#$dgl

Jared Dillian is an old friend of mine and one of the top editors at Mauldin Economics. Here’s a great read from him that I recommend for everyone interested in Gold. 

BY JARED DILLIAN

You have to be careful writing about gold.

You come out in favor of gold and you get maligned as some kind of doomsday-prepping, knuckle-dragging wingnut. Then you never get to go on TV. They don’t invite the crazy gold guys on TV.

I’ve been long gold since 2005. Rode it all the way down from 2011 to 2016. If you ride something down 45%, you are a moron. I’ll own it. I am a moron. I actually had a pretty good idea that there would be a correction in 2011, but I vastly underestimated how severe it would be.

Although that raises an interesting question. If something goes down 45%, is it a correction or a bear market?

Most reasonable people would say that it was a bear market. Nobody should ride positions down 45%. That’s just bad discipline. And a lot of people who had discipline with gold believed in the mass monetization thesis, believed in the hyperinflationary endgame—which still might happen. But nobody should ride anything down 45%.

Anyway, check out this chart of gold in the ‘70s:

Looking at this chart, you’d say that gold was in a bull market, right? But look closely—during that time period, there was a 50% retracement, from about $200/ounce to $100/ounce.

What am I saying?

You know what I am saying.

Based on technicals alone, if gold follows a similar pattern today (whereas we just had our 50% retracement), it could reach a high of $5,000 to $10,000 an ounce in a few years.

Like I Said—I Will Never Go on TV Again

The fundamental argument for gold is pretty strong these days. The alternative is a bunch of government bonds that yield nothing (or less than nothing) and that will probably never be repaid.

Or stocks, which are currently expensive.

Plus, there are indications that inflation is bottoming/has bottomed. All the stuff we have talked about before.

Gold guys like to talk about the endgame. So let’s talk about the endgame.

The US has a 103% debt-to-GDP ratio. It’ll go up a lot under either Trump or Clinton.

Italy’s debt to GDP is about 170% or so.

Japan is at 240%.

There really isn’t any chance that Japan is going to pay you back, or Italy, or even the US, once you take out-of-control entitlements into account.

So what are the options here?

Default

Extend and pretend

Inflate

Nobody is going to default here. You want to talk about Financial Armageddon… that would be it.

Greece hasn’t had a lot of luck with extending and pretending. They’re in this sort of endless depression. I doubt anyone would want to copy them.

Nope, everyone is going to inflate, which is the stealth way to default. There has already been open discussion about helicopter money in Japan (essentially the BOJ retiring or canceling outstanding debt).

This is where people just absolutely lose their minds. If I told a six-year-old that we were going to triple the amount of dollars/yen/euros in the system, they would tell you that prices would rise. More money chasing the same amount of goods.

Somehow, when you get PhD economists thinking about this concept, they tell you that everything will be okay. I guess it is fine for Warren Buffett to eat like a six-year-old, but not for me to do economics like a six-year-old.

Right now, we are in this fantasyland where governments (including ours) with hopeless fiscal situations are able to basically get paid to issue debt that has zero chance of being repaid in undepreciated currency. Somehow these bonds are considered a “safe haven.”

Gold is calling BS.

Gold Cares about Debt

We have sort of had this détente with the deficit under Obama—the Republican Congress has actually been a pretty effective opposition, and spending as a percentage of GDP has declined significantly since 2010. This is progress. But all of this will come to an end in November.

The only candidate campaigning on a platform of deficit reduction is Gary Johnson. But nobody cares. Everyone cared about the deficit in 1992, when it wasn’t a big deal. Now that we have the highest debt levels since WWII, nobody cares.

Gold cares very deeply about debt. Because once you get the debt up to unsustainable levels, it increases the likelihood that it will be directly monetized. That is all gold cares about.

I deal with a lot of dumb questions about gold: “There is no inflation, why should I care about gold?” We will get inflation eventually—but that is not what gold cares about. Gold cares about you treating your currency like toilet paper.

But you say these sorts of things in public and you’re a crank.

The reality is that gold is a very technical trade. There were lots of reasons to be bullish on gold from 2011–2016, and it went down anyway. Nothing has really changed (except maybe the proliferation of negative interest rates). Japan, Italy, and the US are as insolvent as they ever were.

Except now the chart is making higher highs and higher lows. I don’t care what you think about gold—if you don’t respect the chart now, you are as big of a moron as I was for riding it all the way down.

I’m long in a variety of forms, and I’m staying long until further notice.

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Thoughts on gold from Zacks Investment Management...

