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Gold Loses It’s Luster

Gold Loses It’s Luster

Gold isn’t supposed to tarnish but it has certainly lost its luster in my eyes so far in 2021. I have determined that for me, having 10-20% of my liquid net worth in precious metals makes sense as a protection against dollar debasement. Right now we’re in the kind of environment in which I would expect gold to shine (that should be it for the gold puns in this article.).

However, gold has not fared well so far in 2021.

What kind of environment am I writing about? Rising interest rates and helicopter money. Interest rates, while still historically low, have been rising. There has also been “helicopter” money where the treasury is directly sending people checks.

The Economic Environment

The latest round of these “stimmy bucks” should be coming soon, as President Biden is expected to sign a $1.9 trillion bill, which among many other things includes a $360 billion bailout of state, local and territorial governments and $1,400 check to anyone making $75,000 or less.

The blue team currently controls taxes and spending in the United States. While the reds are spendthrifts in their own right, and these stimmy checks were initiated under Trump, the blue team is worse. I’m not aware of a party which practices fiscal discipline in the United States. I expect this to be the first of many trillion dollar spending bills passed during the Harris-Biden Administration.

I understand that if the government is going to make it illegal for a lot of people to work and a lot of business to operate that creates problems, such as unemployment, less available goods and services and a lack of economic resources for individuals and families struggling to make ends meet. So this spending bill is no doubt an attempt to try to fix the some of the problems created by the lockdowns.

Whether these lockdowns were necessary to prevent people from dying from the Wuhan Coronavirus frequently referred to as COVID-19 should be debatable. However, thanks to censorship we all just have to click our heals and accept that without lockdowns the bodies would have piled up in the streets, hospitals would be overwhelmed and furthermore, that the increase in deaths due to undiagnosed cancer, suicide, etc., simply don’t exist or don’t matter. But I digress.

In an environment in which it has been illegal for people to show up to work to produce goods and services, and which the government is sending people checks, you expect rising prices. Prices have been rising. We’ll ignore the CPI, which seems to be designed to not measure rising prices. Lumber is up, oil is up, many commodities are up.

Gold is Not Rising

Even though many commodities are up, gold and silver are not up. Why is that?

Gold Price Action over the last Ten Years

After making new highs in the wake of the 2008-2009 financial crisis, Gold had been in a bear market from September 2012 through November 2015, where it made a low of $1,045. It pretty much traded sideways and slightly up for the next four years, until 2019, when gold rocketed up, finally making that new high in August of 2020, reaching $2,089 per ounce. It then proceeded to sell off and is currently trading around $1,721. I think $1,800 was an important price level, but the yellow metal zipped right through it.

There does seem to be some support around $1,700 but it doesn’t look super strong. I’m definitely biased to the upside, but my guess is gold bounces between $1,700-$1,800 unless and until the Fed does something to manipulate interest rates back down. Why would the Fed do that? An economic recession or a stock market selloff.

In February of 2020, the S&P 500 was trading around $3,350 or so. This was before the lockdowns and the panic. Now, after having shut down a lot of the global economy, after unemployment going upwards, the stock market has recovered, but are things better than they were in February of 2020? The stock market thinks so. The S&P 500 has made a new high of roughly $3,950.

I would think that if interest rates continue to rise there will be a significant correction in the stock market. The Fed would then step in and do what it can to lower interest rates back down which would prop up stocks. So far the market had shrugged off rising rates, however.

Why Hasn’t Gold Performed?

There are three main reasons. Reason #1 why gold hasn’t performed: rising interest rates. If bonds are yielding nothing, then it is easier for gold (which also yields nothing) to compete.

This is supported by the chart below. The 10 year treasury yield is in blue. You can see in late July, the yield on the 10 year bottomed and then started rising. At that same time gold peaked and then began to sell off. That inverse correlation looks very tight to me.

Gold has been a safe haven alternative to bonds in a low interest rate environment. Now that there is some yield to be had with treasuries, perhaps gold investors are concerned that zero yield gold will be replaced paltry (but at least nominally positive) yielding US debt.

