Global Market Comments
July 17, 2020
Fiat Lux
Featured Trade:
(JULY 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(EEM), (GLD), (GDX), (NEM), (GOLD), (UUP), (FXA), (FXE), (FXY), (AMZN), (AAPL), (GOOGL), (FB), (BIDU), (TLT), (TBT), (IBB), (ROM)
Posts
Below please find subscribers’ Q&A for the July 15 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Do you expect foreign equities to begin to outperform US equities sometime soon?
A: I expect them to outperform imminently simply because Europe did their shutdown properly, a total shutdown, and got rid of the virus, so their economy and schools are opening. We did a partial shutdown, some states did not shut down at all, and as a result, the epidemic is on fire here, and our shutdown will have to last an extra six months to a year. So that means you’ll probably want to be rotating out of US stocks and into emerging stocks, and the (EEM) is the ETF to go with there.
Q: Would you buy gold LEAPS at this point?
A: Normally, I say only buy LEAPS on capitulation selloffs like we had in March. We actually put out 25 LEAP recommendations on the long side in tech and biotech in March and they all proved spectacular winners. However, at this point, gold is just short of an all-time high; if you break the high you could get a $500 or $1,000 move very quickly to the upside. If you want to do LEAPS, I would go out one year, I would go fairly close to the money, something like a $200-$210 LEAP in the (GLD) ETF. Your much bigger bang, by the way, would be to do LEAPS on the individual stocks; go 10% or 20% out of the money, you might make 100%-200% on those and the stocks to do there would be Newmont Mining (NEM) and Barrick Gold (GOLD).
Q: Would the US or any other country consider backing their currency with gold?
A: Absolutely not. We went off the gold standard in 1972 for a reason. That’s because they're not making it anymore; there isn't enough gold to support growth in a global economy. On the other hand, a supply of paper is unlimited, and that's why we've had such terrific economic growth since we’ve gone off the gold standard.
Q: I’m seeing some really great deals in energy. Should I get involved?
A: Absolutely not. Don’t confuse “gone down a lot” with “cheap.” We think the oil business is long term going out of business. It can't compete with alternatives and electric cars; the economics for investing in a non-scalable energy form just are not there. It’s like asking an analog adding machine to compete with a computer.
Q: Is it too late to sell the US dollar or the Invesco DB US Dollar Index Bullish Fund ETF (UUP)?
A: No, we’re only in the very early stages of the collapse of the US dollar, so you want to be buying all of the nondollar ETFs like the Australian dollar (FXA), the euro (FXE), and the Japanese yen (FXY). Massive over issuance of currency will destroy its value, that’s one of the seminal lessons of currency markets. The US is not immune to that.
Q: Biotech is getting overheated here—should I buy the rumor, sell the news?
A: We’re also just in the opening stages of the biotech golden age. Even if they cure corona tomorrow, there are another 100 diseases they will cure over the next 10 years using all of the new advanced technology that has just been developed, like gene editing, monoclonal antibodies, and quantum computers. It’s another reason to subscribe to the Mad Hedge Biotech and Healthcare Letter for $1,500 a year (click here).
Q: I see Bill Gross is bullish on value stocks—would you go with that view?
A: No, leave the value stocks for Bill Gross. He's semi-retired and hasn’t been as good on the stock market lately as he used to be, as much as he is a dear friend. This is a chasing-a-winner type market. I would wait for value stocks. You could die a long horrible death by the time value stocks turn around so I would avoid them. Go for earnings growth, that’s the only thing that counts in the future.
Q: What would you recommend as a portfolio starter?
A: I would recommend 100% cash. I know you don’t want to hear that you should keep cash if you just bought an expensive trade alert service, but the fact is the risk now is the highest it’s been in years. I only add new trade at market sweet spots, and you don’t get those every day of the year. I will send you an alert if I see a low-risk high-return trade. Wait for the summer correction—that will set up another bet-the-ranch opportunity. Don’t worry about trade alerts, we’ll be doing about 400 of them this year, but they do tend to come in bunches at market bottoms and market tops.
Q: Do American companies have much of a chance against Chinese tech?
A: The US has an overwhelming lead, which will probably increase at an exponential rate. I think the threat of Chinese tech is vastly overstated by the administration. They needed an enemy to protect us from to stick around. The reality is that the US is so far ahead it’s unbelievable; that’s the reason they steal our technology. And they only have leads in very specific areas, such as surveillance of large populations. I wouldn’t worry too much about tech—if the Chinese really had a lead on tech, would Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Facebook (FB) all be going to new highs every day, while Baidu (BIDU) lagged?