Bucking the global commodity rout, gold spot prices have surged more than +11% over the past six months. Interest in gold is typically driven by disinterest in alternatives or because there is a heightened sense of uncertainty (or, at worst, global panic). It follows that, given some uncertainty over global growth and deflation, gold has again emerged as a temporary “safe haven” for investors.

Interestingly, though, this trend runs contrary to widespread expectations of tepid gold prices in the short to medium term. This is especially the case as the U.S. Fed is embarking on monetary tightening and as recent dollar strengthening has convinced most that gold would lose its luster compared to other higher-yielding assets.

That being said, nagging growth uncertainties around the world have cast a gloomy outlook on the U.S. trade balance such that many investors are predicting a pause in Fed rate hikes followed by a cooling off of the greenback rally. Expectations of the dollar’s depreciation could, in turn, lead to a bullish outlook for gold prices. But, we’d urge investors not to be fooled – we see this gold rally being fueled by an emotional response to market volatility and not due to a shift in the metal’s fundamentals.

As such, we don’t expect the gold rally to endure for too long (no gold rally really ever does).

While some panic-stricken investors rush to gold during a financial meltdown, the recovery period often negates the benefits. For example, in the 2008-09 Great Recession, gold rose mightily as stock markets crashed. But, in the post-crisis period the S&P 500 has grown by more than +46% since 2011 whereas gold declined by more than -9%. Gold doesn’t do so well in good times, and we still think these are good times.

Since 2011, the S&P 500 has Increased +46% while Gold has Fallen -9%

The current U.S. stock decline should not, in our view, be dubbed anything even close to resembling a financial meltdown. Strong economic fundamentals, underscored by firm U.S. consumer confidence (and bolstered by promising wage and employment conditions), should drive the stock market higher as global conditions start to improve and fears subside.

Bottom Line for Investors

The recent ‘gold rush’ is primarily a consequence of investors’ feverish desperation to hedge against uncertainty.  Pessimism over global growth and policies has intensified so much that many are willing to hold a non-interest bearing commodity for its short-term potential price appreciation. But, as economies like Japan and Europe work through their monetary easing policies and global expansion resumes, it is assets with strong fundamentals (like stocks) that will likely yield investors solidly positive returns.

FREE - Zacks Stock Market Outlook Report 

Steady Investor News is published by Zacks Investment Management.

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Gold prices are down almost 50% from their peak a few years ago and are now plumbing the depths of levels we haven’t seen since 2010.

It’s been a slow-motion crash that’s engendered more defensive cognitive dissonance than any asset crash I’ve ever seen. Even the real estate and dot com people admitted when their comeuppance had come. The gold people suffer from no such humility. Instead, they turn personal and nasty toward anyone who points at the scoreboard. They immerse themselves in manipulation and collusion fantasies. The wronger they become, the more ardently they believe they’re right.

As a student of investment behavior, I’m learning a lot from this. It’s a fascinating phenomenon to watch play out. But the fact remains that I don’t have a dog in this fight. I am neither long nor short gold, nor do I intend to be.

A lot of people are making the assumption that I’m either bearish on gold or that I think it has much lower to go. They’re extrapolating my sarcasm about the supposed benefits of gold into a trading bias that I simply don’t have. So today, I’ll set the record straight once and for all: I am a gold agnostic. I don’t care about where it goes and what it does. I don’t like it, I don’t hate it – I simply don’t care about it. This is what sets agnosticism apart from atheism by the way: apathy.

One thing I do have a strong opinion on is whether or not it belongs in an investment portfolio. My opinion is that it does not. It’s utterly pointless as an investment in that there is no conceivable way to value it and it doesn’t do what its most vocal supporters claim it does. Stocks and real estate have historically been a better, more productive hedge against inflation. These are the facts.

And if you think your shares of a paper ETF backed by gold are going to protect you in the event of a societal collapse, I have even worse news for you: the cannibals won’t be impressed by your cost basis in GLD. Taken a step further, an investment in gold mining stocks is even more counterproductive. It’s like gaining exposure to the metal, but net of the costs and expense of running a public company, including bonuses, salaries, equipment, risks of geopolitical interference and worker strikes etc. All the risk of owning any company’s stock, but in this case, the additional risk of a fear/greed cycle in a boom-and-bust commodity that no one can control.

My core view on gold is that, at best, it can be a good trade for those on the right side of a trend. And, at worst, it’s a commodity speculation that certain people have developed a quasi-religious fervor around owing to either their political biases or their inherent gullibility. I understand why reasonable people want to casually include it in their portfolios, even though I think they’re wrong (see A Quick Note on Portfolio Construction and Gold). I’m wrong about plenty of stuff too. I have friends who believe in gold as a portfolio diversifier and they make fair points, mostly revolving around gold’s outperformance during the aught’s decade of flat stock returns. But they’re not religious about it, they’re not what I’d call obsessive.

