Those of us that view the financial world from a fundamental and technical standpoint (as opposed to only looking at fundamentals or only looking at technical trading) have our demons just like any other type of investor. And in looking at the gold market is no exception – in fact it’s an outright shining example of a market where I can see pros & cons all over the fundamental and technical map. now though, we may be putting the pieces in place for gold’s final explosive run – one of those pieces is widespread availability of the metal. However, before we get to discussing that, let’s cover some background…
The fundamental debates are endless:
For centuries gold, silver and other real assets were used as money. Paper money was introduced but it represented a claim on another asset – for example, early US paper money were bank “notes” which were redeemable at the bank for gold. Only until very recently (in historical terms – Bretton Woods in 1944 then Nixon in 1971) was paper money completely separated from a link to something that would give paper currency intrinsic value (gold and silver tied to dollars being an example). So the argument goes, as we issue more and more paper money (even in “electronic” form), we further erode the credibility of that paper money. And remember, credibility is the only intrinsic value of paper money (weird to think about if you really ponder it).
As the credibility erodes, more people will turn to owning old forms of money with intrinsic value, such as gold. And the real kicker is that if rising nations with wealth, creditor nations, continue to add to gold reserves, and offer a competitive interest rate on savings, more money will flow to the paper currencies of those countries and away from the US dollar and other western currencies. This is the argument for gold. It’s basically an inverse proxy to the efforts by western central banks to stimulate economies through large monetary policy.
On the technical side of the debate, I offer Peter Brandt’s recent “treatise” on gold as a good overall summaryof a technical
look at trading gold. Brandt calls the gold market the best trading vehicle on the planet because its tied purely to emotions as gold as a commodity has no business use (and is not really tied to an industry like iron is to construction or rice to people needing to eat:). Yes I understand jewelry but again, it’s a luxury not a business use.
Technicians by definition shouldn’t care if gold goes up or down as they will trade it either way. But even traders who build wealth often keep physical gold as protection because a system based on computer money has its own risk (as anyone who dealt with John Corzine). So oftentimes, even traders will prepare in case the bull fundamental case for gold is true.
And therefore, if the fundamental ideas are true, and that endless creation of fiat money will eventually erode the value of paper currency and lead to greater interest in buying gold by the public in developed western economies ( who still have most of the investible “computer/paper” cash) then we need an easy and reputable public access to buying gold.
In order for any asset to go from strong uptrend to manic price levels, there needs to be in place a means for people to buy that asset. Up until now I haven’t seen banks in the Boston area at least, offer gold. Now one does. As more banks offer this, gold becomes more accessible and the potential pop from widespread buying becomes possible. Banks in other countries sell gold, but when the country with the most available investment cash gets in the game, and the right macroeconomic situation sets up, with the right mix of political stupidity and increasing media coverage, we have the pieces in place for a price blowout.
Some may say that banks offering bullion is a sign that the bubble is already here in gold – sorry but if you’re saying that you probably didn’t see the real estate or tech bubble in the last 12 years. I feel that (and I agree with Bill Fleckenstein on this) everyone is seeing bubbles everywhere now right after they missed the two recent big ones. How all of these people became expert bubble spotters I don’t know. Maybe getting whacked by the real estate and tech bubble sharpened their focus. However, it’s tough to have a bubble when so few people actually own gold – once gold ownership spreads to more of the population, we may begin to see fireworks. But at the moment, gold is not too widely owned – so in my mind, the bubble argument doesn’t hold.
The average person is still a seller of gold (and typically at dumb prices in those gold shops or gold parties). When the average person becomes a BUYER, then the mania will have started. The length and height of the mania can not be known because we haven’t seen it (yet?). It can be argued that the fundamentals support a continued rise in the price of gold. Continuous creation of unbacked credit, fiat money stimulus and awful age/tax demographics all support a solid fundamental case for an eventual return to some kind of asset-backed currencies.
How will this story end? Who knows but if want to have a gold position because you believe in some of the fundamental reasons, I invite you to watch for an upcoming article I am working on – how to construct various gold portfolios and the pros and cons of each portfolio. Stay tuned for that (good news, I have written this article and you can find it by clicking HERE). And if you want to trade gold, Brandt’s paper is a good resource.
*not an endorsement of Leader Bank and I receive no compensation from Leader Bank for any reason at the time of this writing (or before).