Reason #2, which is conjecture on my part, is the stock market continues to rise. If there is real economic growth I would expect stocks to outperform gold long term. Gold is a safe haven asset outside the banking system. It does well when there is economic uncertainty, when a currency is in doubt.

Stocks have not sold off despite rising interest rates. As a result there isn’t a pressing need for a safe haven asset and money flows out of it. There was some volatility in the fall of 2020, but for the most part stocks have continued to go upwards. So while rising rates seems to have scared gold investors, it doesn’t seem to have impacted equity investors much.

Reason #3 is cryptocurrencies, specifically Bitcoin, which currently has over a 61% dominance in the cryptocurrency space. Some corporations are now deciding to put some of their money into BTC, and this institutional investment is doubtlessly driving the price up, and some people who are concerned about dollar debasement are probably deciding to go with so-called “digital gold” rather than real gold. You know it is bad when Peter Schiff’s son is liquidating his silver stocks and going 100% into Bitcoin.

From a transactional perspective it is less expensive to buy Bitcoin through an exchange like Coinbase, than it is to buy and ship gold from a bullion dealer. Some people are doubtlessly taking their stimulus checks and using it to buy Bitcoin.

Bitcoin Over Gold?

I won’t bother charting gold next to Bitcoin because Bitcoin has gone up so much that you would hardly even see gold on the chart.

I’ve never had enough confidence in Bitcoin to put a lot of money into it, and as a result have missed out on a lot of gains. The first mover advantage and name recognition seem to be enough to carry Bitcoin despite the existence of other coins that have superior characteristics, such as anonymity, higher and faster transaction throughput and lower transaction costs.

I’ve bought and sold Bitcoin over the years dating back to 2011 or 2012 and I still own some Bitcoin and EOS. Of course if I knew the price of BTC in 2021 was approaching $60,000 I would have bought and held onto more.

Despite the continued price rise to the moon and beyond, I personally have a lot more confidence that gold will be worth something 20 years as compared to Bitcoin which I have less confidence will be worth anything 20 years from now.

The two mains risks to Bitcoin are 1) The widespread adoption of a better alternative to Bitcoin 2) Interference from the Chinese Communist Party.

But, as I’ve written about countless times before, you can own both, it doesn’t have to be either or.

In the meantime I’ll continue to hold onto my gold and silver as a part of my overall asset allocation.

Gold Loses It’s Luster

Gold Market 2020

2020 has been a good year for gold. Gold is up almost 18.93% in 2020 compared to the S&P 500 which is only up 12.42%. A new high of $2,089 was made in August. This took out the previous high of $1,923 that was made back in September of 2011.

Over the past five years gold has kept decent pace with the S&P 500. Although the S&P 500 has outperformed gold during that time 77.94% to 53.12%, there have been years in which gold outperformed. In 2018 gold was down 2.61% and the S&P 500 was down 7%. And so far in 2020 (as mentioned above) gold is up 18.93% compared to the S&P 500 being up 12.42%.

S&P 500 shown in purple above, compared with gold

It’s was a tough road to get to that new high. Five years ago gold was at a low of $1,045, in November of 2015 to be more precise.

I started buying gold in December of 2012 when gold was trading north of $1,660. I dollar cost averaged in and even bought some gold when it was trading around $1,100.

Gold since 2010. The green bar is the $1,790 price level

Gold is trading at about $1,815 as I write this. I believe this is a key price. While reading technicals could be akin to tea leaves, it is one of the few tools we have when evaluating gold price.

As you can see from the chart below, within about $10-20 of $1,800 there was resistance in 2011 and twice in 2012 when gold tried to rally but sold off again. In other words, buyers would bid the price of gold up to around the $1,800 level, but then sellers would come in and drive the price back down.

Fast forward to 2020. In March when things were going crazy everyone was selling. Gold went down along with stocks. But then around the $1,500 level buyers outnumbered sellers and gold proceeded to rally up to it’s latest high of $2,089.