Q: Should we close out the Regeneron call spread?
A: At this point, we’re so far in the money I would just wait two more days and it will expire at its maximum $10 value, and you can avoid all the fees. You’ll end up making $1,600 or 16.28% 15 trading days.
Q: Presidential candidate Joe Biden has just had a huge surge in the polls in battleground states. Will he be damaging to the market?
A: No, ever since he started his rise in the polls, the stock market has been rising almost every day, and that’s even after announcing in advance that he’s going to raise corporate taxes from 21% to 28%. He’s also going to eliminate the carried interest, which should have been eliminated a long time ago. I imagine there will be some super punitive Roosevelt style 90% tax on net taxable income over a billion dollars—a real billionaire’s punishment tax, as they’ve basically made all the money for the last 30 years. The stock market is voting with confidence for the future Biden government, who am I to disagree? The market is always right.
Q: Will gold hit a new high?
A: Yes, I think we will have a new high in a couple of weeks. That's why I said it’s a rare case when you actually buy LEAPS in a rising market, especially if you go one or two years out. Guess where gold will be in two years? My bet is $3,000, so a $200/$210 LEAP in the (GLD) could bring in a 1,000% return, The overwhelming fundamentals are in favor of gold. I'll keep hammering away at that in the newsletter.
Q: I only trade stocks; how can I take advantage of your recommendations?
A: First of all, buy the stocks. Second, you can buy stocks on margin, which gives you double exposure. Third, there are many 2X ETFs on the stocks or sectors we recommend, like the (TBT), which you can also trade in a stock account. For example, for biotech, you can get your exposure there through the (IBB), and through tech, you can buy the 2X (ROM); but I wouldn’t buy it today because it is too high. In fact, only about 25% of our followers do options, the rest trade stocks or use it to manage their own long-term portfolios.
Q: Will we hit 0% yielding US Treasuries (TLT)?
A: Probably not, that move is behind us. We got down to a 31 basis points yield at the lows. Now, massive oversupply from the US government will be the primary factor dictating Treasury prices, and that means going down a lot.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 25, 2020
Fiat Lux
Featured Trade:
(5 REASONS GOLD IS GOING TO A NEW HIGH),
(GLD), (GOLD), (NEM), (GDX)
Global Market Comments
June 17, 2020
Fiat Lux
Featured Trade:
(THE SECRET FED PLAN TO BUY GOLD),
(GLD), (GDX), (PALL), (PPLT),
(TESTIMONIAL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 8 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Is it premature to be buying long-term LEAPS?
A: Absolutely not—a long-term leap is a bet that your stock will recover beyond your strike prices in two years, which I certainly believe is the case with all of the quality tech and biotech names. These are pretty illiquid so the only way to get a good price is to have a bid in place on one of those absolute puke out days. You will never buy these at the bottom.
Q: Do you see a rally in the stock market in the fourth quarter of this year after the election?
A: For sure—we should be well clear of the pandemic by then, and all of the $6 trillion stimulus will be hitting at the same time.
Q: With the rally in the S&P 500, would you double up on the (SPY) put spread—the May $300-$310?
A: No, keeping your leveraged positions small is crucial in this kind of environment, and the big short play is basically behind us. Better to add the 2X ProShares Ultra Short S&P 500 (SDS) to catch a smaller move down.
Q: Will gold work if the market sells off as a safety trade?
A: Yes, it will. Gold (GLD) had that big 15% selloff a couple of weeks ago when it looked like all financial markets worldwide were going to completely freeze up, and everyone got margin calls all at the same time. We are clear of that now and I expect gold and other traditional hedges like shorting volatility, for example, to also work as a hedge. Gold is going to a new all-time high soon. Buy (GLD), (GDX), (GOLD), and (NEM).
Q: When do you think international borders will open up again, and will that have a positive effect on the economy?
A: Absolutely. You can expect the market to rally 10% into the opening of borders, and then another 10% afterwards depending on where the starting point for the market is in that. As for timing, they may open up in June, and then close up in again in the fall when a second Corona wave hits.
Q: Will you teach us how to buy LEAPS?
A: Just go to my website, type in LEAPS in all caps, and everything you need to know about leaps is there. I will also be following up soon with more individual stock LEAPS ideas, but I don’t want to put them out now because we have just had a $5,000-point rally on the Dow.
Q: Please talk about 5G.
