I made some money in the past year being short gold after the downtrend really accelerated in 2013. I thought that this would continue into 2014.
But with a double-bottom at $1180 on the monthly chart, the enthusiasm for the gold trade has been revived. As I write this morning, the barbarous relic is surging through its downward sloping 200-day moving average and igniting feverish passions everywhere.
My fundamental argument against gold is that it has little fundamental value. Other than the jewelry business, it generates no earnings or income. In fact, there is a net cost to own and store gold that should bring into question old ideas about it being a “store of value.”
The strongest argument in favor of gold’s value has been the “currency inflation” religious school. In the fall of 2009, I was on Maria Bartiromo’s Closing Bell show to talk about this driving force with Fed QE inspiring central banks in China and India to hedge their US dollar risks with the accumulation of gold.
On that day, gold was making new all-time highs at $1,165. I explained to Maria the reasons why it could go to $2,000 very quickly if the central banks were behind the idea of it being the only solution to currency debasement. As you know, gold when quickly to $1,900 one year later.
I still thought gold was Keynes’ relic, but I played the “valuation is perception” game in 2009 and 2010 and made some money off of the gold miners and digger-makers (CAT and JOY) anyway.
But in 2013 as the shiny yellow metal flirted with a breakdown through $1,600 I came back to my senses and saw the bearish opportunities. Everybody loved gold and thought it should be on it’s way to $2,000 (infinity) and beyond. I saw that the “maximum pain trade” for gold-loving PMs like John Paulson was due to get worse.
What were my best fundamental arguments against the gold bugs and their currency inflation beliefs? Simply these four facts that (1) we had no inflation, (2) despite massive QE, (3) in the era of elaborate credit facilities and electronic super-highways for money, mining and storing gold was beyond an anachronism, and (4) the dollar wasn’t plummeting, it was simply doing what it had always done — fluctuate.
And so now, gold is ignoring all these facts, especially as the appetite from China and India stays strong. It seems the perception is still that gold has a place as the hardest “common currency” anyone in the world can bank on.
As I was summarizing my views for my Market Timer group about our short gold trade yesterday, my fellow trader and friend Brian Lund was typing up his views in a piece I just found this morning titled Why Gold Will Eventually Be Almost Worthless.
Brian doesn’t take the hard road that Bitcoin will replace gold (although that is something we should consider), but he does make some compelling arguments about the new fields of gold which may need another century to make gold worth a whole lot less: the Internet.
Lots of sides to this issue to be sure. I just want to know today, do you think gold has value as a hard currency and that you should have investment exposure to limit your fiat money risk? Or do you think it is all a “valuation is perception” game to stay away from?