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I haven’t written about investments for some time, feeling that I have no better insights than anyone else about what is sensible to do in this environment. The equity markets seem overvalued, the bond markets face at some point a rise in interest rates that will be bad for bond prices, and commodities seem to be predicting a resurgent world economy that is by no means certain.

What seems to be continuing its long-term strength is gold. Now, I for one, have always felt that investing in gold is like shooting craps, because gold has no intrinsic value. It is only worth what people are willing to pay at the moment, and this can change for many reasons. I’ve been reading those who are gold bulls for years, and for the most part ignoring their counsel. Now, I’m feeling that gold may be a reasonable place to put some of one’s money. The primary reason for this is that the US and other countries have “printed” so much money (in their efforts to prevent the financial collapse) that the future value of currency relative to gold seems likely to continue to fall (so the price of gold in currency terms will rise).

Aside from this argument, gold has quite steadily risen in the last year (as well as previous years) even when events would argue that it should be declining. This suggests growing underlying demand.

David Rosenberg, who is a great skeptic about equities and the economy, puts the case for gold well:

GOLD GLITTERS

While the gold purchase by India’s central bank is widely viewed as the trigger point for the latest jump in the gold price, there are good reasons why bullion is in bull mode. It comes down to a fiscal policy in the U.S.A. that will stop at nothing to ensure that the economy embarks on an uptrend. Even with a fiscal deficit north of 10% of GDP, the article from yesterday’s WSJ that was titled Job-Creation Panel Leery of Spending really resonated. To wit:

“So far, the White House and Congress have been weighing a range of short-term tax ideas to spur job growth, such as expanded refunds for big companies that suffered losses; extension of a first-time homebuyer tax credit; and a new tax credit for hiring.”

So the strategy remains on “short-term” tactics as opposed to any long-run measures to improve the capital stock, enhance skills and training, bolster education and enhance productivity growth. If Milton Friedman taught us anything from the permanent income hypothesis, it was that changes to income or wealth that are perceived to be permanent have a much more beneficial and enduring effect than measures that are only transitory. But of course the other problem is who will pay for this fiscal largesse, and the answer is that nobody —the Fed will simply monetize the debt. More dollars will be printed and that is bullish for gold whose production is in secular decline.

Then we saw this article on the WSJ yesterday too, titled Labor Gets Boost In Skies, on Rails. Anyone involved in the markets, has to read this article and understand the differences between what is happening now and when the secular bull market began under Reagan administration in the early 1980s. To wit:

“Organized labor appears to be gaining the upper hand in the skies and on the rails, as labor and business battle for influence under the Obama administration.

Another reason for our bullish stance on gold is that we are not seeing the onset of a secular bull market in equities like the one we saw in the early 1980s.

The National Mediation Board wants to make it easier for thousands of airline and railway workers to unionize under the Railway Labor Act by seeking to junk a 75-year old election rule, according to a proposal published Monday in the Federal register. The move comes after a White House appointment shifted the balance of the government agency’s three-person board. Linda Puchala, a former flight attendant union leader, was selected to replace Read Van de Water, a former Northwest Airlines lobbyist, earlier this year.”

To reiterate, this is not the onset of a sustainable secular bull market in equities as we had coming off the fundamental lows of prior bear phases, such as August 1982, when:

• Dividend yields were 6%, not sub 2% currently
• Price-to-earnings multiples were 8x, not 26x
• The market traded at book value, not over two times book
• Inflation and bond yields were in double digits and headed down in the future, not near-zero and only headed higher
• The stock market competed with 18% cash rates, not zero, and as such had a much higher hurdle to clear
• Sentiment was universally bearish; hardly the case today
• Global trade flows were in the process of accelerating as barriers were taken down; today, we are seeing trade flows recede as frictions, disputes and tariffs become the order of the day
• Unionization rates were on a secular decline; today labor power is clearly on the rise
• A Reagan-led movement was afoot to reduce the role of government with attendant productivity gains in the future; as opposed to the infiltration by the public sector into the capital markets, union sector, economy and of course, the realm of CEO compensation

FINAL WORD ON GOLD

Gold broke out to a new high yesterday of $1,084/oz (and continues to rally today). It did this despite the S&P 500 managing to tick up two points and despite the DXY index actually eking out an 8bps rise to 76.3. This is NOT just a U.S. dollar story — have a look at what bullion is doing in Euro terms. Very impressive. This is a broadly based breakout and that means a durable secular bull market.
Looking at the growth rates in fiat currency that central banks are creating to stimulate their economies and the amount of bullion that would be necessary to back up this massive global monetary infusion suggests that gold can at least double if not triple from here. If you missed the first 4x runup from the $250/oz lows a decade ago, don’t worry about it. It’s like worrying about how you would have missed the first half of the rally in the S&P 500 from 1982 to 1992 when the index was at 400 and still had 300% to go before finally peaking out and sputtering at the 1500+ highs eight years later. In other words, the cup is still half full — and still can be filled with gold eagle coins.

Another investment source, Prieur du Plessis, who I respect, makes the case for gold from another perspective:

Gold bullion surging in all currencies

I argued the bull case for gold in my posts over the past few months (see “Gold bullion – regaining its shine?“, “Gold bullion glitters bright” and “Gold bullion – challenging $1,000“. With the gold price scaling fresh peaks and closing in on $1,100, it would certainly seem as if renewed interest in the yellow metal is being stirred up, especially subsequent to the purchase by India’s central bank of 200 metric tons of gold from the International Monetary Fund.

As printing presses are running at full speed to produce ever-increasing quantities of fiat money as governments engineer the greatest asset price reflation in human history – and the US greenback is heading South – the longer-term fundamental case for the yellow metal is arguably positive.

“The gold bug has caught several big hedge fund managers this year including John Paulson of Paulson & Company, Kyle Bass of Hayman Advisors and David Einhorn of Greenlight Capital, who believe enormous monetary and fiscal stimulus that has been injected into the global economy will eventually result in hyperinflation,” said The New York Times.

The gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies as illustrated by the table and graph below. This is a manifestation of increased investment demand, whereas the initial rise in the gold price from its low in 2001 ($250) was mostly a reflection of US dollar weakness.

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The shorter-term technical picture is also looking interesting. This is explained by Adam Hewison of INO.com who prepared a short technical analysis of gold’s most likely direction and key chart levels. Click here to access the video presentation.

Seasonally, the period from November to December has traditional been good for gold, with average gains ranging from more than 1% to almost 2.5% since 1970.

Source: Plexus Asset Management

I remain bullish on gold in the medium term, especially as I believe the vast money printing by central banks could set off strong inflation pressures down the road. I will not be surprised to see bullion remaining in a secular uptrend in the medium term. Add bullion to your portfolios, but given the notorious volatility of the metal only do so on pullbacks. (Emphasis added.)

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I stress the last sentence in Mr. Plessis’s article, because even thought the trend is strongly upward, there is a lot of volatility in price. Buying now, after such a sharp rise entails the risk of a fall. On the other hand, gold fever seems to be spreading quite broadly, which could lead to near-term sharp rises.

The simplest way to invest in gold is the buy GLD through a stock broker. This is an exchange traded fund that holds physical gold equal to the value of the outstanding shares; so it is relatively secure, and it is very actively traded.

A final warning: my timing has been less than sterling in the last year; so my coming to feel gold is a reasonable investment (among a set of relatively bleak choices) could be a good contrary sign.