A: The best play is Qualcomm (QCOM). They have a near-monopoly on a 5G chip which virtually the entire world has to buy. The stock has also held up incredibly well. Buy two-year LEAPS on Qualcomm with probably a $90 or $100 strike price.
Q: What level in the S&P do you think this will fail?
A: I think it will fail right around here, so that's why I have been adding on the short positions on every rally. We are exactly at halfway point between the February high and the March low, which is a perfect bear market rally.
Q: What’s the definition of the next big dip?
A: You give up the 5000-point rally we just had, and whether we give up 4000 or 6000 of it, at these kinds of conditions, 1000 points in the Dow (INDU) is a round lot, like the daily move. So, looking at the charts and these lows, it could be a $19,000, $18,000, or $17,000.
Q: Fundamentals may tell you the virus may be peaking, but the worst of the economy is yet to come.
A: True. Do all the markets follow fundamentals now? No, they will look at the virus numbers. Economic numbers are utterly meaningless and out of date here. I wouldn’t depend on them at all, just look at the new cases every day from the Johns Hopkins website, and that gives you a better buy signal than any economic indicator can.
Q: Are all the good shorts are over?
A: When I say shorts are over, from here you’re not going to get the 80% and 90% down moves that we have seen so far; those are gone. The reason I bought the 2X ProShares Ultra Short S&P 500 (SDS) is to play for the bottom end of the range, which could be down 2000 to 4000 points from here, and also to hedge the short volatility (VXX) puts that I already have. A rising market should make the (VXX) go down, and a falling market will make the (VXX) and the (SDS) go up. So, it's both a hedge and a view on a range of a market.
Q: Could the Federal Reserve buy shares?
A: Yes, they have done that already in Japan, with no success whatsoever in helping the economy, but I doubt the Fed will buy shares here. The government will take minority share ownerships in the troubled industries like the airlines, much like they did with (GM) and the top 20 banks during the 2008-09 crash and sell them later at huge profits. I don't expect them to go beyond that. The Fed here has too many other things to buy, like all of our different bond and money markets; those don't exist in other countries like Japan or Europe. Stocks are often the only thing they can buy, and in Japan’s case, they already own the entire government bond market, so they had nothing else left to buy besides stocks.
Q: How about buying Boeing (BA)?
A: I would buy Boeing LEAPS here, something like a $170-$180. If you’re going to make a 1,000% return on LEAPS on any one stock, it's going to be Boeing. That company will be around somehow, and you could get literally a 10-fold return just by going 50% out of the money on two-year LEAPS.
Q: How is liquidity on 2-year 30% out of the money LEAPS?
A: It is practically nonexistent. You have to put in a limit order and then wait for a dump in the market to get filled. That’s how all the people who have been doing LEAPS have been getting them. Put in a bid and when you get these cataclysmic, down-1,000-point days, they hit any bid. The algos go in there and they just say hit any bid, and you can get done at incredible prices in those situations.
Q: Are the fees on (SDS) a problem?
A: No, your standard equity commission is all you should be paying. They trade like water.
Q: Would you short junk bonds short-term?
A: No, because you short the (HYG) or the (JNK), you are shorting a 7.5% yield which you have to pay if you’re short, so the great short in junk bond play was in February when it was yielding 4.5%. It’s too late now.
Q: Will treasuries go to zero?
A: They could, but we’re close enough to zero where you might as well think of them at zero.
Stay healthy all.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 8, 2020
Fiat Lux
Featured Trade:
(THE ULTRA BULL ARGUMENT FOR GOLD),
(GLD), (GDX), (GOLD), (SLV), (PALL), (PPLT)
(TESTIMONIAL)
SPECIAL GOLD ISSUE
Global Market Comments
March 27, 2020
Fiat Lux
Featured Trade:
(MARCH 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(ROM), (BA), (VIX), (UPRO), (SSO), (UBER), (LYFT), (MDT),
(GLD), (GOLD), (NEM), (GDX), (UGL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 25 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Since we flipped the off button on the economy, I don’t see how we can simply flip the on button and have a V-shaped recovery. It seems much more unlikely that it will get back to pre-recession levels.
