Let’s take a step back and talk about what a huge waste of money I think it is to own gold. It’s not just that I don’t think it goes up in value, it’s more about what else we could be doing with that money. It’s the opportunity cost here that I believe burns the hole in your pocket. Will our money be treated better in rocks or in stocks? I still think it’s in stocks.
In early October, I put out a note reiterating why we wanted to be selling gold. This is after over a year of a bullish approach towards the yellow metal. So to be clear, I am not a gold bug or a gold hater. The truth is that I couldn’t care less whether gold doubles in price or gets cut in half. It’s not my problem. For me, Gold is just another asset in a humongous world of many assets. If you think it’s anything more than that, I believe you’ve already lost.
As a reminder, a big reason why we were so bullish of Gold throughout the 4th quarter last year and beyond was because Commercial Hedgers had on their largest net long position in history. Commercial hedgers in Gold actually hedge. So the fact that they were net long was a huge tell. This, coupled with the fact that I was incredibly bearish of stocks at the time, made Gold one of our favorite long positions.
Today, the exact opposite is true. I’ve been one of the more vocal stock market bulls throughout the Fall. Commercial Hedgers built their largest net short position in gold of all time, AND Gold hit our upside objectives. There is no, and has been no, reason to own rocks this Fall.
Here is the brick wall that Gold ran into, which was former support back in 2011-2012 before breaking down in 2013. The Principle of Polarity is one of the most important concepts, not just in technical analysis but, in understanding market behavior period.
Click on Charts to Zoom in
For me, it’s quite obvious and simple. Until Gold proves that it can get back above that former support, I think owning these rocks is a waste of money. We can call it $1560-1570, and the same can be said for $31 in $GDX, the Gold mining fund. If we’re below these levels, it seems foolish to have any position in metals from any kind of intermediate- to long-term time horizon. In the short-term, over days or a week, have a ball. Trade them long, short or sideways. That is where I have less of an opinion. For me, it’s the bigger picture here and everything we look at continues to suggest staying away.
What’s it going to take? For one, Commercial Hedgers can’t have their biggest net short position of all-time lol. That certainly needs to unwind. Silver needs to start out performing gold to really prove there is risk appetite in the space. And most importantly, the demand needs to finish absorbing all this overhead supply, as seen in the chart above. None of these things have taken place. If/when they do, I’ll be happy to flip the book long metals. Today, however, I think that’s a horrible decision to make.
Now, that doesn’t change the fact that I believe we are in the early stages of a new secular bull market in Gold. Doesn’t this bottoming process remind you a lot of what we saw 20 years ago?
It’s really important to identify your time horizon. Almost all arguments either on twitter or in real life could have been avoided simply by identifying a time horizon. People in disagreements are usually talking about two completely different timeframes. What does an opinion on something over the next several years have anything to do with tomorrow? I think there will be plenty of time to buy this stuff, just like we did 2002, 2003 and 2004.
Let’s take a look at what happened. The bottom at the turn of the century was a process, not an event. We had years of base building, an initial thrust, some further backing and filling, the secular breakout, the calm before the storm AND THEN the new bull market really took off over the next 8 years. Let me reiterate, this was a process, and a long one at that:
For me, we’re seeing something very very similar today. Look at this massive base since the collapse back in 2013. Look at that initial thrust in early 2016 and the backing and filling thereafter. The recent run we’ve seen since last year can be considered that Secular breakout.
BUT, now it’s got some work to do, for the many reasons I mentioned above:
What will prove me wrong?
If we’re making new 52-week highs in Gold and $GDX, this thesis of staying away from Precious Metals is completely invalidated. But to be clear, the bet we want to make is NOT that Gold breaks out. The bet we’re making is that it continues to be a waste of money to own these rocks.
Oh, and if you even think about emailing to go on this whole dissertation about how Gold is a mineral and not a rock, I think you’re just proving my point that you’re paying attention to the wrong things. So save it.
I think this can be a logical progression for Gold moving forward. This can be a 2020 story, and possibly even a 2021 story. Only time will tell:
What do you think? Shoot me a note. I love hearing from you!