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What’s Wrong With Gold? Absolutely, Nothing.

Gold. What’s wrong with it? From spiking inflation, falling real interest rates, and massive money printing, it seems logical that gold, a touted inflation…

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This article was originally published by Real Investment Advice

Gold. What’s wrong with it? From spiking inflation, falling real interest rates, and massive money printing, it seems logical that gold, a touted inflation hedge, should be rising. Yet, so far this year, gold has done little.

So, what’s wrong with this precious metal? Absolutely, nothing.

Is Gold Really An Inflation Hedge

One of the primary arguments for owning precious metals, particularly physical gold, is its effective hedge for inflation. However, is that still the case today?

The chart below shows the non-inflation-adjusted price and key events throughout history.

The U.S. being on a “gold standard” is a crucial consideration of the argument of gold being an effective hedge against inflation.

“The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.”Investopedia

As you can see in the chart above, prices remained stable until the point that President Nixon ended the gold standard in the U.S. However, for this analysis, the question is whether the golden metal is, or was, a good hedge against inflation?

Timing Is Everything

The answer is both “yes” and “no.”

As with all things investing-related, it is always a function of when you start. For investors in the stock market, those who started when valuations were in low double to single digits did much better than those with high valuations. (That is a lesson many of the Millennial and Gen Z investing group will come to learn.)

The chart below shows $1 invested in gold (non-inflation adjusted) and “inflation” as measured by the Consumer Price Index.

At first glance, like with the stock market, it is easy to see the precious metal outperformed inflation over time. However, that is only true if you bought gold before 1980, between 2002 and 2013, or in 2017. If you purchased gold outside those periods, you lost money relative to inflation.

The following chart makes this concept easier to grasp by showing the difference in the annual rate of change and inflation.

For every investment, there is always an “opportunity cost.” There is nothing wrong with owning gold in your portfolio, except when other assets, in this case, we will use the S&P 500 index, provides a higher rate of return.

Currently, given the influx of $120 billion a month from the Federal Reserve, the stock market provides a higher rate of return on investment than owning gold. Therefore, market participants choose to own ethereal assets due to the belief in “insurance against loss” rather than hard assets.

Will this “psychology” eventually change? Absolutely.

However, the question is, how much “lost opportunity” was there in the process? That is an evaluation that each investor will have to make for themselves to determine if such aligns with their investment goals and objectives.

Gold’s Correlation to the Fed’s Footprint

As noted, there are certainly valid concerns of the Fed’s ongoing monetary interventions. As Michael Lebowitz previously reported:

Linking real rates to the degree of central bank action form the basis on which we can look at the dollar’s value through the prism of gold. The first graph below shows gold has trended similarly to the monetary base.”

Fed's Golden Footprint, Lebowitz: The Fed’s Ever-Growing Golden Footprint

The next set of scatter plots are more compelling. They tell the story of how the price of the preciious metal became increasingly correlated to real yields as they decline. Said differently, gold is growing more positively correlated to the size of the Fed’s footprint.

The three scatter plots break down the relationship into three-time horizons as shown below.

Fed's Golden Footprint, Lebowitz: The Fed’s Ever-Growing Golden Footprint
  • The Pre QE period, covers 1982-2007. During this period, real yields averaged +3.73%. The R-squared of .0093 shows no correlation.
Fed's Golden Footprint, Lebowitz: The Fed’s Ever-Growing Golden Footprint
  • The second graph covers Financial Crisis-related QE, 2008-2017. During this period, real yields averaged +0.77%. The R-squared of .3174 shows a moderate correlation.
Fed's Golden Footprint, Lebowitz: The Fed’s Ever-Growing Golden Footprint
  • The last graph, the QE2 Era, covers the period after the Fed started reducing their balance sheet and then sharply increasing it in late 2019. During this period, real yields averaged +0.00%, with plenty of instances of negative real yields. The R-squared of .7865 shows a significant correlation.
Fed's Golden Footprint, Lebowitz: The Fed’s Ever-Growing Golden Footprint

As he concludes:

The message is not in the price of gold per se but its strong correlation to destructive fiscal and monetary policies.

The Gold “Fear Trade”

There is one key “takeaway” from this article.

“Fear.”

Investors tend to buy “hard assets” when there is “fear” of increasing debt, inflation, a dollar decline, recession, a market crash.

