings wearing hoodies offering to pay cash.
It could be a long wait for real inflation, possibly into the mid-2020s, when shocking wage hikes spread elsewhere.
You may have noticed that I have been playing gold from the long side virtually every month since it bottomed in January. I’ll be back in there again given a good low risk, high return entry point.
You’ll be the first to know when that happens.
As for the many investment advisor readers who have stayed long gold all along to hedge their clients' other risk assets, good for you.
You’re finally learning!
https://www.madhedgefundtrader.com/wp-content/uploads/2014/07/John-Thomas-Gold-e1455831491219.jpg297400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-05-08 01:07:542019-05-07 21:01:47The Ultra Bull Argument for Gold
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 17 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What will the market do after the Muller report is out?
A: Absolutely nothing—this has been a total nonmarket event from the very beginning. Even if Trump gets impeached, Pence will continue with the same kinds of policies.
Q: If we are so close to the peak, when do we go short?
A: It’s simple: markets can remain irrational longer than you can remain liquid. Those shorts are expensive. As long as global excess liquidity continues pouring into the U.S., you’ll not want to short anything. I think what we’ll see is a market that slowly grinds upward until it’s extremely overbought.
Q: China (FXI) is showing some economic strength. Will this last?
A: Probably, yes. China was first to stimulate their economy and to stimulate it the most. The delayed effect is kicking in now. If we do get a resolution of the trade war, you want to buy China, not the U.S.
Q: Are commodities expected to be strong?
A: Yes, China stimulating their economy and they are the world’s largest consumer commodities.
Q: When is the ProShares Short Russell 2000 ETF (RWM) actionable?
A: Probably very soon. You really do see the double top forming in the Russell 2000 (IWM), and if we don’t get any movement in the next day or two, it will also start to roll over. The Russell 2000 is the canary in the coal mine for the main market. Even if the main market continues to grind up on small volume the (IWM) will go nowhere.
Q: Why do you recommend buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB) instead of the Volatility Index (VIX)?
A: The VIX doesn’t have an actual ETF behind it, so you have to buy either options on the futures or a derivative ETF. The (VXXB), which has recently been renamed, is an actual ETF which does have a huge amount of time decay built into it, so it’s easier for people to trade. You don’t need an option for futures qualification on your brokerage account to buy the (VXXB) which most people don’t have—it’s just a straight ETF.
Q: So much of the market cap is based on revenues outside the U.S., or GDP making things look more expensive than they actually are. What are your thoughts on this?
A: That is true; the U.S. GDP is somewhat out of date and we as stock traders don’t buy the GDP, we buy individual stocks. Mad Hedge Fund Trader in particular only focuses on the 5% or so—stocks that are absolutely leading the market—and the rest of the 95% is absolutely irrelevant. That 95% is what makes up most of the GDP. A lot of people have actually been caught in the GDP trap this year, expecting a terrible GDP number in Q1 and staying out of the market because of that when, in fact, their individual stocks have been going up 50%. So, that’s something to be careful of.
Q: Is it time to jump into Qualcomm (QCOM)?
A: Probably, yes, on the dip. It’s already had a nice 46% pop so it’s a little late now. The battle with Apple (AAPL) was overhanging that stock for years.
Q: Will Trump next slap tariffs on German autos and what will that do to American shares? Should I buy General Motors (GM)?
A: Absolutely not; if we do slap tariffs on German autos, Europe will retaliate against every U.S. carmaker and that would be disastrous for us. We already know that trade wars are bad news for stocks. Industry-specific trade wars are pure poison. So, you don't want to buy the U.S. car industry on a European trade war. In fact, you don’t want to buy anything. The European trade war might be the cause of the summer correction. Destroying the economies of your largest customers is always bad for business.
Q: How much debt can the global economy keep taking on before a crash?
A: Apparently, it’s a lot more with interest rates at these ridiculously low levels. We’re in uncharted territory now. We really don't know how much more it can take, but we know it’s more because interest rates are so low. With every new borrowing, the global economy is making itself increasingly sensitive to any interest rate increases. This is a policy you should enact only at bear market bottoms, not bull market tops. It is borrowing economic growth from futures year which we may not have.
Q: Is the worst over for Tesla (TSLA) or do you think car sales will get worse?
A: I think car sales will get better, but it may take several months to see the actual production numbers. In the meantime, the burden of proof is on Tesla. Any other surprises on that stock could see us break to a new 2 year low—that's why I don’t want to touch it. They’ve lately been adopting policies that one normally associates with imminent recessions, like closing most of their store and getting rid of customer support staff.
Q: Is 2019 a “sell in May and go away” type year?
A: It’s really looking like a great “Sell in May” is setting up. What’s helping is that we’ve gone up in a straight line practically every day this year. Also, in the first 4 months of the year, your allocations for equities are done. We have about 6 months of dead territory to cover from May onward— narrow trading ranges or severe drops. That, by the way, is also the perfect environment for deep-in-the-money put spreads, which we plan to be setting up soon.
Q: Is it time to buy Freeport McMoRan (FCX) in to play both oil and copper?
A: Yes. They’re both being driven by the same thing: China demand. China is the world’s largest new buyer of both of these resources. But you’re late in the cycle, so use dips and choose your entry points cautiously. (FCX) is not an oil play. It is only a copper (COPX) and gold (GLD) play.
Q: Are you still against Bitcoin?
A: There are simply too many better trading and investment options to focus on than Bitcoin. Bitcoin is like buying a lottery ticket—you’re 10 times more likely to get struck by lightning than you are to win.
Q: Are there any LEAPS put to buy right now?
A: You never buy a Long-Term Equity Appreciation Securities (LEAPS) at market tops. You only buy these long-term bull option plays at really severe market selloffs like we had in November/December. Otherwise, you’ll get your head handed to you.
Q: What is your outlook on U.S. dollar and gold?
A: U.S. dollar should be decreasing on its lower interest rates but everyone else is lowering their rates faster than us, so that's why it’s staying high. Eventually, I expect it to go down but not yet. Gold will be weak as long as we’re on a global “RISK ON” environment, which could last another month.
Q: Is Netflix (NFLX) a buy here, after the earnings report?
A: Yes, but don't buy on the pop, buy on the dip. They have a huge head start over rivals Amazon (AMZN) and Walt Disney (DIS) and the overall market is growing fast enough to accommodate everyone.
Q: Will wages keep going up in 2019?
A: Yes, but technology is destroying jobs faster than inflation can raise wages so they won’t increase much—pennies rather than dollars.
Q: How about buying a big pullback?
A: If we get one, it would be in the spring or summer. I would buy a big pullback as long as the U.S. is hyper-stimulating its economy and flooding the world with excess liquidity. You wouldn't want to bet against that. We may not see the beginning of the true bear market for another year. Any pullbacks before that will just be corrections in a broader bull market.
Good Luck and Good Trading John Thomas CEO & Publisher Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2016/08/John-on-Deck-Overlooking-Alps-e1470435995343.jpg328400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-04-23 01:06:542019-04-22 23:24:34April 17 Biweekly Strategy Webinar Q&A