A: Actually, all we really need is confidence. Confident people can go outside and not get sick. Once we start seeing a dramatic decline in the number of new cases, the shelter-in-place orders may be cancelled, and we can go outside and go back to work. It’s really that simple. So, we will get an initial V-shaped recovery probably in the third quarter, and after that, it will be a slower return spread over several quarters to get back to normal. Everybody wants to get back to normal and let's face it, there's an enormous amount of deferred consumption going on. I have hardly spent any money myself other than what I’ve spent online. All of those purchases get deferred, so in the recovery, there's going to be a massive binge of entertainment, shopping, and travel that is all being pent up now—that will get unleashed once the airlines start flying again and the shelter-in-place orders are cancelled. We’re not losing so much of this growth, we’re just deferring it. Obviously, some of the growth is gone permanently; you can forget about any kind of vacation in the next couple of months. I would say, the great majority of consumption in the US—and thus growth and thus stock appreciation—is just being deferred, not cancelled outright.
Q: Other than the ProShares Ultra Technology ETF (ROM), do you have any other leveraged sectors coming into the recovery?
A: There is a 50/50 chance the Roaring 20s started 2 days ago, on Monday, March 23 at the afternoon lows. We may go back and test those lows one more time, which at this point is 3,700 points below here, but we are clocking 1,000 points a day. It doesn’t take much, like a bad non-farm payroll number, to go back and test those lows. The good news is out; they're not going to spend any more money other than the $10 trillion they're putting in now.
Q: Would you buy Boeing (BA) here? Is this the bottom?
A: The bottom was at $94 on Monday; we went up 100% in three days and now we’re at $180. Incredible moves, and a total lack of liquidity. One reason I haven't added any positions lately is that they have closed the New Yok Stock Exchange floor and its not clear that of I send out a trade alert, it could get done. We have gone totally online, so I just want to see what happens as a result of that. I don’t want to be putting out trade alerts that no one can get in or out of, heaven forbid.
Q: What do you mean by “The spike to $80 in the Volatility Index (VIX) was totally artificial?”
A: When you have a series of cascading shorts triggered by margin calls, that is artificial. I have seen this happen many times before, both on the upside and the downside. This happened twice in the (VIX) in the last two years. When you go from a (VIX) of $25 to $80 and back down to $39 in days, which is what we did, you know it was a one-time-only spike and we are not going to visit the $80 level again— at least not until the next financial crisis because those positions are gone and are never coming back. A (VIX) of $80 means we are going to have 1,000 point move in the Dow Average for the next 30 days.
Q: I bought some ProShares Ultra Pro ETF (UPRO) which is the 3x long the S&P 500 at $1,829. Do I take profits by selling calls or just hold longer?
A: I would just sell the whole position outright. The (UPRO) is so incredibly volatile that you are rewarded heavily for just coming out completely and then reopening fresh positions on these big meltdown days. We will probably be doing trade alerts on (UPRO) or its cousin, the 2x long ProShares Ultra S&P 500 (SSO) sometime in the near future.
Q: With 2-year LEAPs, would you go at the money or out of the money?
A: This is the golden opportunity to go way out of the money because the return goes from 100% to 500%, or even 1000% if you go, say, 30%-50% out of the money. A lot of these stocks are ripe for very quick 30% bouncebacks, especially the (ROM). So yes, you want to do out of the money 20% to 30%. It will easily recover those losses in weeks if you are picking the right stocks. Over a two-year view, a lot of these big tech stocks could double by the time your LEAP expires, and then you will get the full profit. The rule of thumb is: the farther out of the money you go, the bigger the profit is. But I wouldn’t go for more than a 1000% profit in 2 years; you don't want to get greedy, after all.
Q: You called the Dow to hit 15,000. Is that still possible? We got down to the 18 handle.
A: Yes, if the coronavirus data gets worse, which is certain, we could get another panic selloff. How will the market handle 100,000 US deaths, given the exponential rise in cases we are seeing? With cases doubling every three days that is entirely within range. So, I would say, there is a 50% chance we hit the bottom on Monday at 18,000, and 50% chance we go lower.
Q: Do you know anything about the coronavirus stocks like Regeneron (REGN)?
A: Actually, I do, it's covered by the Mad Hedge Biotech & Health Care Letter, click here for the link. If you get the Biotech Letter, you already know all about stocks like Regeneron. Regeneron literally has hundreds of drugs in testing right now to work as vaccines or antivirals, and some of them, like their arthritis drug, have already been proven to work. So, we just have to get through the accelerated trials and testing to unleash it on the market. But for anybody who has a drug, it's going to take a year to mass-produce enough to inoculate the entire country, let alone the world. So, don't make any big bets on getting a vaccine any time soon—it's a very long process. Even in normal times, some of these drugs take months to manufacture.
Q: Are there any ventilator stocks out there?
