I've been looking for an intelligent bear case against gold to listen to. Barry Ritholtz fits the bill (click here).
His thesis is that a bounce is due (say $1400), but after that he expects lower lows. I agree with the bounce idea, but I'm still thinking thru what happens after that.
Here's his case for lower lows:
- Fundamentals - The gold bug narrative of money printing, collapsing dollar, inflation then hyperinflation (sounds like Sinclair, Turk and a host of others) is just not happening yet (apart from the money printing). The dollar, in particular, is at multi-year highs. And what currency are you going to go to beside the dollar? So, no weak dollar which is bad for the gold anti-dollar.
- Barry: You Missed The Most Bearish Fundamental: The Indian G-Man has recently taken a regulatory stick to the imports of gold (tariffs, removing financing, bullying gold dealers, etc.) This is a huge market for gold. How long it takes "informal" importation (smuggling) and how fully that compensates for this remains to be seen. If the Chinese G-Man does the same thing gold may hit your sub-$1000 targets. IMPORTANT: Any gold bullish message you read which doesn't address this is clearly just trying to spin you bullish rather than bring you a valid perspective on gold. This provides a litmus test for distinguishing between the spinners (bullion, news letter or gold stock salesman) and those trying to be objective.
- My response: Well, those aren't the only fundamentals. How about these bullish fundamentals:
- BRICS (and other) central bank buying as gold insurance against the USA's abuse of its hegemony power. This is a national security issue. Just ask Iran which is reduced to using gold for all International trade payments after being "embargoed" by the hegemony. National security takes priority especially when it doesn't take that much gold buying to change the demand / supply balance and when these countries have plenty of saved up dollars sitting around looking for something useful to do. These dollars are piling up from manipulating their currencies lower against the dollar for an export advantage to minimize their internal unemployment.
- Substantial Indian and Chinese (and other Asian) consumer buying that can be expected to grow as their disposable income grows. These folks, within living memory, have situations where gold saved them or their relations necks as protection against hyperinflation (China), government tyranny (China and India) and social unrest (aka civil war) (China and India). The use of gold as protection against tyranny and social unrest goes back for millenia.
- The fact that debt is growing faster than the economies of the developed countries (with no change in sight) and such growth is long-term unsustainable.
- Inflation follows money printing after a variable delay which hasn't really expired yet.
- There's got to be a shortage of gold given how long its going to take Germany to get a piece of their gold back from the USA.
- The marginal cost of production for gold is probably $1500 /oz with a tonne of production being unsustainable at the recent $1200ish lows.
- The need for gold as insurance against social unrest and government tyrarny (including bank bail-ins) throughout large swaths of Europe, the Mid East and even South America and Asia.
- The long-term trend of gold (even with on-going mine production) falling as a percentage of global GDP.
- Technical - The prior trend is clearly broken and the collapse has been historic, so a bounce is due. At that point, the story will match the news (good news for gold). Typically after that bounce, this kind broken long trend will continue collapsing. $600 / oz is possible.
- My response: I clearly accept that the nice, friendly gold bull market from around 2002 to 2011 is clearly OVER. But... there are other cases of gold breaking down from an accelerated uptrend into a bear market and subsequently resuming its upward trend. These include 1975-1976 and 2008. Bull markets can resume when there is strong fundamental support as there seems to me to be for gold.
I haven't decided whether the gold bull market is dead. I should have reduced my exposure when it was clear the nice, friendly, consistent bull market was over (which was pretty clear before the April loss of support), but I didn't. I gave too much credence to Mr. Sinclair's assurance that the bottom was in rather following prudent risk management. I see now that this was a mistake.
Going forward, I expect I will reduce exposure if we get a decent bounce, but how much will depend on both my risk tolerance at that point and my evaluation of the fundamentals.
As the chart from the 70s shows, there was an eight-fold rise that followed the 1975-1976 nearly 50% correction and there was a 60% bounce in 1982 bounce that followed the 1979/1980 collapse. So, there could be some really nice bullish action coming up.
Thank you Mr Ritholtz for helping me clarify my own thoughts about gold at this point.