A six thousand year bubble

2015-01-21 10am EDT  |  #Buiter #gold #Goldman Sachs #Ned Davis

Towards the end of last year the gold bears were as confident as the US basketball team heading off to the Olympics. And it was easy to see why. Over the past three years gold had gone from being a hedge fund darling to a complete and utter pariah.

The move lower from $1800 down to $1185 was relentless. Every time it looked like it might bounce, new sellers emerged. For the first $400 or $500 lower, many hedge funds stuck with their previous long positions. However, by the time we got down below $1300, the overwhelming hedge fund consensus had become bearish.

Articles like Barry Ritholz’s “The Gold Fairy Tale Fails Again” filled my inbox. Granted much of that article simply highlights that the gold bulls were spinning a yarn that was not based on reality, but the simple fact that Barry felt the need to shoot them down was symptomatic of the negativity surrounding gold at the end of last year.

There were respected analytical firms like Ned Davis Research saying that a $660 gold price was a possibility. Earlier in the year, during the summer, Goldman Sachs made waves with their $1050 price forecast. And my favourite was Citigroup’s Buiter’s claim that gold was a “six thousand year old bubble, ‘shiny Bitcoin,’ and something that no self-respecting central bank should hold in reserves ever.” The sheer arrogance of that statement is unbelievable. Yet that is what the market wanted to hear last year…

I am no gold bug. I hated it when in 2011 when all the hedge funds were stuffed to the gills with it, but I mistakenly did not understand how low they would be able to drive it the other way in their liquidation phase. I find the gold bugs lack of flexibility just as frustrating as the bears staunchness. All too often, discussing the gold price ends up being like fighting about religion. You shouldn’t be either bullish or bearish irrespective of the gold price. At a certain price, gold is a buy. At another price it is a sell. And most importantly, you shouldn’t be getting more bearish at lower prices, nor more bullish at higher prices. You should be adjusting your outlook based on the conditions of the global financial system.

Three years of straight down, with all sorts of calls for a cascading fall even lower was no time to get bearish. Add in the fact that apart from the Federal Reserve, the world’s Central Banks were getting more easy, just added to gold’s appeal. Negative interest rates are hugely gold positive. The final coup d’etat was the year end tax loss selling.

It all added up to a perfect buying opportunity at the beginning of this year. I have been lucky enough to have stuck with my long positions, and even had the courage to increase it a little into the year end weakness.

Since then we have steadily risen. It’s funny how the bears are suddenly quiet. No longer are we getting the “barbarous relic” articles. And what is also encouraging is that the bulls have been so beat up, even they are not taking any victory laps on this recent rise. Gold has simply been quietly heading higher.

This rally is not being driven by crazy aggressive hedge funds, but instead by long term investors that are rightfully worried about the condition of the global financial system. Negative interest throughout Europe is an obvious sign of the problems.

I am running late, so I am going to have to wrap this up early, but I want to leave you with one thought. In the last credit crisis, private banks did not trust one another. This next time around, it will be the Central Banks who do not trust one another. We have seen many countries repatriating their gold back to their own shores. They are only doing this for one reason – they are worried about the financial system becoming unstable. With much of the world descending into negative interest rates, I will gladly forgo my fiat currency that I need to pay to own, for a little of the 6,000 year old bubble asset.