The Golden Chameleon Has Changed Colors
Is gold a commodity, an investment, or money?
The answer is…
Gold is a chameleon. It changes in response to the environment. And as I’ve said before, gold is making an important change right now.
At times, gold behaves like a commodity. The gold price tracks the ups and downs of commodity indices. At other times, gold is viewed as a safe haven investment. It competes with stocks and bonds for investor attention. And on occasion, gold assumes its role as the most stable long-term form of money the world has ever known.
A real chameleon changes color based on the background on which it rests. When sitting on a dark green leaf, the chameleon appears dark green to hide from predators. When the chameleon hops from the leaf to a tree trunk, it will change from green to brown to maintain its defenses.
Gold also changes its nature depending on the background.
And right now, gold is behaving more like money than a commodity or even an investment. It’s important to take off your dollar blinders to see that the dollar is just one form of money. And not necessarily the best for all investors in all circumstances. Gold is emerging again as a strong competitor in the horse race among various forms of money.
This is great news for those with price exposure to gold. The price of gold in many currencies is going up as confidence in those other currencies goes down.
Gold is competing with central bank fiat money for asset allocations by global investors. That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling. For the first time since 2008, it truly looks like central banks are losing control of the global financial system.
When you understand that gold is money, and competes with other forms of money in a jumble of cross-rates with no anchor, you’ll know why the monetary system is going wobbly.
Gold does not have a central bank. Gold always inspires confidence because it is scarce, tested by time and has no credit risk.
Gold’s role as money is difficult for investors to grasp. One criticism of gold is that is has no yield. Gold has no yield because money has no yield. In order to get yield, you have to take risk. And with trillions of dollars of government bonds around the world trading at negative yields right now, gold is certainly more attractive than many “safe” sovereign bonds.
An asset with zero yield beats one offering negative yields. So in light of the fact that investors are buying bonds offering negative yields, the argument that gold doesn’t offer any yield makes no sense right now.
Also, bank deposits, and so-called money market funds have yield, but they are not money. A bank deposit is subject to default by the bank as happened in Greece and Cyprus. And a money market fund is subject to collapse of the fund itself, as we saw in 2008. Gold does not have these risks.
What signs do we see that gold is now behaving like money?
For one thing, gold price action has diverged from the price action of other commodities. This divergence first appeared in late 2014, but then became more pronounced.
COMEX gold peaked at $1,876 per ounce on Sept. 2, 2011. And recently traded as low as $1,056 per ounce on Nov. 27, 2015. That’s a 44% decline in just over four years. Yet in the same time period, broad-based commodities indices fell even more. One major commodities index fell 53%.
The contrast between the behavior of gold and commodities is even more extreme when we narrow the time period. From June 20, 2014 to Jan. 15, 2016, the broad-based commodity index fell 63%, while gold fell only 17%. The collapse in commodity prices was almost four times greater than the decline in gold prices.
From mid-January to mid-February 2016, gold rallied 14% while commodities still languished near five-year lows. All told, gold is now up 20% on the year, including its post-Brexit spike. Commodities overall have shown some recent strength recently, but gold continues to lead the way. It’s also true that the dollar has rallied, especially after the Brexit shock, but the shock has worn off and the dollar should weaken.
Lost confidence in fiat money starts slowly then builds rapidly to a crescendo. The end result is panic buying of gold and a price super-spike. We saw this behavior in the late 1970s. Gold moved from $35 per ounce in August 1971 to $800 per ounce in January 1980.
That’s a 2,200% gain in less than nine years.
I think we’re in the early stages of a similar super-spike that could take gold to $10,000 per ounce or higher. It won’t happen tomorrow. And there will of course be setbacks along the way. But it’s the big picture we’re concerned with. And when that massive gold super-spike does happen, there will be one important difference between the new super-spike and what happened in 1980.
Back then, you could buy gold at $100, $200, or $500 per ounce and enjoy the ride. In the new super-spike, you may not be able to get any gold at all. You’ll be watching the price go up on TV, but unable to buy any for yourself.
Gold will be in such short supply that only the central banks, giant hedge funds and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980.
The time to buy gold is now, before the price spikes and before supplies dry up.
Normally I recommend a 10% allocation of investible assets to physical gold for your permanent portfolio. But I also recommend select gold and mining stocks that can leverage higher gold prices into potentially staggering profits. It happened in the 1970s and it happened again in the early 2000s. And now it’s happening again as gold begins its march to $10,000.
This chameleon has changed color recently. And the new color is gold.
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