By upbringing, I should hate gold. My father (the smartest guy I know) was burned by it in the early 80s. He wasn't alone. The net result was that he essentially disavowed it and the mere mention of it would cause him agita. And so I was predisposed to feel the same way. I remember moments in my younger years where I would actively route against it. Not quite rational I suppose.
But, that changed. Several years back, as it seemed like the world was ending, I set out to learn why. My research introduced me to thinkers (and investors) who had correctly anticipated what was happening, and could point to a string of mistakes by politicians and the ways in which central bankers had totally mangled things up. And, in appreciating those insights, I learned more about gold. The objective features that make it a compelling place to be, given what had happened and what was likely to come.
The fundamental story is not complicated. It is historically the true monetary asset: no one else's liability and limited in its supply by the constraints around mining it. Aristotle himself identified five traits that make gold money: durability, divisibility, consistency, convenience and value of itself. We know what politicians and central banks are liable to do. We know they prefer inflation and seem to think any form of deflation is bad. Even when mistakes are made, they choose to paper them over rather than deal with the political ramifications of letting events play out to their natural end.
So, when I watch the gold market get slaughtered, I hear pundits, commentators, economists and academics tell me that the great bull run is over. And, yes, while the chart may look a little ugly and banged up, I don't hear anything out of them that tells me how the fundamental story is different. The variables in play that first made it attractive to me several years ago are still there, perhaps moreso now than even then.
But, why is it going down if gold is the real shelter in the storm? In my mind, the reasons are three:
(1) Margin calls, in a levered paper market, where you can have a cascading effect as soon as panic sets in. Add to that, the US Dollar is still viewed as king (for the time being) since the printing press is always at the ready.
(2) Gold is one of the few profitable trades out there this year. As things get worse, the hedge funds, etc. want to lock in those rare winners.
(3) The chart looks like poop now and the artificial intelligence running some of the trading desks is telling everyone the same thing. Heck, by my own naked eye I've been talking about a head and shoulders pattern for a little while. If I can see it, trust me, so can Gig the Computer.
So, yeah, people are selling, and the scorn for gold is only going to be exacerbated for the most recent converts. But, I defy anyone to tell me what's changed in the world. I hear about austerity and I am simply puzzled. Where is it? Guys point to the U.K., but that country is still going to be running a deficit that's 8% of GDP a few years out. In the U.S., the conversation/debate between left and right is still about big deficits and even larger ones. When exactly did the definition of austerity change?
In the end, you own gold as protection. Which is why you take physical possession and avoid any type of leverage around your position. I say that objectively, not as some sort of nut who's stashed away canned goods and guns for Armageddon (the beauty of being an investor again). If I were betting (and I guess I have been for a while now), I think we are nearing the end of this bloodletting. The trend is still your friend. And the fundamentals are practically your best friend. I own it, I will continue to own it. And when the bull market is really over, I will move on.