During this time there was resistance more around the $1,750 level. It touched $1,800 in April and then in June. But instead of selling off considerably, it just bumped around between roughly $1,700 and $1,800 before a flurry of buyers sent the price to the new high in the last two weeks of July.

The move in July was fairly rapid and aggressive, moving nearly $300 in just a few of weeks. Since then gold has been trending downwards. Buyers seem rather squeamish at these prices and gold has sold off since August and currently is hovering around $1,815.

An analogy for markets and price movement are lungs. You can’t breath in (buying) or out (selling) constantly, you need to exhale in order to breathe more. With the rapid price rise we’ve seen in 2020, it makes sense gold would sell off and exhale some.

The question is wether gold will continue to rise in price in the remaining weeks of 2020 and beyond or if it will move down or sideways.

Future Price Guesses

Gold, like any other asset, can either move up down or sideways in price.

It has been trending down over the past few months. At the $1,800 level the resistance encountered in 2011 and 2012 could serve as support and gold could consolidate in price here and make another run at a new high.

Based on the nice rally up to $1,815 that could be the more likely case.

If gold does go back down to $1,750 or lower I think it will continue to go lower until there is another catalyst. I doubt gold would go lower than $1,450.

As I’ll discuss more in the last section, I think a Biden-Harris administration coupled with COVID-19 should be a great environment for gold.

Bitcoin Makes New Highs

Bitcoin has made new highs of $19,625 in November of 2020, taking out the previous high of $19,497 back in December of 2017. It is certainly possible that Bitcoin is taking some of the bidding away from gold as a save haven asset.

Opting Out

Alternative assets like gold are a way of opting out of the traditional financial system. Gold is also often considered an inflation hedge and safe haven asset.

I think it is more likely there will be a Biden-Harris administration in the White House. I think lockdowns are more likely throughout the United States and the world. Governments are paying people to stay home and seem intent on preventing even one more COVID-19 death regardless of other deaths or consequences.

I don’t think there is enough debate or discussion on what the consequences of the lockdowns are or if they are even effective.

Small businesses going out of business, unemployment rising, and other byproducts of lockdowns such as increased depression, suicide and substance abuse should be weighed against the effectiveness and results of lockdowns.

Regardless of their efficacy and consequences, lockdowns means more spending and stimulus. Not only that, but fewer people working means fewer goods and services that are available to buy.

I believe assets like gold and silver will do well in this environment and are an important part of my diversified investment holdings. I think it is important to have 10-20% of my portfolio in precious metals like gold and silver.

Disclaimer: None of the above is investment, health or legal advice.

Another Member of the “Can I eat it?” School of Investing

Another Member of the “Can I eat it?” School of Investing

I was watching a video the other day by a famous YouTuber. He specializes in “modern homesteading” and I find some of his videos informative and entertaining.

However, he went off the rails with one of his comments.

He mentioned someone asked him if they should buy gold and he pointed out that you can’t eat gold. 

I’m rather tired of this silly cliché. So I’ve decided to give this line of thinking a name.

Batteries are not edible. Please do not eat batteries.

The “Can I eat it?” School of Investing

The “Can I eat it?” school of investing is simple. People trained in this method rule out any investment or purchase they can’t eat.

For example, if someone were to ask, “Should I buy a car?”

Answer: “Well, you can’t eat a car, so what is the point?”

“Should I buy stock in Netflix?” “You can’t eat Netflix, so no.”

To be honest I‘ve never heard anyone make the “You can’t eat it” argument for any other investment or purchase decision. But for some reason when it comes to gold people think it is important to be able to eat it.

The notion that you have to be able to eat something in order to want to own it reminds me of small children at that developmental stage where they tend to stick everything in their mouth.

It seems like a fair number of people don’t understand the purpose of gold and so they revert to that childlike instinct of sticking in in their mouth.

I Buy some things knowing I Can’t Eat Them

As it turns out, there are many useful things that people might want to own that in fact can’t be eaten.