So, let’s revisit the “original” question: “What is wrong with gold?”

Absolutely nothing. Except there is presently no “fear” present to drive investors into the psychological “safe haven” of gold. That lack of fear is evident in everything from:

  • Record issuance of money losing IPO’s.
  • Mass issuance of SPAC’s
  • Record margin debt levels.
  • Near record stock valuations.
  • Retail investors taking on personal debt to invest.
  • Bitcoin.
  • Belief by investors of the “Fed Put”

You get the idea.

Two Primary Problems

When it comes to investing, individuals need to determine “why” they own gold? Is it a short-term bet on prices rising or a “psychological” trade based on “fear” and “emotion?”

If it is the former, there is nothing wrong with owning gold. It is a commodity that will rise and fall in price. Given that gold has no fundamentals (earnings or dividends), the “price” of gold is all you need to know to trade the metal successfully.

The latter is more problematic. Given that gold is no longer exchangeable for currency, and vice versa, the broken link as an inflation hedge remains. In today’s “fiat” currency economy, the ability to use gold as a method for transactions on a global scale remains destroyed. Therefore, gold has become a “fear trade” over concerns of the dollar’s demise, inflation, and an economic reset.

While there are valid reasons to be concerned with such disastrous outcomes, those events can take decades to play out. For example, Japan is the poster child of a demographic timebomb combined with the world’s highest debt-to-GDP ratio. Such remains the case since the turn of the century, but the “bug has yet to hit the windshield.” Yes, it eventually will, but how much longer it will take is unknown.

Final “Precious” Thoughts

Therefore, from an investor’s standpoint, the question is not whether you should own gold, but “when?” Too much of your asset allocation in a “fear trade” when there is literally “no fear” in the financial markets could lead to a more significant loss of future purchasing power than inflation. In other words, “opportunity cost” can have as large an outcome on your financial future as inflation or the dollar’s demise.

As is always the case, timing is everything.

Is there anything wrong with Gold? No.

However, as long as the Federal Reserve is engaged in inflating asset prices and forcing investors to take on excess risk, gold will likely continue to underperform.

Will that eventually change? Absolutely.

When? As soon as the market participants realize the error of their ways.

The post What’s Wrong With Gold? Absolutely, Nothing. appeared first on RIA.

Economics

“Culture As An Asset”

#CKStrong Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground…

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#CKStrong

Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls.

This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.

In general, there are two types of assets,

  1. They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or baseball cards or
  2. They can generate cash flows over time  – GaveKal

Creating An Illusion Of Scarcity

Scarcity relative to the money stock is what its all about now, folks. 

It probably won’t be long before the Fed has to bailout the baseball card market, no?

Full disclosure,  I do own a Mike Trout rookie card

Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to justify, rationalize, and drive speculation. 

Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain and super charge the price ramp by snapping a few pictures of each sample, converting them to NFTs to load up to the internet.

Then again, maybe all this is signaling the start of a big, big inflation cycle and the markets are looking to get out of cash and protect their purchasing power.   But that’s too rational.  

Can you believe what markets have become, folks?   It is hard to see clearly when everybody is making money. 

 

 

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Articles

Bryah nabs strategic exploration ground around namesake project

Special Report: Bryah Resources has expanded its footprint in WA, securing three exploration licences covering 50 km2 around its existing … Read More
The…

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Bryah Resources has expanded its footprint in WA, securing three exploration licences covering 50 km2 around its existing land holding in the Bryah and Padbury Basins.

The Bryah Basin hosts the high-grade copper-gold mines at DeGrussa, discovered by Sandfire Resources (ASX:SFR) in 2009, and at Horseshoe Lights, which was mined until 1994.

It also hosts several historical and current manganese mines including the company’s Horseshoe South mine.

Bryah Resources’ (ASX:BYH) is confident that the new tenements – E52/3848, E52/3898 and E52/3963 – cover prospective and under-explored areas which have gold, copper-gold and manganese exploration potential.

The tenements were acquired for 4 million ordinary shares at an issue price of $0.055/share.

Tenure right next to historic gold mine

The largest tenement (E52/3898) covers exploration ground adjacent to the historic Wilthorpe shallow open cut gold mine.

The mine straddles the boundary of new tenement E52/3898 and an adjacent E52/2059, held by Westgold Resources (ASX:WGX).