A: There are; a company called Medtronic (MDT), which the Mad Hedge Biotech & Healthcare Letter also covers. They are the largest ventilator company in the US. Their normal production is 100 machines a week. Now, they are increasing that to 500 a week as fast as they can, but it isn’t enough. We need about 100,000 ventilators. China is now selling ventilators to the US. Elon Musk from Tesla (TSLA) just bought 1,000 ventilators in China and had them shipped over to San Francisco at his own expense, and Virgin Atlantic just flew over a 747 full of ventilators and masks and other medical supplies from China. So yes, there are stocks out there to play these things, they have already had large moves. We liked them anyway, even before the pandemic, so those calls were quite good. And China thinks their epidemic is over, so they are happy to sell us all the medical supplies they can make.
Q: Why did 30-year mortgage rates just go up instead of down? I thought the Fed rate cuts were supposed to take them down; am I missing something?
A: In order to get 30-year mortgage rates down, you have to have buyers of 30-year loans, and right now there are buyers of nothing. The lending that is happening is from banks lending their own money, which is only a tiny percentage of the total loan market. When the Fed moves into the mortgage market, you will see those yields move to the 2% range. The other problem is how to get a loan if all the banks are closed. They are running skeletal staff now, and you can’t close on real estate deals because all the notaries and title offices are closed; so essentially the real estate industry is going to shut down right now and hopefully, we’ll finish that in a month.
Q: Do you think Uber (UBER) and Lyft (LYFT) will go bankrupt?
A: It is a possibility because one to one human contact inside a car is about the last situation you want to be in during a pandemic. Their traffic was down 25% according to a number I saw. It’s very heavily leveraged, very heavily indebted, and those are the companies that don’t survive long in this kind of crisis. So, I would say there is a chance they will go under. I never liked these companies anyway; they are under regulatory assault by everybody, depend on non-union drivers working for $5 an hour, and there are just too many other better things to do.
Q: Is this the end of corporate buybacks?
A: To some extent, yes. A future Congress may make it either illegal or highly tax corporate buybacks, in some fashion or another because twice in 12 years now, we have had companies load up on buying back their own stock, boosting CEO compensation to the hundreds of millions—if not billions—and then going broke and asking for government bailouts. Something will be done to address that. If you take buybacks out of the market (the last 10,000-point gain in the Dow were essentially all corporate buybacks), we may not see a 20X earnings multiple again for another generation. Individuals were net sellers of stock for those two years. We only reached those extreme highs because of buybacks, so you take those out of the equation and it's going to get a lot harder to get back to the super inflated share prices like we had in January.
Q: How long before an Italian bank collapses, and will they need a bailout?
A: I don’t think they will get a collapse; I think they will be bailed out inside Italy and won’t need all of Europe to do this. But the focus isn't on Europe right now, it's on the US.
Q: Do you think this virus is really subsiding in China based on their past history of dishonest reporting?
A: Yes, that is a risk, and that's why people aren’t betting the ranch right now—just because China is reporting a flattening of cases. And China could be hit with a second wave if they relax their quarantine too soon.
Q: What's your opinion on how the Fed is doing and Steve Mnuchin in this crisis?
A: I think the Fed is doing everything they possibly can. I agree with all of their moves—this is an all-hands-on-deck moment where you have to do everything you can to get the economy going. Notice it’s Steve Mnuchin doing all the negotiating, not the president, because nobody will talk to him. For a start, he may be a Corona carrier among other things, and you’re not seeing a lot of social distancing in these press conferences they are holding. About which 50% of the information they give out is incorrect, and that's the 50% coming from Donald Trump.
Q: What do you think about no debt and no pension liability?
A: That’s why Tech has been leading the upside for the last 10 years and will lead for the next 10. You can really narrow the market down to a dozen stocks and just focus on those and forget about everything else. They have no net debt or net pension fund liabilities.
Q: Why have we not heard from Warren Buffet?
A: I'm sure negotiations are going on all over the place regarding obtaining massive stakes in large trophy companies that he likes, such as airlines and banks. So that will be one of the market bottom indicators that I mentioned a couple of days ago in my letter on “Ten Signs of a Market is Bottoming.”
Q: What’s the outlook for gold?
A: Up. We just had to get the financial crisis element out of this before we could go back into gold, so I would be looking to buy SPDR Gold Shares ETF (GLD), the gold miners like Barrick Gold (GOLD) and Newmont Mining (NEM), the Van Eck Vectors Gold Miners ETF (GDX), and the 2X long ProShares Gold ETF (UGL).
Q: Does the Fed backstop give you any confidence in the bond market?
