Most people don’t realize it, but these three dudes (a younger bearded Eric Sprott beside a distracted Marc Faber with an unusually rare photo of a non-mullet sporting James Rickards) are the last three remaining gold bulls out there. And as you can see, they have all been gold bulls for a long, long time, so they almost shouldn’t even count.
And it really should be no surprise. The damage done to the gold market has been brutal. We all know it is bad, but have a look at this great tweet by Charlie Biello about the latest yearly percentage returns for the GDX gold miner index ETF:
That really sums it up, doesn’t it? Think about surviving five down years in a row. Tough to keep up the optimism in the face of that sort of draw down.
When the New Year rolled over, my inbox was filled with tons of trading recommendations trying to catch the oil bottom. Kyle Bass’s Wall Street Week appearance </a>where he advocated pulling out the blue tickets for almost everything in the energy square was typical of the smart money knife catching. But I did not receive a single “you gotta buy gold” call. The idea of investing in gold is about as cool as this guy:
Don’t get me wrong – I also like energy, but my point is that absolutely no one was trying to catch the bottom in gold. No one believes in the precious little yella’ fella anymore._ Sentiment is about as bad as it can get._
Yet amidst this gloom the bullish case for gold has probably never been better. Capital to the sector has completely dried up so the amount of new supply coming on the market will not be growing any time soon. In the mean time, we are trading under the cost of production for many mines, so bit by bit, as more mines close, supply will shrink.
But more importantly, the financial system has become increasingly unstable. There are massive imbalances that will not be easily fixed. The credit crisis of 2008 was ushered in by a contraction in the private credit sector. Faced with a reversal in the grand credit super cycle expansion of the past few decades, government officials chose to not allow natural credit destruction to occur, but instead replaced private credit destruction with massive public credit expansion. The end result is that we enter 2016 with total indebtedness never being higher. Not only that, but excessively easy monetary policies have pushed asset valuations to asinine levels. The Federal Reserve’s attempts to normalize monetary policy are already causing tremendous strains to the global financial system.
So far the market’s faith in the world’s Central Banks is steady, but for how long? As it becomes more obvious that these Central Bankers are doing nothing more than papering over very real troubles, the market’s desire to hold something other than fiat currencies will skyrocket.
At this point you are probably dismissing me as yet another delusional gold bug. I get it. All of these points could have been made last year and yet gold still shit the bed. But think about the recent trading action. One after another markets are rolling over. First it was commodities, then emerging markets, right behind was junk and high yield bonds. Every time you turn around another asset class is hitting fresh lows. The only man left standing is US equities.
Over the past few years nothing else but the rising US dollar and US financial assets has mattered to investors. Why bother with anything else when the world’s largest investing asset class was the also the top performing?
If you think about gold as Jim Grant does as the best way to bet against Central Bankers, then it is no surprise gold is sucking wind so badly. These bankers’ ability to levitate financial assets at the expense of everything else has been memorizing. Stunning actually. And if you believe these ivory tower Central Bankers can continue to manage this extremely unbalanced, massively leveraged, increasingly interconnected, global economy, then by all means – continue buying fiat financial assets.
But I would rather be on the other side of that trade. And I would especially like to fade Central Bankers’ prowess when there is so little premium built into the cost of my bet. Let’s face it, given the amount of pessimism out there regarding gold, it wouldn’t take much for negative expectations to be exceeded. We could get another sixth down year, but even the most ardent trend followers have to be a little scared of the mean reversion trade.
And I will leave you with this idea from a different Grant. The always entertaining Grant Williams recently made an absolutely terrific observation about pension funds’ minute gold exposure. Grant noted that physical gold and gold equities account for 0.3% of pension fund assets. If the faith in Central Banks was shaken a little and the pension funds doubled that exposure to 0.6% (still not a meaningful number), then that would result in $100 billion of gold buying. This amount would be enough to buy:
- all of the XAU gold index companies
- the entire GDX gold miner ETF
- the entire GDXJ (junior) gold miner ETF
- and all of the GLD ETF!!!
Williams goes on to note that for $125 billion you could buy every major gold producer out there. Another market commentator noted that with all the cash on Apple’s balance sheet, they could buy every gold miner in existence.
Gold is a tiny market where a slight shift in attitude can have an enormous effect on the price.
Sentiment is so bad, and the risk reward so skewed to the upside, I am making gold my favourite trade right now… So make that the last 4 remaining gold bugs out there...
Thanks for reading,