The winning asset of the millenium keeps on winning
As with many of my post titles, this may be a bit, ah, tongue in cheek … at least not quite on the nose. For it’s not a given that gold has actually gone anywhere. All we know with certainty is that it keeps taking more and more dollars to buy the stuff. How much of that is due to a change in the value of gold and how much to a change in the value of dollars can’t be ascertained from mere changes in that rate of exchange.
We do know that quite a bit of it is due to changes in the value of the dollar. If we see other prices across the spectrum of assets engage in similar moves, that’s a strong hint. And we have. Stocks for instance have broadly seen the same kind of price changes over the past five years.
On the other hand, gold has outpaced stocks so far this year, and more impressively, so far this century. But even that doesn’t amount to final proof; it could be that stocks have lost value. It’s not beyond the pale, considering their overvalued status both at the beginning of the year and the beginning of the century. And we do know that gold is the same stuff that it was then. It hasn’t changed in a billion years. We certainly can’t make the same claim about dollars or stocks. Yet we do know that how humans value gold does change … for instance between 1980 and 2000 it verifiably lost purchasing power to both dollars and stocks.
So the implication that it’s going somewhere comes with an asterisk or two. The surest interpretation is in the context of its gains versus dollars.
On this basis, it rose 1.43% today.
Platinum rose 3.01%. Copper 4.01%. Silver beat them all with an impressive 5.00%.
Looked at this way, gold was a piker.
It did beat stocks, however, which rose a mere 0.68%. It’s highly questionable whether stocks even rose at all. They may have gained against dollars, but that’s pretty lame competition these days.
The good folks at the Fed have figured out how to make it look like things are going up just by shrinking our favorite measuring unit. All these wonderful stock “gains” are as if I shrunk my ruler and claimed I grew taller.
One thing occurred to me as I was reflecting on how this reflects on American living standards. Those years in which American dollars gained ground over gold – 1980-2000 – are remembered as prosperous times for America, at least compared to the years since, and especially the years since 2020. We may have slicker toys, but that’s small consolation to the large number of folks that can’t afford a home. In the final years of those two decades, some economists openly wondered what the financial system might look like without a US Treasury debt market. Needless to say, there have been no such worries over the last few years.
You can almost think of the US dollar as stock in America. The better it’s doing, the better its people are doing. Even if policymakers seem to think otherwise.
So what next? The policies that have been shredding the dollar and lighting a fire under gold show no signs of going anywhere any time soon. As poorly as this may bode for Americans in general, those few that own gold may be exceptions.
Gold looks unstoppable as far as the I can see. As long as the dollar can lose value, gold prices can rise. As is usually the case, short term is much more of a crap shoot. A brief breather would come as no surprise, especially given the stocks:gold ratio is in territory where it’s reversed before. I actually sold some silver today. Not taking a bearish view – it still leaves me a tad overweight – but when an asset moves in twenty four hours the equivalent of an entire year’s worth of TBill returns, it’s not generally a harbinger of sustainability. Yet if it pops another five percent tomorrow, my slightly downsized position will do well enough. As they say, bulls make money, bears make money, pigs get slaughtered.
the steep ascent reminds me of the run up to 1900 in 2011. the problem with these parabolic rises in knowing when or how much to sell. long term, i expect gold to go higher [or dollars to go lower if you prefer]. otoh, i wish i’d sold in 2011 and bought back between 2015 and 2018. but i’ve learned at great expense that i’m a terrible trader. of course, there are worse quandries to have.
Gold is colorably overbought at the moment. I would be more worried about it if it were really just gold. But as I pointed out in the post, it’s about even with stocks over the past five years. It’s been mostly just dollar depreciation. You might say the dollar is oversold.
For a striking illustration of this, try changing the pricing unit. As also revealed in the post, even on a big supposedly “up” day like this, gold was down in terms of three other metals. As it turns out, it’s actually down for the month in terms of all three.
