An “epic” battle to pay attention to. In the last few days, gold attempted to break down to the mini bottom set September 18 (which itself was a retest of Aug 8-9). This morning, buyers have successfully repelled that fall and gold is popping a bit – but this could change in 10 minutes as it may be worries over the ‘debt ceiling’ (haha) but again, we don’t want to get into the habit of assigning a reason to every little gyration in the market.
Some Background and Rambling by Me
But in the bigger picture, the battle of QE without consequences vs those who think the consequences will be great is going on. Both sides have their emotional arguments, and arguers for that matter (gold bugs would secretly and not so secretly like to see the US monetary system collapse to teach a lesson to the money printers; Hyper-Keynesians or the MMT crowd would like to send gold finally to the dustbin for ‘barbaric relics.’).
The central banks of the world could not argue – if gold were blowing past 2k an ounce – that their policies were creating serious mistrust in the fiat monetary system. But that is not happening right now. So they assume that endless money printing (which Japan and the US are engaged in, and may be “trapped” into continuing permanently) is not affecting price levels. And gold bulls could not argue, if the economy were to meaningly improve with real world price levels not increasing.
Right now we have a bit of both. Gold is not screaming toward 2k and government measured price levels are not rising quickly. Though one could counter-argue that gold’s powerful advance since 2000 requires a long basing period and that real people that pay bills, could see serious price increases in the necessities of life since 2000 (gas, food, health insurance, etc – with only technology and fracking saving them from higher natgas prices).
Personally, I am a student of history. And in history, increasing the monetary base as a stimulus of some kind (or simply to pay the bills of a bloated state), has not worked well at all. So I am cautious – I am open to anything though. Thankfully, thinkers like Barry Ritholz, Peter Brandt (with public blogs), and reading books like Market Wizards has taught me that it’s ok to have an opinion but that being agnostic about outcomes is the best way for me to be. Biases can cost money, especially if held without a trading plan!
Words to Action
So what am I doing? Since I have this bias against faking growth through increasing the monetary base (always makes me laugh how the central bank is trying to “create” inflation. Inflationary price increases, in a good way, are the result of an economy that is growing. But reversing the process and going for inflation first, as Japan is doing, should seem odd to a thinking man), I am still biased toward protecting myself with gold, even as I invest in stocks, real estate, running a business etc.
I am still doing what I outlined in my previous article How I’m Sneaking into Gold (6/28/13). Bullion is for security, prospect generators can be deep value and larger mining stocks are trading vehicles in my opinion. So following up that advice, I currently own a little bit of gold stock shares in one growing mining company and a slug of October call options on another growing mining company. Thereby keeping risk limited with some nice upside potential. My clients are a bit more conservatively exposed with many owning shares in a well-managed gold fund that combines shares and bullion (gold bull clients have some individual shares and bullion), though even a limited exposure to gold has hurt over the past 18 months.
By doing this, I honor my bias while keeping risk reduced. And many clients know as I often tell them to buy bullion. My argument is simple – “you have a job, you have a 401k full of stocks, you own a home, you are fully exposed to a good economy. Doesn’t it make sense to put 2% of your money aside to insure against something other than a good outcome?” I personally do more than 2% but the argument is the same. The lesson though is again – if you have a bias it’s ok, but find a way to satisfy it without sinking the ship – as many recent gold bugs have done recently with a portfolio full of mining stocks that are down 60%+ from highs.
At the time of this writing I or my clients own the following mentioned in this article: gold, gold mutual funds, gold mining stocks, other stocks
And remember, since I mentioned some ideas here I want you to Read the disclosures– the above is NOT advice – it’s information only. Only clients that hire me professionally through my advisory practice Walnut Hill Advisors, LLC are getting advice. Thanks and feel free to comment!