It was mined by Dominion Mining from 1993-94, producing 4,650 ounces of gold from 72,817 tonnes of ore grading 2.0 g/t gold.

And there has been limited gold exploration since.

Based on the reported mineral occurrences, Bryah considers the tenement package highly prospective for copper, gold, and manganese.

Pic: Tenement location plan

Exploration planning underway

The company will shortly commence a thorough desktop review of all historical exploration reports as well as its own extensive database.

The data review will support a detailed phase of exploration planning, ahead of ground exploration activities.

In the meantime, reverse circulation drilling is underway at Bryah’s manganese JV, in a 2000m program fully funded by partner OM Holdings.

 


 

 

This article was developed in collaboration with Bryah Resources, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

 

The post Bryah nabs strategic exploration ground around namesake project appeared first on Stockhead.

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Economics

US stocks march on, lifted by business optimism

Benchmark US indices closed higher for the second consecutive day on Thursday September 23 lifted by positive sentiments from Fed s economic outlook…

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Benchmark US indices closed higher for the second consecutive day on Thursday, September 23, lifted by positive sentiments from Fed’s economic outlook.

The S&P 500 was up 1.21% to 4,448.98. The Dow Jones rose 1.48% to 34,764.82. The NASDAQ Composite rose 1.04% to 15,052.24, and the small-cap Russell 2000 was up 1.82% to 2,259.04.

Traders ignored the weak unemployment data released by the Labor Department on Thursday, which showed new jobless benefits claims rose by 16,000 to 351,000 in the week ended Sep 18.

Economists consider the rise in benefits claims to be because of Hurricane Ida and forest fires and not due to flawed policy action. On Wednesday, the Fed said that it might start withdrawing stimulus support from November. The statement raised confidence in the economic recovery.

Financial stocks were among the top movers on S&P 500 Thursday, while energy and real estate stocks declined. Stocks of BlackBerry Limited (BB) rose 12.08% a day after reporting quarterly results. Its revenue rose to US$175 million in Q2, FY21, from US$174 million in the year-ago quarter.

Accenture plc (ACN) stock jumped 2.63% after reporting its fourth-quarter results. Its net income was up US$1.43 billion from US$1.30 billion in the same quarter of the previous year.

Salesforce.com, Inc. (CRM) stock rallied 7.38% after it raised the full-year revenue guidance. It expects its FY 2022 revenue to be US$26.35 billion, up from its earlier forecast of US$26.3 billion.

In the energy sector, Exxon Mobil Corporation (XOM) rose 3.58%, Chevron Corporation (CVX) gained 2.51%, and ConocoPhillips (COP) gained 2.45%. Kinder Morgan, Inc. (KMI) and EOG Resources, Inc. (EOG) advanced 2.51% and 2.76%, respectively.

In the consumer discretionary sector, Nike, Inc. (NKE) increased by 1.26%, Starbucks Corporation (SBUX) gained 1.25%, and General Motors Company (GM) rose 2.24%. Ross Stores, Inc. (ROST) and Hilton Worldwide Holdings Inc. (HLT) ticked up 1.62% and 4.30%, respectively.

In financial stocks, Berkshire Hathaway Inc. (BRK-B) rose 1.65%, JPMorgan Chase & Co. (JPM) jumped 3.35%, and Bank of America Corporation (BAC) rose 3.79%. Wells Fargo & Company (WFC) and Morgan Stanley (MS) jumped 1.58% and 2.86%, respectively.

Also Read: Top five communication stocks that rode the Q2 rebound

Also Read: ONTX stock dives 16%, DVAX stock in green after clinical data

US stock indices closed higher on Sep 23 on positive economic outlook.

Also Read: Crypto exchanges Binance vs Kraken: Where would you like to trade?

Futures & Commodities

Gold futures were down 2.05% to US$1,742.40 per ounce. Silver decreased by 1.71% to US$22.515 per ounce, while copper fell 0.48% to US$4.2317.

Brent oil futures increased by 1.38% to US$77.24 per barrel and WTI crude was up 1.37% to US$73.22.

Bond Market

The 30-year Treasury bond yields was up 5.04% to 1.941, while the 10-year bond yields rose 7.71% to 1.434.

US Dollar Futures Index decreased by 0.39% to US$93.100.

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