The Long-Term Trouble With Gold

I have never been a fan of gold as an investment, ever since I was an investor in short pants. Even though my first stock at 8 years old was a gold mine, no matter I collected Roman and Medieval gold coins, no matter how many people love everything about gold as money, I had until recently considered gold a “dead duck.”

Then along came Covid and obviously exploding inflation and suddenly gold looked like a no brainer. Ten percent inflation should mean gold goes up 10%, and likely more, as everyone tried to flock into a liquid asset that is a hedge against inflation.

Inflation is tricky to dodge because most assets are illiquid and if you buy a Renoir, it might take you a year to sell and there are all sorts to clip you on the way through. Gold isn’t so bad, although frankly it’s far from perfect, but nonetheless a lump of gold or silver is pretty close to cash, more so than even a house.

In any event, without finessing it, gold is investment 101 from inflation.

I bought a lot and proceeded to lose quite a bit of money.

That fall was broken because the dollar got so strong that as I judge myself denominated in euros and pounds the physicals didn’t actually drop in my home currency, but for any American that’s no good and worse still the nagging question is, why hasn’t gold gone through the roof?

You might use the argument that crypto took the shine off, but crypto has collapsed, a more successful prediction by me than gold, so who would be looking for cover there from inflation? No, it’s not bitcoin’s fault.

Here is the chart to refresh our memories:

So what now?

(BTW I’m still dollar cost averaging gold, but all my gold stocks are long gone. Maybe that should be the other way around but that’s how I’m playing it.)

Inflation is still rampant and is not coming down overnight. So what happened?

Now some would say it’s all about tightening and rising interest rates. You can indeed now get nice rates on short-term Treasurys, but I believe the simple answer is different and it opens up a big opportunity in the future to make some money.

There is a big seller. They are selling at a discount and that gold is being hedged and processed through the system, pushing down the price.

So there are two factors here, dollar strength and forced gold sellers.

Dollar strength is plateaued and will likely stay there because now Europe and the U.K. and others have synced up to catch up with the Federal Reserve, and the Fed doesn’t want to burn the world to the ground or for that matter it’s direct economy by tightening too much and crushing other currencies further. While a runaway dollar may now be in check, tightening money supply and falling inflation will not do gold any favors, unless tightening does not have the textbook effect over the next year or so. That seems unlikely. Inflation will fall, if perhaps not as fast as “promised,” but lowered liquidity will nonetheless pull on all assets.

The second factor is Russia. Perversely if peace breaks out, up will go gold as Russia will stop dumping their output and reserves through the Asian conduits that are laundering it, and unless a miracle happens Russia will be left with a bunker mentality where gold needs to be hoarded once again.

This, however, is a long way off. You only have to look at major gold miners to see there is no excitement for gold in the near future:

So for me gold remains a low level acquire and I believe the miners will be the signal of a change in trend when they start to trend up. That in itself will likely be politically driven, which is the state we find ourselves in these days, where it is politicians that call the tune in markets rather than economics. That makes it extremely hard to predict but also builds up a huge move for the future, and it is these disruptions we need to stake out. Gold most certainly will be one of them.