Gold's Brick Wall

For the past four years, every time gold hit the 1350-1370 level or so, it is turned down sharply.

Yesterday, gold surged nearly $24 intraday. John Rubino at Dollar Collapse noted Gold Tests Resistance - Again, posting a similar chart.

A monthly gold chart provides much needed context.

Gold Monthly

What Have You Done For Me Lately?

As an asset class that has performed quite well since 2000, it's interesting that gold is so despised.

The popular games at the moment are "momo", TINA, and passive index investing. In reality, it's all the same game. Eight stocks in the nasdaq make up 48% of the index.

If you are in the Nasdaq index and think you are not hugely involved with high-price momo-darlings, you are mistaken. The S&P 500 has a 41% technology weighting.

TINA says There Is No Alternative, not even gold.

The Herd

The Herd is right until it's massively wrong, just as happened in 2000 and 2007.

Technically Speaking

Technically speaking the longer gold is bottled up beneath this resistance, the faster the move once it does break out.

Fundamentally Speaking

Passive investment, TINA, and MOMO strategies will get crushed (timeline unknown), the late-stage economy will hit recession, and the Fed will respond with cuts.

It's a mistake to assume stocks will respond the same way next time as they did the last three times the Fed pulled a QE rabbit out of its hat.

It's not too hard to envision a scenario in which gold is the beneficiary the next time central banks attempt to inflate. And that is what I believe will happen.

Mike "Mish" Shedlock

Comments (40)
No. 1-40
Robin Banks
Robin Banks

Gold monkey hammered back down $20. If I was Putin, now he's accumulated 2000 tonnes of physical gold, I would do a raid on the LBMA for a quick 200 tonnes and demand delivery. Would cause panic without firing a missile.

Onni4me
Onni4me

I've been thinkin to put some money in gold. Not necessarily physical gold bar. Any suggestions how to invest in it without having to store it?

Wagner_
Wagner_

Here is a good podcast with George Selgin - https://www.youtube.com/watch?v=SQ547i8tFIo
While I don't necessarily agree with all of the points he is making it is still worth to watch.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

OUNZ, Bitgold, Goldmoney, Bullionvault - All of those are physical gold - The smaller the quantity the more the first two are favored

AWC
AWC

@Mish, "Passive investment, TINA, and MOMO strategies will get crushed " Add to that, "Risk Parity" and you have it. Question of course is always when? Funds of funds of funds of funds, yada, yada.

AWC
AWC

@Omni, might want to look into Physical Gold held in Trust, and Physical Gold held in personal possession. Key word, "Trust."

AWC
AWC

Central Bankers like to hold gold. Central Bankers also hold assorted .govs in monetary capture, at the ready to go out and collect the stuff for them. Various vaults containing gold in trust are easy one stop shopping for these "Collectors."

Bam_Man
Bam_Man

Gundlach has noticed the massive basing pattern on the long-term Gold chart and says he sees a $1,000+ upside price move coming soon.

Bam_Man
Bam_Man

One of the few times I have agreed with him, ever.

Germ
Germ

Mish - just wondering if you still have a relationship with GoldMoney.

Germ
Germ

You used to have a link on your old site.

hmk
hmk

As far as investing in it if you think there is going to be a massive rise in price the miners are the best leveraged bet, the GDX or juniors GDXJ. As far as physical, I thing its best to have a year or so of living expense in case of SHTF scenario. Owning physical 1oz gold or silver coins are what I would recommend and not letting a third party hold it for you. I don't care what anyone says if you don't possess it you are at risk. Obviously if you possess it you will have to secure it some way to prevent theft or confiscation. Silver is more leverage to price changes than gold on a percentage basis. During the financial crisis gold dropped to the 8-900 dollar range and silver to the 10 dollar range. Silver topped at about $50 while gold at $2000. This lasted about 15 minutes and then started a steady decline to where we are now. If you want to profit the miners are the best way but possessing the physical will give you some personal safety. JM Bullion usually has the lowest premium over spot prices for 1 oz coins.

AWC
AWC

@Bam, "Silver is ridiculously cheap right now." Amen to that.

Wagner_
Wagner_

I would also recommend you to evaluate likelihood of gold being in almost 3000 year speculative bubble that could be slowly deflating now.

Majority of people on this site are quite old and/or are Austrian School minded. They have nostalgia for currency that is backed by gold. And also are heavily invested in gold, so obviously you will never hear from them that Gold could be bad investment.

Wagner_
Wagner_

Actually you sound silly.

  1. you are not factoring in gold storage fees in that graph. Want to do it yourself? It is still your time and risk of someone stealing it.
  2. and that graph assumes that someone keeps paper dollar notes under mattress. Did I suggest that? Now go on Google and find s&p500 performance with dividend reinvestment.
RoyRudy
RoyRudy

1/2% per year in storage cost vs 3% Dollar's inflation 2. done that study years ago. Average Joe could not have invested in a DOW-tracking mutual fund till what 1960? There have been times to sell Gold and buy Dow. But not now. Study Gold/DOW ratio

Wagner_
Wagner_

I love these "zerohedge.com style" charts where 10x ratio was fixed at 1928 (a.k.a almost the peak before Great Depression). Anyway assuming someone was unlucky and would have invested almost at Dow peak in 1928, the chart still looks reasonably good to me.