As for the gold obsessives, I’ll just say that they typically don’t like me. I believe that most stuff tends to work out in the end and that the American experiment is worth betting on. Especially during those moments when it looks most dire (see Optimism as a Default Setting). This is not to say that I’m not preparing myself for events to turn out badly – it’s just that I don’t envision them staying that way forever.

History is on my side, not theirs. We have a $19 trillion stock market and a $17 trillion economy and that didn’t happen overnight.

Gold obsessives are not optimists by nature, they are skeptics. Which is perfectly ok, except they never seem to be skeptics about the one thing that matters – the claims being made about the metal they’ve fallen in love with. Becoming a “gold guy” – and yes they are almost all men – is about more than just the pursuit of investment returns. It’s a posturing or a signaling of sorts that you are not okay with the direction things are heading. It’s a flag waving exercise in the guise of a “sound money” investment policy.

In my experience, there’s a very high correlation between gold obsessives and conspiracy theorists. Or between gold obsessives and Glennnn Beck fans who think America’s best days ended in 1959. Or between gold obsessives and people who generally abhor popular culture and societal progress.

The thing is, they could actually be right that things can only get worse. I don’t think they are, but the possibility exists.

Maybe, just maybe, the world is about to end – brought on by the thawing of social rigidity, the dissipation of 20th century status quo morality and the interference in so-called “free markets” on the part of governments and banks. In this case, I’ll let Charlie Munger do the talking for me:

“I don’t have the slightest interest in gold. I like understanding what works and what doesn’t in human systems. To me that’s not optional; that’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational. And I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk.”

Gold could be on the verge of a major comeback, vindicating the faithful and bailing out the people who’ve wagered their retirement hopes on it. This wouldn’t change any of views from a portfolio perspective. To me, it can only ever be a trade. One of my proudest accomplishments as a financial advisor over the last few years has been the rescue and deprogramming of dozens of investors who had been previously lured into all manner of junior miner promotions and dubious precious metals funds.

And for those who’ll point to this post as evidence that “the bottom is at hand” or say I’m a johnny-come-lately to gold agnosticism, I’ll point to some of the more important things I’ve written on the topic going back to 2011:

Gold: LET THE WILD RUMPUS BEGIN! (TRB)

BREAK-IN: The Goldbug Rapture Has Begun! (TRB)

Gold: This is What an Ex-Momentum Trade Looks Like (TRB)

A quick note on portfolio construction and gold (TRB)

Deep Thoughts with Josh Brown: Gold Miner Dividends (TRB)

Memo to David Einhorn re: Gold Miner Suckitude (TRB)

Gold Miner Update: Yes, they still suck. (TRB)

Things I Learned at Gold-Buy-GoldWest (TRB)

God is Making Gold Crash to Test Your Faith (TRB)

Being an agnostic means I neither root for nor against gold’s price. I simply avoid it entirely, confident that there are better hedging options for whatever ‘flation may come down the pike next. It’s not a controversial stance. To me, it’s a logical one.

Since gold peaked around $1900 per ounce in 2011, gold stocks have endured a challenging three years. In 2014, things started promisingly enough as gold stocks began to stage a recovery in the first half of the year. This was before weakness in global currencies, versus the U.S. dollar, and expectations of a Fed rate hike combined to reverse the momentum. And then, towards the end of last year, sentiment tumbled to all-time lows creating a unique opportunity for contrarian investors. However, while gold declined slightly in USD terms during 2014, it actually posted respectable gains in most foreign currencies. Gold has historically had an inverse relationship with the US dollar. Because gold is priced in USD, as the greenback strengthens the gold price typically weakens. However, in the first two months of 2015 this hasn’t been the case. Why? Well, a number of factors have driven renewed investor interest in both gold and gold equities. This includes stubbornly low inflation, fears of outright deflation in Europe and Japan, the ongoing conflict in the Ukraine and continued uncertainty surrounding Greece’s future as an EU member nation. In a bid to stimulate growth, several central banks have enacted negative interest rate policies leading to approximately $2 trillion of government debt globally that has a negative yield. This diminishes the opportunity cost of holding gold at a zero yield. Increasingly, investors are also growing concerned about the unforeseen consequences of central bank policies. Most recently, the markets were rattled when the Swiss Central Bank abandoned its commitment to peg its currency to the Euro. As a result, investors have begun to return to the sector. For the first time in several years, inflows to gold ETFs have turned positive and gold equities have been strong performers year-to-date. So, why should investors consider gold stocks? The primary reason that investors allocate a portion of their portfolios to gold stocks is portfolio diversification. Historically, the correlation between gold stocks and traditional stocks is very low. With the S&P 500 and Dow Jones indexes at all-time highs, it could be a good time to consider an asset class that typically does well during stock market corrections. How should investors position themselves to participate in the recovery? Not all gold stocks are created equal. Far from it. Some of the sector’s largest companies by market capitalization are the most indebted, have experienced declines in their production and have poor track records of creating shareholder value. Picking individual gold stocks is risky given their higher than normal volatility and mutual funds may not always be the best option for all investors. As a result, investors are increasingly looking at ETFs as a low cost way to gain access to a diversified basket of gold stocks. Traditional gold mining ETFs track purely passive market capitalization indexes which means that the larger the market value of a company, the larger its weight in the index. There are new index methodologies available that use different company factors such as quality and momentum to select and weight stocks. These alternative index methodologies are growing in popularity with both institutional and individual investors.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

