There is a revival of interest in gold and precious metal stocks, with gold outpacing the stock market this year, which itself is doing very well. Investors are taking heed.
I think I need to reiterate a running theme in my investment philosophy. I am not one of those that believe that good economic times and higher growth is bad for gold. I am not a gold bug that believes that the US needs to go to hell in a handbag before gold can soar. In fact, just the contrary.
Gold has been bumping up against the 1300 dollar level for some time, and finally penetrated that level. It quickly moved to the 1330 level… then good news on the economy came out and gold corrected back down to the 1300 level. A lot of commentators immediately blamed good economic data for the fall...they always do. And conversely, if the economic data is negative they attribute a higher gold price to the negativity.
But consider it: if you are an individual or a fund manager that is predisposed to hold a portion of say 5-10% of your investments in gold, wouldn't you accumulate gold as your wealth increased? It's called "re-balancing".
It is not a leap of logic therefore, to suppose that as the worlds' wealth increases the demand for gold may rise, and with it the price. That is exactly what has happened in the last century. A hundred years ago, gold was 22 dollars an ounce. Today it's 1300 dollars an ounce. The primary reason for the increase is inflation, i.e., more dollars chasing gold and everything else mankind wants and uses.
Yet you will hear every time there's a good economic report and gold sells off, that gold is going down due to a better economy. And worse you will hear that gold is not a store of value or a prudent investment because it doesn't return interest or dividends.
Well, I beg to differ with most investment advisers and gold commentators. In my lifetime I have witnessed and profited from gold rising from 35 dollars an ounce to 1900 dollars an ounce and am here to tell you that it DOES provide both a good return and more than acts as a good store of value. Going from 35 dollars an ounce in the 70s to the present day 1300 dollars an ounce more than proves that point.
But holding physical gold and silver for insurance purposes and trading the shares differ greatly. You need to sell the shares at times to make good returns, while you need to hold the physical gold to have an effective insurance hedge. I hold physical gold and silver long term as insurance against financial and monetary crises, but buy and sell gold shares for profit on a short-term basis.
I think most people who believe that growth is gold’s enemy must have held gold and the shares during the 80's and 90's when the economy boomed and gold fell, and gold bugs suffered greatly. I was not one of them. I sold out my excessive position in physical gold and all of my gold and silver stocks and moved into common stocks. At that time guys like David Stockman and other popular economists and investment advisers bought into the theory that large deficits would lead to runaway inflation. They still believe that to this day, after thirty-five years of large deficits and declining inflation and interest rates.
I sold for one reason: because we were moving away from socialism toward capitalism with the implementation of Reaganomics. I saw a period of growth ahead with lower inflation and falling interest rates. But unlike today, we were at historic highs in inflation and interest rates. With the appointment of Paul Volker as head of the Fed, and then Alan Greenspan, monetary policy changed drastically for the better. That's why gold fell, not because of growth and a good economy.
I played gold from 35 dollars an ounce in the 60s and into the 70s to 800 dollars an ounce in 1980. Then I sold with the election of Ronald Reagan and the onslaught of a new set of free market policies proposed, and eventually enacted by Congress.
I eventually got back into gold and PM stocks in 2001 at the 250 to 300 dollar levels, mainly because I thought they were grossly undervalued. And I sold out totally in 2011 at 1900 because I thought it was grossly OVER valued. I specialize in investing and trading resource stocks in general and gold and silver stocks in particular. I am just as prone to selling gold and silver shares as buying them.
At this point, my view is that we are in an upturn in PM's, but it's conditional. This particular move, (and they are always different), will turn on changes in monetary and fiscal policy -- for good or for the bad. That has yet to be determined. So, as of today, I'm taking this rally as a bounce off oversold levels. 1050 gold is where I re-entered the gold market and have been trading it since then, as a legitimate rally. But it’s been choppy mainly due to the lack of any guiding policy at work.
I’ve responded to this choppy environment by trading the market, going very heavy at times and selling down to very low levels of exposure depending on the circumstances – and lately they’ve been changing weekly.
With the break above $1300 we have a good chance of having a go at $1400. But tax reform is crucial. That will change the amount of money in circulation. If trillions of dollars held captive abroad come pouring back into this economy, things will change dramatically. We will need to see where the new money goes in order to benefit as investors. It could be good for PMs, or bad. It depends on human action and individual choices.
I can envision a scenario that takes gold back to the $1900 dollar high or one that takes it down to the previous low. We can go either way depending on an array of factors including money supply, economic growth, inflation, recession, deflation, or geo-political events.
So again, as I said at the beginning of this year, we need to take things one day at a time. We have not yet established the policies that will determine things like inflation or deflation, growth or recession. That will come. But we're not there yet.
(UPDATE: I retired and discontinued my Market Update service June 1st, 2019. I also discontinued my commentaries in 2018. But there are about 200 commentaries available to read at this site, that still pertain to the economy today.)
Paul Nathan
Paulnathan.biz