But, how about re-plotting that chart not from year 1928, but rather 1932? Merely changing this reference point alone you would suddenly get a chart where Dow almost never underperforms gold.

But to be fair, you also need to factor in:

  1. Dividend boost for Dow Jones (~3% yield/year for 80 years): 1.03^80=10.64=1064%. By 80 years you would get 1064% more than that chart you gave to me indicates.
  2. Maintenance fees for gold (0.5% fees for 80 years): 0.995^80=0.669=66.9%. In storage fees over 80 years you would lose 33% of your gold value.

So who is silly? Is interest, fee and dividend compounding thought in Austrian School?

One thing I omitted is that, for example, SPY ETF has 0.09% maintenance fee. You can subtract it. Also, dividend compounding for stocks is a little bit different than interest compounding for bonds in sense that "principal" for bonds stays constant or slowly reduces. Whereas "principal" for stocks fluctuates.

And just like arguing that S&P500 will crash, I don't think anyone knows for sure whether gold will crash too.

I feel really sorry for those people who in the last 80 years invested in gold, paid Gold maintenance fees and missed out on stock dividends.

hmk
hmk

I don't think the argument here is what is best in the long run, I think that investing in the DJIA in 1929 at about 230 vs gold in 1929 at about $20 ounce gives you the answer. I would think gold is a hedge more so than a long term investment, Also keep in mind than no fiat currency in history has ever survived in the long run. That being said in the long run were all still dead. The question is when will it happen and what replaces it. I also don't think a gold based currency has ever survived either. I also don't believe either that gold is in a bubble. My guess is that it will go down when the market finally corrects but will recover, There still is demand for gold in jewelry etc and central banks hold gold.

MntGoat
MntGoat

Mish, from reading your blog posts you seem to believe deflation is coming due to the coming asset crash and credit contraction. Yet you are also bullish gold which is an inflation hedge? So you see gold going up as a response to more Fed printing post next crash, but not due to inflation?

TheLege
TheLege

It doesn't matter that there exist a thousand more credible people who say that gold is about to embark on another bull run, it doesn't matter that simple economics illustrates glaringly that gold is likely very under-valued, there is always someone who is resolutely contrary i.e. a troll.

fiat_free
fiat_free

This is a complex issue, easily simplified in my way of looking at gold. That is, I see gold as a store of value, not an investment.
Would 1000 $ or probably my any fiat currency invested 50 years ago given a better return than the same on gold? Absolutely! If I had left that same thousand dollars in the bank , it would buy me a small % of value than it would of 50 years ago, whereas that hold dear old pappy buried out back still buys the same amount of goods, stocks...whatever. In the current environment, I think I have more to lose from a devalued currency, ie better in gold than numbers in a bank. Sure, I could use the cash and invest in stocks now too...who knows, they might beat gold too, however my risk reward sits with something that has been a store of value for thousands of years. The big boys might call it an old school relic, yet they’re still buying it hand over fist in some major economies around the world.

aqualech
aqualech

I would also recommend that you consider elements beyond this site or even the USA and take note of the beliefs and behaviors of the other few billion people on earth. Gold is recognized and utilized as a store of value by populations that dwarf that of the USA..

Escierto
Escierto

To me the tell is the behavior of the mining stocks. They are still in the dumps and have not participated in any of these upward fake moves by gold. When the mining stocks break out and I think they will because they are universally despised right now, then that's the moment.

Wagner-
Wagner-

The comments from my old account with underscore at the end don't appear anymore (only visible to me). I asked Mish to take a look if my old account has been accidentally banned or suppressed.

So here are my responses with screenshots, because I don't want to retype again from this new account:

@RoyRudy @RedQueenRace

Wagner-
Wagner-

@aqualech @TheLege (same for my responses to you guys). Sorry, that response is in screenshot form - next time will copy paste in clipboard in case my old account goes bust.

MntGoat
MntGoat

@Wagner- thanks for your comments Wagner keep it up. I'd rather see a debate on topics vs. an echo chamber of everyone else re-enforcing every one eases confirmation bias. Your comments on some guru's selling doom newsletters, connected to gold sellers, or maybe have big positions in gold, are good comments. I always try to be aware of the inherent biases or conflicts of interest where information is coming from. Sometimes I wonder if some market newsletter writers actually believe what they say or have just figured out perma doom gets them more subscribers. The other thing with many of these newsletter guru;s, bloggers, etc... is have they actually ever made money investing? No one knows as they have no verifiable records (unlike say Buffett, Howard Marks, etc... who have 30 yr histories of beating the market) That being said, I am bearish myself right now on the economy and markets, and I probably lean too bearish most of the time. And I do think gold is a interesting investment at this time.

RedQueenRace
RedQueenRace

@Wagner_

What does your definition of a speculative bubble have to do with my post? I said gold WAS MONEY for much of those nearly 3000 years.