Is dollar depreciation about to end? As the post’s concluding remarks intimate, the ceiling for the gold price depends on the floor for the value of the dollar. That leaves a lot of thin air.
That said, as I also noted, gold is probably due for a breather, a notion that’s supported by the stocks:gold ratio being in the neighborhood where it’s reversed multiple times since 2020. But that’s a short term issue, and likely more a problem for silver in light of its shooting-the-lights-out performance.
So it’s more of a question for traders than investors. Of course we never know the future with certainty, but the likelihood of a nearby 2011 rerun is IMO very low. In 2011 the economy was still recovering from the GFC. Investors were just beginning to regain confidence in stocks. The inflation baton passed from gold to stocks, and the flight to safety hedge was no longer in demand.
We’re 180° from that kind of environment now. Stocks are way overvalued after a run of strong profit growth, and now the economy is starting to look wobbly. The inflation baton is now passing in the other direction.
Other ingredients are now present that were not in 2011. The weaponization of the dollar, existentially threatening fiscal debt growth, and escalating war.
What might stop it? Hot official data readings, like CPI or PCE that put the Fed back in inflation fighting school. They will come, but it would take more than one to jolt the Fed out of its reverie. And the fiscal situation as well as its obeisance to Wall Street leaves it under pressure to continue to inflate anyway.
So all things considered, the longer term case for gold remains intact. As a practical matter, the real question for investors is how much to have. That depends heavily on individual factors like time horizon, cash flow imperatives, what the rest of their portfolios look like, etc. No one size fits all answers there.
Except that in my opinion few if any should have none at all. All gold and nothing else would be appropriate for equally few. That leaves a rather wide of a band of personal preference.
Anyway, that’s how I decide when to sell. Set a target allocation and if gets too big it’s time to trim it. A too far too fast move helps pull the trigger, as it did for silver for me today.
One of the central problems of investing is you always have to be invested in something, or take a vow of poverty and join the brotherhood. The menu is limited. So it’s not enough to be wary of this or that; there’s no “out of the game” option. If you are suspicious of cash, of bonds, or stocks .. what else is there? My view of gold has always been that it’s the default asset … what you own when everything else looks bad. If you’re suspicious of gold too, what are you gonna do? The only rational approach is to diversify among the least dirty shirts.
Finally, attentive readers may recall a similar post from a few months ago: Gold Is Unstoppable. Gold went on to chop sideways for a few weeks, then resumed its ascent. It wouldn’t be the least surprising if it consolidated in the $2600 area before advancing further.
A note from UBS gave me a chuckle last night. It was forecasting gold would reach $2700 by the middle of next year.
https://www.kitco.com/news/article/2024-09-23/gold-price-could-hit-2700-mid-2025-silver-will-outperform-gold-ubs
Bold prediction. Futures are at $2690 now.
Some independent thoughts on gold:
https://www.kitco.com/news/article/2024-09-25/gold-actually-starting-its-second-rally-and-3000-not-far-away-dylan-smith
“Investors concerned that gold prices may be overextended have nothing to fear as a new set of drivers are propelling the precious metal into another distinct rally…”
I’m thinking a little more long term, but Rosenberg Research is a respected source and the analysis thoughtful.
I had to look for a while to find a contrary opinion – a valid reason to consider one – too much money on one side of the boat tends to tip it the other way. But here is one. It’s purely technical, in contrast to my analysis and Smith’s. Just so readers can weigh both sides of the case, Radomski calls for gold to hit $2730 and then turn into a bear:
https://www.investing.com/analysis/gold-how-high-can-it-go-before-a-big-decline-200652259
FWIW, I could see it reversing around there too, but maybe pulling back to $2600 and chopping around there for a while. No serious bearish action … not unless you think the government is about to discover fiscal responsibility and monetary prudence.
Make of it what you will …
Costco is now selling platinum bars. Here’s what to know, from price to availability.