As a technician that looks at multiple asset classes and stock markets all over the world, I treat them all the same. For us it’s just math. Whether we are looking at shares of MSFT, US Dollar Index, Malaysian Stock Market, Treasury Bonds, etc to us they are all the same. For most market participants this is not the case and people tend to be more interested in certain stocks or markets.That’s understandable. AAPL is a good example, precious metals, Oil lately for obvious reasons, etc etc. These days, I’ve been getting a lot of questions about the price of Gold since the yellow metal has gotten the year off started on such a strong note.

So if you want to know where Gold prices are headed, I think your best bet is to watch Silver. They generally move together, although Silver tends to me the more volatile of the two. Nevertheless, I think if you want to know where precious metals are going as a group, Silver is the cleanest one and that’s our tell.

First of all, you guys know I don’t like to assume correlations like we see some other do so often. I want to responsibly make sure that the math adds up. So after running the numbers, the correlation coefficient between Gold & Silver over the past month is +0.9, over the past quarter it is +0.9 and it is also +0.9 over the past year. They move together.

Now, here is a weekly candlestick chart of Silver going back a few years where we can see that key support near 18.50 throughout the second half of 2013 and into 2014 until it broke last September. Our polarity principles tell us that former support should turn into resistance. This is precisely what occurred over the last couple of weeks. This resistance, or “overhead supply”, is what we want to watch going forward.

As you can see on this chart, not only does this former support now represent resistance, but this is also where we run into a downtrend line from the highs in late 2012. In addition, the 18.35 level is exactly the 38.2% Fibonacci retracement from the entire August 2013 – November 2014 Decline. There is a big cluster of resistance levels here that we simply cannot ignore.

Until prices are above all of that resistance, I don’t see any reason to be long precious metals, particularly from a structural perspective. Sure, there will be some volatility and plenty of ups and downs for short-term traders to take advantage of. Therefore, I think it is more important than ever to define your time horizon. To simply ask, “Where is gold going?”, is a bad question. You mean, in the next 10 minutes? Tomorrow? Next month? Next year? Time horizons have to be defined.

As far as I’m concerned, I generally use weekly and daily charts to first get a structural bigger picture perspective, and then break it down to a shorter timeframe for executions. Right now, I do not see any reason to be long precious metals, for my time horizon. I think if Silver can break out and stay above the cluster of resistance levels mentioned above, then we can look to put money on the long side. Until then, I don’t see anything to do here.

This symmetrical triangle that’s been forming over the past year is resolving itself to the downside as prices break the lower of the two converging trendlines. We should not be surprised as these types of consolidations tend to resolve themselves in the direction of the underlying trend, which in this case has been down since the 2011 highs. With momentum in a bearish range and rolling over hard, I would expect Gold prices to at the very least retest the 2013 lows near 1180. But in all likelihood we will break those levels and head towards 1000 where we run into support from former resistance in 2008-2009. From a sentiment perspective, there is no where near as much pessimism in this market as there was at last July and December’s lows. This lack of extreme bearish sentiment is likely to be the catalyst to take this market much lower. It would take a rally back above 1290 to invalidate this bearish breakdown 

Short-term you can see prices breaking below the lower of the two converging trendlines that define the symmetrical triangle consolidation in Gold. The fact that prices failed to reach the upper trendline in July was warning number 1 that this market was weakening. Now that we’ve officially broken down, we are running into support from the early June lows. I would expect some sort of acknowledgement of this support, but only temporarily. Any rallies can be sold as I think we break this support level very soon and head towards last year’s lows near 1180. It would take a rally above 1290 to invalidate this bearish thesis. Although I believe that is the lower probability outcome, keeping an open mind is something that we take very seriously. If you’re still not in, I think a great short entry would be a bounce above 1270