Whether or not gold has been in a speculative bubble since it began floating can be debated. But not before then. In the early days of FRNs, which came into existence a little over 100 years ago, the exchange ratio was fixed at 1/20 ounce per dollar. After Roosevelt devalued the dollar to 1/35 an ounce of gold the average price remained close to that until 1968. Nixon devalued the dollar again 3 times between 1971 and 1973, with his 1973 order being the final end of the Bretton Woods agreement. A nearly 3000 year speculative bubble when its only been floating for less than 50 years?

RedQueenRace
RedQueenRace

"Why it can't be debated whether gold was in speculative bubble when it was considered "the money"?

Then make your argument for a bubble. How did people participate in it? By what measure was it in a bubble, especially when the government defined its price? You have nearly 3000 years to cover.

"In that case no one can debate now whether dollar (or any other fiat currency) is in speculative bubble, because it is "the money".

Post-Bretton-Woods currencies and gold all fluctuate against each other. At least it is possible to speak of a bubble in terms of some monetary unit used as the measuring stick and I do not object to the use of "bubble" for gold these days. I don't really care for the term "bubble" for currencies, especially the dollar, whose "value" is an index based on a basket of 6 different currencies. The Euro is 57% of the weighting. No other currency exceeds 13%. I don't follow FX closely but I would guess that most dollar over/under-valuations involve its Euro exchange ratio.

The investopedia definition uses the term "spike." The moves in the major currencies are glacial compared to other markets and don't go to their extremes. a couple reasons why I am not a fan of the use of bubble wrt currencies. When a currency move is fast and/or extreme (e.g., Zimbabwe, Venezuela) it isn't because they are participating in a foreign currency bubble.

TheLege
TheLege

Hey Wagner, state your credentials or STFU. A forecaster says "there is rain on the way". Wagner, the (ahem) 'intellectual powerhouse', says "wrong, the sun is shining at the moment". Duh! Worse, you pick a salesman like Jim Rickards as someone who represents the entire pro-gold argument, conveniently ignoring all the genuinely credible people who actually understand 'money' (you, quite clearly don't). You are relatively new here so you won't know that Mish has regularly trashed Rickards when he's been blatantly puffing gold.. I would ask you to 'try again', however, you are such a dunce I'd suggest investing your energies elsewhere.

Snow_Dog
Snow_Dog

“TINA says There Is No Alternative, not even gold.”

You’d do best by listening to TINA.

Wagner-
Wagner-

Thanks you for your rant. I think it says a lot.

You are more confused than I previously thought.

Mish is just like any other Gold related product advertiser (can I put Jim Rickards one more time here for the sake of comparison?), because Mish does have relationship -

In the sake of full disclosure, I have a relationship with GoldMoney and BitGold.

Mish has not disclosed what exact relationship is that and whether such relationship had to be disclosed to "cover ass" because of some "stupid" government regulations (SEC?).

Of course, I don't mean to say anything bad about Mish, because his audience certainly is better educated than Jim Rickards. He writes about other stuff too - not only about doomsday and he does not promise incredible returns. I also think there is way more competition for the Jim Rickards audience to sell any gold related product than for Mish'es audience.

What makes me skeptical is that I have quickly googled over Mish Talk articles and I haven't seen one where Mish dares to call out Jim Rickards for selling these doomsday hedged products. He merely says that Jim Rickards is over exaggerating how things will turn out for gold. Could the reason be because he is afraid that competition will call him out for also being related to some gold products?

And I haven't seen an honest analysis on where he compares how stock portfolio would have performed "store of value" function. Would it have performed better than gold portfolio in the last 80 years without providing fine-tuned charts? If he would post such analysis I am willing to take back all my words I posted here.

Wagner-
Wagner-

I know that most readers will reject what I am saying here, but here you go:

Where is the possible "speculation" element?

Imagine that back in gold times there is weaver A and weaver B and you are a farmer. Weaver A starts to use weaving machine and undercuts prices of Weaver B. You as farmer are holding gold. You did not do anything, but suddenly, thanks to production improvements unrelated to what you as farmer are doing, your gold can suddenly buy more of fabric. So you are willing to hold gold in hopes that in future there could be even more production improvements and the gold you are holding would be worth even more. And repeat the cycle.

What has changed?

Diversified stock market portfolio performs "store of value" function better than gold in sense that it has lower maintenance fees and can exponentially reinvest dividends (I think I already proved this in previous comment). Why stick with gold for "store of value" purposes then?

One may ask - stock market has been around for while but gold price has still increased?

While I agree that free markets are good and efficient, I don't agree that markets are 100% efficient. Only recently, thanks to online brokers, it has been easy to trade diversified stock portfolios. And you still can't use your SPY portfolio directly with credit card to buy goods in Costco or elsewhere.

Is Ph.D. Standard the new gold standard?

Yes, but I am not defending Federal Reserve - in fact I dislike when few people can make such important decisions alone and are prone to "insider" trading and on top of that are not properly audited. But what if we could fix that problem without returning to Gold Standard?

What could be alternative?

How about SPY backed dollar instead?