Gold Isn't Good For Anything
The frustration of precious metals investors is growing more palpable by the day as the gold price continues to grind lower. This morning, we have a little 1%+ bounce from an overnight low of $1678 after the ECB announced it will be buying PIIGS sovereign debt in order to "counter fragmentation". The post-ECB bounce is neither here nor there, and technicians will chalk it up to the dead-cat variety unless the yellow metal can mount a multi-day rally.
A friend of mine who is also a reader of these Morning Emails made an interesting comment about gold and mining stocks last night:
I know I share this reader's sentiments and the recent episode of surging inflation and a falling gold price (since March) is certainly extremely frustrating.
What is this dense shiny rock good for anyway?!!!
The answer is that gold is great for jewelry, watches, and has many uses in electronics (cell phones, electroplated coating on connectors and contacts, etc.). However, gold as an investment is an entirely different story, and it is its role as a portfolio diversifier ('non-correlated asset') and store of wealth by investors that drives its market price on a daily basis.
Ultimately gold is a monetary metal that performs best during times of weak (weakening) economic growth and increasing money supply, as fiscal and monetary policy actors attempt to counter economic weakness through lowering the price of money and stimulating demand. This is what we witnessed from the end of March 2020 through late-2021.
Why didn't gold go up if we just went through a perfect time to own gold?
The answer is that it DID go up, a lot!
Gold (January 2019 - August 2020)
From January 1st 2019 through its peak in August 2020 gold rose more than 60%! And even after gold's recent decline it is still up roughly 10% from the start date of the covid-19 pandemic in January 2020 (first official reported case in China).
It's important to remember that gold doesn't pay a dividend, doesn't generate earnings, and doesn't have any assets it can sell. Gold does not have the same support of global financial institutions and central banks that the stock market enjoys. Gold is the red-headed step child of financial markets and many gold investors are the type of investor that is skeptical of the global financial system and government control.
Gold is also a timeless store of value that has been used as a form of money by mankind for thousands of years. Some might also say that gold's value is derived from how difficult it is to find and extract from the earth. However, today gold is traded on international markets in exchange for fiat currency. Its value in those fiat currencies changes rapidly based upon multiple factors including interest rates, central bank policy actions, economic growth rates, and so many other things.
To wit, gold's value in fiat terms is derived from the market's constantly shifting perception of the value of gold's fiat denominator.
In August 2020 at $2080/oz gold was factoring a huge expansion of the money supply globally and deeply negative real interest rates. Today, US real rates have climbed into positive territory and the money supply is declining ever so slightly.
If you choose to wrap your head around what drives the gold market it's not difficult, but it is no less frustrating to hold the metal during extended corrective phases.
"What about gold mining stocks?" you ask. Well that's a story for another day but simply stated any investment that can generate a 1,000%+ return in a matter of months can also produce absolutely horrendous returns when things aren't going well.
And therein lies the risk, the opportunity, and the rollercoaster of emotions that the mining sector generates in its investors.
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