Paul Brodsky always has great insight into the credit markets and interest rates, along with the market in general, so it was great to receive his insight on gold.
Here are the two points I want readers to realize:
- Real interest rates (nominal rates less CPI) are negative across the majority of the largest developed and emerging economies, implying that a stable or rising gold price has positive carry.
- When valued in terms of Enterprise Value per Gold Ounce (EV/Gold), in-ground bullion may be owned for as little as $30/oz through shares in operating companies already in production (we will distribute a more in-depth analysis of this to Fund investors later in the month).
I would encourage you to read the entire piece to get a quick summary of the dynamics in the gold market.
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The poor man's gold.
Silver was going wild, then came back down. I had bought it in the teens, and sold it in the 40's, and was pretty happy to sit out for most of the recent volatility. But here's the thing - I still believe that central banks will have to print.
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Sure, gold is an old relic, but we've held on through the recent hiccups without losing focus.
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There is a flood of data and headlines that seems almost spiteful to anyone trying to enjoy their usually-slow August. For me, it gives a good excuse to turn away and read even slower as most of the flood is meaningless for my portfolio. That being said, some of it is not.
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Gold broke out, but is showing signs of being extended.
Even a pullback to 1200 wouldn't break the uptrend from 2004, and it could break down even further and STILL not break the uptrend off the lows.
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Gold reached a new milestone today as it surpassed SPY to become the largest ETF by assets.
From
CBS Marketwatch:
Net assets in the gold fund Friday were $76.7 billion vs.
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Just a quick reminder: gold will peak on fear, not greed, and fear hasn't peaked.
No charts, no nothin'. Gold is a safe have when there's no trust in the system.
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August 2nd was the debt ceiling deadline, and as anticipated, our leaders came through with a deal that raised the debt ceiling, but has only negative long term implications in terms of fiscal policy.
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I recently got good news from a sell-side analyst: Equity might be bottoming because when measured against hard assets like gold the S&P 500 is already down 80% and at some point will start moving higher. Below is the inverse chart of gold:spx, with the argument being that gold vs.
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Approaching new highs in almost every currency. Euro can sustain any bids, and I'm not even sure who's bidding other than the Chinese. Why are the Chinese bidding? No clue; maybe they like losing money. Regardless, gold and even more importantly for me, the gold miners, are rising today.
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Gold was down for a week and the fear was palpable: yes, ladies and gentlemen, gold will have pullbacks; however, seen on the weekly chart, gold remains stable and strong, and not just technically.
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Warren Buffett famously remarked that when the tide recedes we get to see who has been swimming with not bathing suit.
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Osama bin Laden is dead, and while it gives me a great sense of emotional and psychological satisfaction, I also know, logically, that this is at best a temporary and symbolic victory. It doesn’t take away from it, it’s just a recognition that the same forces (geo-political, economic, social, etc.) that were at work before, are still present. And so, on cue, we turn to precious metals.
Silver is all the rage today. As margin requirements were raised and rumors about delivery failures going around the world for the umpteenth time, silver dropped 12-13% at one point before starting to recover. All that is not that interesting to me, not just because I sold my silver exposure out of fear of these kinds of manic moves, but also because I think the more interesting story is gold.
Gold’s resilience in the face of massive silver volatility is significant in that we finally see that different forces are at play for these metals. Gold holders are not looking to trade it – at least not yet. Gold holders appear to be longer term and less influenced by external influences. In fact, gold is up on the day, approaching new highs in various currencies, and looks to move higher. Simultaneously, it’s interesting to note that the miners continue to underperfor – making them more attractive on a relative basis.
Relevant ETFs: GLD, GDX, SLV
You wouldn’t believe the vehemence of the responses I’ve received for selling silver last week, and the chides so far this week. Sure, I sold silver and bought GDX and XLU in its stead and missed out on a few percentages of relative performance. The comments have only served to solidify my resolve – I am not a momentum investor and I fully recognize that I might miss out on the explosive parabolic move that might come. On the other hand, I’ll be able to sleep at night knowing that I was buying undervalued assets and not worried about being the last one out or trying to time the final move. In the meantime, no one is mentioning the fact that our positions in energy have done fabulously, and the rest of the precious metals are following silver up (although maybe not at the same blistering pace). I can only imagine what will happen when we rotate out of those.
Relevant ETFs: SLV, GLD, GDX, XLU, PALL, PPLT, FCG, KOL, NLR
A lot of minor adjustments today, so I’ll keep it brief:
- Looking at relative sector valuation and performance, I initiated a position in utilities through XLU. Long story short, it’s the most undervalued S&P sector, underperformed, 4% yield, etc.
- I had some clients with exposure to PSLV, which we completely reduced and depending on portfolios increased or initiated exposure to GDX or GLD, just makes sense as part of our exposure to precious metals.
Check out this chart from Bespoke:
Some clients have asked whether we think silver will go higher. The short answer is yes, however, I think there are better risk/reward opportunities at these levels. If nothing else, I have been holding silver for such a long time that I remember that there were days when people asked whether we should keep holding it, where as now they focus on whether we should sell it. I don’t need to be in it at this stage when gold and miners look more attractive. So, yes, it will probably go higher as fiat currencies continue to come under pressure, and no, I do not believe it’s a bubble at this time, but we can reduce exposure to it. Plus, we still have exposure to SLV. PSLV, on the other hand is trading at 20+% premiums to NAV at any given time, so it’s definitely not my style.
Relevant ETFs: GLD, GDX, SLV, PSLV, XLU
Commodities/Futures | | 
December 21, 2011 9:31 am | 
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