The Bear And The Gold Bull

It’s a no-brainer to imagine gold should rocket with inflation. This link is investing 101. Well it seems that information is obsolete because gold is stuck, all the while huge inflation numbers are splashing all over the world.

The U.K. has lots of mining companies and many good gold mines. Their values have been plummeting.

Here is an example:

Centamin mines roughly $600 million in gold and pays a 7% dividend. I bought both gold and this share at the same time, and in the time gold is up 6% in British pounds, this company is down 11% in the same currency. It’s important to remember that while gold fans predict the demise of the dollar, USD is up through the roof. The dollar’s doom is predicted constantly, meanwhile it is crushing every other asset.

This is of course a good explanation of gold’s poor performance in times of inflation. While the U.S. is suffering rapid rising prices, the dollar is smashing the yen, euro and sterling. Gold is way up in those currencies.

It’s a slick take, but if companies are making income in gold dollars they should be up in these sagging local currencies, and looking at the above you will notice a real lack of tracking between a gold company and the “underlying” price itself.

You might say, well how about the tracking of a U.S. gold major against gold? Here is Newmont Mining’s:

In an efficient, near perfect market this should not be the picture and ultimately the conclusion has to be, something is broken with gold.

Supply and demand is meant to determine prices. So when supply of a commodity gets tight, up goes the price. We see this in commodities be it oil, lumber, nickel and even more abstract commodities like shipping. So when gold went out of stock during Covid, what happened? Nothing much. Now when I say out of stock I don’t mean at retail, like the Kitco’s of this world that became destocked of gold and silver, I mean Sovereign Mints that make investor gold coins in billions of dollars of value. They went out of stock. Did the price explode like nickel or bitcoin? Nope. Did some governmental reserve disgorge like the Oil Strategic Reserve? Not that I’ve heard. Gold went out of stock and nothing happened. Gold and silver have still not got back to normality at retail where long gone are the days of lowly premiums on spot prices for physical metal.

So what is the play for gold?

If you are a doomster, and there seem to be plenty, then gold and silver are still THE investment. If you believe that the markets can’t be out of whack forever and reality must win out, then gold is a buy and hold. If you think that gold is boomer bitcoin, then you should steer clear.

I can’t help wondering if gold is being held back by Russian sales. The Russians must be selling their huge gold hoard, because gold is for war. It’s the main use case because when a country is at war, trading partners will not take the paper promises of a warring country, not if they have any sense. That is why countries have bunkers full of it, not because they want to protect against running out of raw material for teeth and bangles, but to have the oldest item in government: a war chest.

The Russian war chest may likely be holding gold back and for me the strategy is to accumulate, because either the conflict ends or the war chest empties or both, and with a lot of inflation in the meantime, when that occurs gold will go up a lot. Unless better long term opportunities come by, a fair chunk of my portfolio will be golden.

Disclosure: I own lots of gold stocks and metal positions and own all the instruments mentioned.