Some people have decided that it makes sense to allocate a portion of their savings to physical gold as a way to “store value” (Austrian economists: please don’t take that phrase too technically) and protect purchasing power against inflation and dollar devaluation.

Of course it only makes sense to own gold after you own a lot of other basic necessities.

But if you really must be able to eat an investment for you to be able to consider it–I give you the following dish which uses edible gold leaf as a garnish.

Gold Reaches New All Time High

Gold Reaches New All Time High

Today on 27 July 2020 Gold has reached a new all time high over $1,940.

After writing about gold for over four years it is vindicating to see gold reach a new high in dollar terms. I certainly don’t know how high gold will go but as I speculated it would, gold has taken out the 2011 high of $1,920 under Trump.

Silver has been rallying as well. While still far from its all time highs above $50 per ounce, it is trading north of $25 per ounce for the first time since 2013.

Gold Trades over $1,900

Gold Trades over $1,900

I wrote my first article on this website advocating for holding some precious metals like gold and silver over four years and four months ago on 19 March 2016. At that time gold was trading around $1,250 per ounce.

Now for the first time since September of 2011 gold is trading northwards of $1,900 per ounce. This is a 52% increase in price.

So with gold trading near the September 2011 high of $1,924 I’d like to look back at some of the previous statements I made about gold.

In November of 2019 Gold was trading in the $1,520 to $1,445 range. It had suffered a large interday drop and I predicted gold would reach $1,600 in 2020, which it did just a couple monthly later in January.

While the recent price action looks rather bearish over the next 3-6 months I think gold will reach $1600 in 2020.

From "Gold Receives a Severe Drubbing" 9 November 2019

Back in 2017, a few days after President Trump was sworn in, I predicted gold would reach $1,920 during his first (and probably only) four years.

I also think the dollar will lose a great deal of value and the price of gold will outperform and reclaim the 2011 high of $1,920.

From "Trumped Up Economy" 22 January 2017

Gold has not hit $1,920 yet but it is within an Andrew Jackson (or Harriet Tubman?) of that price.

Back in 2016 I predicted gold would reach $2,000 or higher.

I would have preferred to have bought gold at the lows of $1,040, but as yet I don’t have a crystal ball that allows me to perfectly time the bottom of markets and I firmly believe that based on the fundamentals gold will make new highs in excess of $2,000.

From "Inflation Destroys Dollars" 19 March 2016

Gold isn’t at $2,000 yet but it seems increasingly likely. I of course can’t predict the future, just make educated guesses on price and time. But so far gold has been a solid investment. The technical damage after the 2011 high has been filled in and the chart is looking strong.

Silver has done well in the very short term. It’s previous high was almost $50 in April of 2011. It’s been steadily trending downward since then, making a low of $11.64 in March of 2020. Since then it has rocketed back up to $22.82 in a 96% increase in just a handful of months. It is still well shy of the $50 high but silver could provide a better value and more upside potential than gold. However, it tends to be more volatile.

Gold Reaches 8 1/2 year high

Gold Reaches 8 1/2 year high

As of writing this article spot gold is trading at $1,783. August gold futures are trading at $1,800. Gold hasn’t been at the $1,800 level since November of 2011, although it came close in October 2012.

August Gold Futures

Silver is up to $18.19.

I’ve been bullish on gold since 2013. I think gold has more legs to go higher. There is a lot of uncertainly right now in the short term. The November election, Covid-19, social unrest, and of course the national debt. Gold is often used as a safe haven to park money amidst uncertainty.

Inflation Pressures

With many people unemployed, that will put downward pressure on consumer spending. However, between credits cards, stimulus checks and unemployment benefits, people will still be able to spend. So in categories like food and other essentials, I think there will be price inflation. And even the CPI, which historically under-represents actual price increases, shows food prices increasing by 4.8%.

While the COVID-19 recession is undoubtably be deflationary, the government’s response will surely be to print and inflate. Gold should continue to do well in this environment.