GOLD – It’s Time to Pay Attention

The last time I shared my thoughts on gold, a subject I had previously wrote about constantly, was all the way back in July of last year. That post was titled, 4 Mainstream Media Articles Mocking Gold That Should Make You Think. Here’s an excerpt:

There are many reasons why I stopped commenting on markets, but the main reason is that I started to recognize I wasn’t getting it right. In fact, in some cases I was getting it spectacularly wrong. Whenever this happens, I try to isolate the problem and fix it. In this case there was no fix, because much of why I was no longer getting it right was rooted in the fact that my heart, soul and passion had moved onto other things. My interests had expanded, and I started a blog to express myself on myriad other matters I deemed important. Providing relevant market information needs intense focus, and my focus had shifted elsewhere. I recognized that I wasn’t intellectually interested enough in centrally planned markets to provide insightful analysis, and so I stopped.

Years ago, Martin Armstrong was saying that nothing goes up in a straight line and that gold would experience a severe correction before beginning its real bull market. We are seeing his prediction unfold before our very eyes. What he also said is that as gold approached the $1,000 per/oz mark or even below, everyone would proclaim that “gold is dead” and start making comically bearish statements. In a nutshell, negative sentiment would plunge to levels not seen in years, if not more than a decade. We are starting to see this now.

I didn’t write this article to “call the bottom in gold” or anything like that. I merely want to flag these four articles due to the hyperbolic nature of some of the statements made (they are exhibiting pretty much exactly the same behavior as the gold bugs they mock do). I do think that something is happening on the sentiment front that warrants we are closer to the bottom than the mid-stages of a bear market.

Fast forward six months, and gold has been more or less flat. Nevertheless, a lot has changed in the interim and it’s time for an update. Specifically, the multi-year fundamental outlook has turned far more bullish, while sentiment remains depressed. Yesterday, following multiple back-to-back  messages about gold on Twitter, someone asked me for my bullish thesis, I wrote:

@BrianZaratzian Negative yields, central banker panic at next downturn, bearish sentiment turns bullish, cashless society calls.

— Michael Krieger (@LibertyBlitz) February 2, 2016

But there’s more to it. A lot more. First, let’s look at the improved fundamentals. Gold bugs will exasperatingly proclaim that fundamentals have been great for the past four years yet the price plunged anyway, so who cares about fundamentals? To this I would respond with two observations. First, large institutional investors and sovereign wealth funds have been anticipating a rate hike cycle for a very long time now. They didn’t know when, but they expected it. The fact that the gold bugs never believed this is irrelevant; what matters is that big money believed it, and it was perceived to be very gold negative. In their minds, this anticipated rate hike cycle would confirm that things were getting back to normal, and if things are normal you don’t need to own gold, right?

The problem is that this assumption is quickly being called into question. Sure the Fed hiked rates once, but it is starting to look more and more like a policy error. Meanwhile, other major central banks around the world are going in the opposite direction, toward negative rates. I am a huge believer in market psychology, and the psychology dominating the minds of most institutional investors over the past few years has been that things were slowly getting back to normal. This has weighed on institutional demand for gold in a big way, and been a meaningful factor in the bear market (manipulation aside). If this psychology shifts, the shift back into gold could be very meaningful.

While that backdrop is interesting in its own right, what may make the move into gold that much more explosive is the lack of alternative investments. Let me explain.

Very wealthy people in the Western world do not like gold. In fact, if you talk to them, most will sneer at you with a combination of disgust and bewilderment at the mere suggestion of buying physical gold. These people will scour the planet for every and any alternative they can find before buying any gold, and this bias has been evident globally over the past few years. We have seen mansion prices and luxury real estate generally soar to unforeseen heights across the globe, and we have seen tremendous bull markets in equities. Similarly, competing “safe haven assets” such as sovereign bonds have rallied to the point many of them offer negative returns. Specifically, the FT just noted that negative yielding bonds now account for one-quarter of the entire government bond universe. Think about that for a second.

So what we are looking at is a far stronger fundamental backdrop for gold, coupled with an investment landscape in which almost all the alternatives look overpriced and unattractive. While wealthy Westerners will be dragged into the next gold bull market kicking and screaming, dragged into it they will be. They may not like gold, but they like losing money even less. This will create the buying power so desperately needed for a new gold bull to catch fire, and many people will be caught off guard. Personally, I think a new bull market in precious metals will be birthed with the next 12-months, and it’ll be a big one. 

*Note: I think it is beyond obvious that all financial markets, particularly precious metals, are actively manipulated by Central Banks around the world. Recognition of this fact does not help one determine when the psychology of markets and related price action will change, which is why it was not addressed in this article.

Finally, in case you missed it the first time around, you should check out the July 2015 article: 4 Mainstream Media Articles Mocking Gold That Should Make You Think.

In Liberty,
Michael Krieger

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