A: Yes, it does. I think we finally may be getting to the natural level of the market, which is around an 80-basis point yield. Let’s see how long we can go without any 50-point gyrations.
Q: Do you foresee a depression?
A: We are in a depression now. We could hit a 20% unemployment rate. The worst we saw during the Great Depression was 25%. But it will be a very short and sharp one, not a 12-year slog like we saw during the 1930s.
Good Luck and Good Trading and stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
It’s Been a Tough Month
With global stock markets in free fall and interest rates everywhere headed to zero, the outlook for gold has gone from strength to strength.
Shunned as the pariah of the financial markets for years, the yellow metal has suddenly become everyone’s favorite hedge.
Now that gold is back in fashion, how high can it really go?
The question begs your rapt attention, as the Coronavirus has suddenly unleashed a plethora of new positive fundamentals for the barbarous relic.
It turns out that gold is THE deflationary asset to own. Who knew?
I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them down to historically low levels across all asset classes.
But now that much of the world already has, or is about to have negative interest rates, a bizarre new kind of mathematics applies to gold ownership.
Gold’s problem used to be that it yielded absolutely nothing, cost you money to store, and carried hefty transactions costs. That asset class didn’t fit anywhere in a yield-obsessed universe.
Now we have a horse of a different color.
Europeans wishing to put money in a bank have to pay for the privilege to do so. Place €1 million on deposit on an overnight account, and you will have only 996,000 Euros in a year. You just lost 40 basis points on your -0.40% negative interest rate.
With gold, you still earn zero, an extravagant return in this upside-down world. All of a sudden, zero is a win.
For the first time in human history, that gives you a 40-basis point yield advantage by gold over Euros. Similar numbers now apply to Japanese yen deposits as well.
As a result, the numbers are so compelling that it has sparked a new gold fever among hedge funds and European and Japanese individuals alike.
Websites purveying investment grade coins and bars crashed multiple times last week, due to overwhelming demand (I occasionally have the same problem). Some retailers have run out of stock.
And last week, the virus went pandemic as silver rocketed 8.6% and others like Palladium (PALL) were also frenetically bid.
So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.
Since it last peaked in the summer of 2011 at $1,927 an ounce, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it. It faced a perfect storm.
Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant.
The biggest buyers of gold in the world, the Indians, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.
Chart gold against the Shanghai index, and the similarity is striking, until negative interest rates became widespread in 2016.
In the meantime, gold supply/demand balance was changing dramatically.
While no one was looking, the average price of gold production soared from $5 in 1920 to $1,400 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.
It’s almost as if the gold mining industry is the only one in the world which sees real inflation, since costs soared at a 15% annual rate for the past five years.
This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher risk, more expensive parts of the world to find the stuff.
You know those tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.
Barrick Gold (GOLD), the world’s largest gold miner, didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.
What this means is that when the spot price of gold fell below the cost of production, miners simply shut down their most marginal facilities, drying up supply. That has recently been happening on a large scale.
Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate, as older mines carry costs that go all the way down to $600 an ounce.
No one is going to want to supply the sparkly stuff at a loss. So, supply disappeared.
I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).
They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices, similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.
So, when the chart below popped up in my inbox showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using.
To match the gain seen since the 1936 monetary value peak of $35 an ounce, when the money supply was collapsing during the Great Depression, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low. That would take our barbarous relic friend up to $8,400 an ounce.
To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.
Have I gotten your attention yet?
I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $2,300/ounce long-term prediction positively wimp-like by comparison.
The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own Krugerrands in 1979, was triggered by a number of one-off events that will never be repeated.
Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.
South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.
But then again, I could be wrong.
In the end, gold may have to wait for a return of real inflation to resume its push to new highs. The previous bear market in gold lasted 18 years, from 1980 to 1998, so don’t hold your breath.
What should we look for? The surprise that your friends get out of the blue pay increase, the largest component of the inflation calculation.
This is happening now in technology and is slowly tricking down to minimum wage workers. When I visit open houses in my neighborhood in San Francisco, half the visitors are thirty-somethings wearing hoodies offering to pay cash.
It could be a long wait for real inflation, possibly into the mid-2020s, when shocking wage hikes spread elsewhere.
I’ll be back playing gold again, given a good low-risk, high-return entry point.
You’ll be the first to know when that happens.
As for the many investment advisor readers who have stayed long gold all along to hedge their clients' other risk assets, good for you.
You’re finally learning!
Global Market Comments
January 6, 2019
Fiat Lux
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