Sunday, September 20, 2009
Gold - Long Term Thoughts
The short and intermediate-term future for Gold and any investment for that matter are tricky to navigate. I have guessed right and wrong many times on shorter-term moves. It seems that the best most investors can hope to do is identify the long-term secular bull market (i.e. the major bull market of the current 10-20 year period) that is in progress, buy into it, and hold on.
Since it is easier, safer and more comfortable for most investors to go long rather than go short (due to risk management issues, availability of different types of trading in retirement accounts, margin, etc.), most would like to invest in a bull market rather than a bear market. To each his own, and I like a little of both, but the majority of people with money to invest are looking for a buy and hold bull market.
I can tell those investors that, without a doubt, that bull market is no longer in general stocks. Period. Buy and hold for stocks and corporate bonds (individual specific stocks or bonds aside) is dead for the next decade. I can also tell those investors to avoid real estate (same caveat related to unique individual opportunities). Commodities are more of a question mark as the inflation-deflation debate rages on and are certainly not a slam dunk in a weak global economic environment.
Government bonds are very high risk at the local / state level and are again a little more uncertain at the federal level. This is related to currency risk (again, the inflation-deflation debate) and the paltry yields paid to take on this risk. The likelihood of significant appreciation is also very close to zero, as yields will not go below zero percent for any length of time.
Which leaves us with Gold. Yes, that shiny piece of metal that you can't eat, has no growth prospects and that pays no dividend. Yes, the Gold that crazy people seem to like - the ones who are always talking about guns and the end of the world. Yes, the Gold that mainstream financial "advisers" always say is a bad or risky investment. Yes, the Gold that is up 300% for the decade while the S&P 500 is down 20% over the same period. Yes, the Gold that just had it highest weekly closing price in United States history on Friday (in nominal/non-inflation adjusted terms).
Gold is in a beautiful, long-term secular bull market with a technically perfect uptrend that shows no sign of having started the "blow-off" top that ends nearly all major bull markets (think oil last year or the NASDAQ in 2000). Here's a look at a monthly Gold price chart in log scale over the past 10 years:
A bull market chart doesn't get any clearer than this. Yes, you can try to guess when the bull market will end based on fundamental data you see on the news or in cyberspace, but the trend is unmistakably up and very strong. And this trend will continue for a long time after the fundamental reasons for the Gold price to go higher are there (remember dot-com mania in 2000 or how the world was going to run out of oil any second last summer?).
I have certainly tried and will continue to try to time this bull market when considering buying more physical Gold (I like to buy on weakness rather than strength and view every significant pull-back in the Gold price as a buying opportunity) and when trying to trade Gold miners with my speculative capital. But my core Gold position is not for sale and won't be until I see concrete signs we are near the top of this Gold price bull market. I hear many people think they are seeing these signs (e.g., Gold television commercials), but let me ask you a question: if you were to poll 100 random U.S. investors right now, what percentage of them do you think have a significant portion of their investment portfolio in Gold or Gold miners? Even more importantly, what percentage of them have purchased actual physical Gold? We are not even close to full participation in this bull market and we will be before it's over.
Stepping back from the short and intermediate-term moves in the Gold price, I want to show you in a "big picture" sense where I think we are in this Gold bull market. Below is a chart stolen from Approximity's Gold Charts page (love your site, man, thank you!):
Once we broke above and held the $850/ounce level in Gold we set the stage for MUCH higher prices. There are NO long-term overhead price resistance points that currently exist. The "sky is the limit" in a sense. I believe we are closer to the beginning than the end of the current Gold bull market, at least in price. A 7-fold rise in the Gold price would lift us to $1785/oz., which I think is the absolute minimum long-term secular high in the Gold price. I personally don't think it is reasonable for Gold to top out before we reach the $2000/oz. level. And these are the worst case scenarios for the Gold price!
Depending on what happens to the U.S. currency in the future, prices could certainly go much, much higher. In fact, here's what I see as a move comparable to Gold's break-out above $850 in terms of where we are in this secular Gold bull market (chart stolen from sharelynx - also love your site!):
The Dow Jones went up 10 fold once it was finally able to break above the 1000 level for good. For those who follow oil, it went from a $10 low around the turn of the century to $147 per barrel at its peak last year (a 1370% gain - a similar-sized gain would put the coming peak Gold price at $3500/oz.). These numbers are meant to show what a secular bull market is capable of doing over years. It is Gold's turn to shine and its bull market is not over!
The fundamental underpinnings of this bull market have to do not only with unprecedented money/debt creation (this fiat paper money/debt backed only by hot air/promises rather than real assets), but also with the nature of money and our monetary system itself. The Chinese government is now openly telling its citizens to buy precious metals for investment and making them widely available. Many countries are now starting to clamor for a new global reserve currency to replace the Dollar. Trust in the government and its promises is starting to break down significantly in the United States as more and more people no longer believe our government has their best interests at heart or has the money to pay for all its promises.
A powder keg is also waiting to be ignited in the paper metal ETFs, which cannot possibly have even a fraction of true access to the physical Gold or silver they claim to be in custodial (or sub-custodial) possession. These metal ETFs are diverting investment money away from the actual physical metal and are slowing its bull market progress (this was one of the intentions of these instruments, by the way). Once people realize they cannot trust bankstas at all and need to obtain a little actual physical Gold to be held outside the system, look out!
I am not sure what's going to happen to the Gold price over the next few weeks or even months. I am actually in the deflation camp for now and think the U.S. Dollar will soon have a strong rally. This may or may not affect the Gold price on an intermediate-term basis. Gold is true money and cash is king during deflation, yet the Gold price is denominated in U.S. Dollars. Gold has risen in the past right along side the U.S. Dollar and I believe this can and will happen again.
However, even if Gold is due to take another rest here on a short or intermediate-term basis, I do know that the Dow to Gold ratio will get back to 2 and may even get below one before this secular Gold price bull market is over. And until that time, Gold will vastly outperform stocks, real estate and corporate bonds. Any surprises in a strong bull market are almost always to the upside and Gold will be no exception.