Just a quick update on the gold outbreak I wrote about on July 1st. Many follow-up actions for the metal ETFs and related mining stocks. Gold is now significantly above its previous nominal highs.
In my experience, it is probably a mistake to think that you are smarter than the crowd and will fade when an asset class or commodity has reached several decades of high. Think of the wise men who wanted to sell to the Nasdaq when it challenged the dotcom bubble high of 5,000 – now it’s 10,000 years to go.
The gold rally seems to have just started, although it has been running since November. The US dollar index (dollar versus a basket of currencies) hits two-year lows as deficits and debt levels explode. In the meantime, miners are benefiting from limited supplies (coronavirus shutdowns) and generation-related lows in fuel costs. As for mining stocks – many discoveries that are taking place as a whole new generation are exposed to the Austrian economy, MMT debates, dollar devaluation, Fiat fights, inflation, etc. Not to mention the new crop of momentum traders who have never seen a loss in their lives.
Here is Peter Boockvar this morning about what has changed since gold last hit nine years ago:
Regarding gold, which has now reached a new high and surpassed the September 2011 high, compare the fundamentals today with those of the past. NIRP didn’t exist then and I don’t think it was even thought of as a possibility (I think I’m saying it naively, now knowing what some central banks have pulled off). Today there are about $ 15 trillion, which is less than zero. The Fed’s balance sheet was just under $ 3 trillion, compared to about $ 7 trillion today, while nominal US GDP rose by about 35%. The ECB’s balance sheet has tripled since then and we know where the BoJ, BoE, SNB, etc. balance sheet went, and that’s high up. The 5-year REAL return was between -50% and -1.0% in mid-2011 compared to -1.10% today. US government debt is $ 26.5 trillion compared to $ 14.5 trillion in 2011. In 2011, the dollar index ranged from $ 75 to $ 80 versus $ 93.8 trillion today.
Gold has risen 24% since the beginning of the year and has annualized to around 10.5% over the past five years. This means that its return is very close to that of the stock market, and the correlation is very low from day to day. Jason Zweig did it A really great Mea Culpa in the journal this weekend and took back some of the things he said about gold in the past. The graphics alone are worth the click.
Gold attracts a lot of money in a hurry. Exchange-traded funds that had $ 118 billion in gold assets a year ago now have $ 215 billion. According to the World Gold Council, a fifth of the total money has flowed in since January 1, making up almost half of global gold demand. Gold-backed ETFs lured a record $ 40 billion in the first half of 2020, compared to $ 5 billion in the first half of last year.
As you can see in my graph below, the miners (in the ETFs GDX and GDXJ) still have a long way to go while the two largest gold ETFs representing ownership of the metal itself – GLD and IAU – legs have increased significantly.
Just to repeat it again – it’s a commodity, not a religion. Act accordingly and do not fall in love.
There the dollar goes (TRB)
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