Although I am sympathetic to the long run bull argument for gold, I am by no means a true “gold bug.” If you were to convince me that Western governments were going to stop leveraging up the financial system and instead focus on returning to sound monetary policy, then I would immediately sell all my gold.
This gold bug has more money than brains…</a> </div>
Imagine if tomorrow the government altered the Fed’s mandate. What if the Fed was charged with following the Taylor rule systematically. The government has it in its power to alter the Fed’s mandate. There is nothing stopping them from tying monetary policy to some other anchor instead of their twin task of price stability and maximizing economic growth.
But given the massive debts that we have already incurred, do you think this is going to happen? Can you imagine how painful it would be for monetary policy to be properly priced?
Decades of imprudent monetary and fiscal policy has saddled us with a debt burden that will be immensely difficult to navigate through. The most attractive way to clear the decks of the debt would be to simply grow our way out. However that is not going to happen. There is simply much, much too much debt for that to be a realistic option.
Which leaves us with two other choices. Given that the current debt is not economically serviceable at proper interest rates, we could default on the debt. This process started during the 2008 credit crisis. The system was trying to cleanse itself through a debt liquidation. Left to its own devices there would have been a massive defaults across the board. The pain would have been immense, but on the other side of the depression we would have come out without the crushing debts.
However society is not ready for this sort of discipline. We got into this mess because we wanted everything now. We didn’t care about the long term consequences of our actions and therefore we continually incurred debt after debt without a second thought about the fact that eventually has to be paid back. Which is why I believe in the only way out of this mess is for us to inflate our debts away. We are going to pay them back – the money is just going to be worth a lot less.
Which is why ultimately I think gold is a something you need to own. If I am wrong and society decides to get religion about monetary policy then I will change my opinion towards the shiny yellow stuff. But even after seeing the costs of continually piling on more debt (the 2008 credit crisis), we have once again decided that the best way forward is to do even more of the same shit that got us into the mess in the first place.
As a trader that long term view definitely taints my day to day trading. I find that I have trouble shorting gold. Even when all the technicals seem to be pointing downward, I still want to buy it.
Lately I find myself even more conflicted than usual towards the little yella’ fella. From a seasonal point of view we are approaching the best time to own gold.
Monthly Returns of Gold</a> </div>
In the chart above, the first row has the average monthly percentage return of gold over the last 10 years. July, August and September have consistently been great months to be long gold. October has been a push and November has actually been the best month. From a seasonal point of view, there is probably no better time to own it than the current period.
The technical picture is also shaping up nicely.
Gold chart</a> </div>
We had a decent move off the May lows and ran all the way to $1350. Since then we have sagged a little, but have held at approximately $1300. To me it looks like the recent consolidation is just a pause before the May move upward resumes.
Gold seems to track the inverse of the long run real rate of interest. Given the US bond market’s recent rally, this has pushed real rates lower, implying a higher gold price.
Gold (yellow line) vs Inverse 30 Year Real Rate (white line)</a> </div>
But herein lies my conflict. Although the long end of the bond market has been running like it stole something, the short end of the bond market has actually been doing the complete opposite. Short rates are rising – not falling.
Here is the chart of the 2 year yields:
US 2 Year Yields</a> </div>
This backup of the short end has also caused the US dollar to be bid.
US Dollar Index</a> </div>
The trader in me is long US dollars and thinks that this bull move is just starting. That is why I am having trouble owning any gold for the short run. I want to find a reason to buy it, but I am worried that rates and the US dollar are going to make any upwards progress tough slugging.
For now I am going to sit on the sidelines, but I find myself nervous about not owning a decent position through the best seasonal period.