Gold is at another interesting inflection point. After the break of support, gold crashed 15% in two days. It has since then staged a bounce and is now retesting support. Is it going to be a dead cat bounce and collapse further or a double bottom and rally?
Is the great trend over? I’m not sure, but if you’re an intevestor in gold I hope you’ve been double checking your thesis. A great place to start is the Golden Dilemma paper also here and here. In short, it examines the common reasons for holding gold, including:
“gold provides an inflation hedge”
“gold serves as a currency hedge”
“gold is an attractive alternative to assets with low real returns”
“gold a safe haven in times of stress”
“gold should be held because we are returning to a de facto world gold standard”
“gold is underowned”
Examine your own reasons carefully. Most people blindly buy into gold as a religion. I used to believe that gold was a hedge against instability but I’m not so sure anymore, as it trades more like a financial product, commoditized by wall street. Gold’s former role should have thrived in the current environment of intervention and positive feedback loops but it has since lost the qualities that have been described by others:
“The abandonment of the gold standard had broad cultural significance. It is no exaggeration to insist that going off the gold standard was the economic equivalent of the death of God. God functions in religious systems like gold functions in economic systems: God and gold are believed to be the firm foundations that provide a secure anchor for religious, moral, and economic values. When this foundation disappears, meaning and value become unmoored and once trustworthy symbols and signs float freely in turbulent currents that are constantly shifting.” ——Mark C. Taylor
The end of the gold standard (1973) unfettered the dollar from precious metal backing and laid the seeds for unconstrained credit growth. The economic consequences of the movement off of the gold standard have been incalculable, but the psychic effects have been no less profound. In a world in which financial promises are only as good as the counterparties that make them, gold is a promise kept. Gold is the anti-derivative, the anti-credit default swap, the anti-LBO. More important, it is the anti-dollar, the anti-fiat currency. And a fiat currency is the ultimate example of a promise, increasingly, a promise that can’t be kept. Gold is a tangible object in a world that came to overvalue intangible things. It is grounded in a world where few values are grounded. Most important, it is a physical good that is limited in supply. If the end of the world ever comes, gold will be your best friend. And it is indisputable that the end of the world is closer today than it was yesterday, and will be closer tomorrow than it is today
Source: Michael Lewitt
It seemed like the world was a perfect place for the former ‘foundation’ version of gold, with government intervention reaching new extremes in this Keynesian experiment. Positive feedback loops now taking place will have unintended consequences in the future. No one knows how this experiment will end. Gold seemed like the perfect place to hide….
Source: Ineichen Research and Management
As I said before, gold has traded more like a financial product lately than the foundation or hedge it was supposed to provide. Is the trend in financial assets to gold (Tangibles) finally reversing course?
No one can tell you for sure. As an investor, I don’t like gold under its support line around 1500. Under that line and its much harder to manage risk and know when you’re wrong. We shall see where gold heads in coming days.