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2/14/18

Time to be a goldbug (from IKN456)

This was the intro op-ed from IKN456, last Sunday evening. It took two days for gold to move up over 5% and to be even more annoying, it's for the reasons laid out below. 




Time to be a goldbug
All our times have come
Here but now they're gone
Seasons don't fear the reaper
Nor do the wind, the sun or the rain
(Don't Fear) The Reaper, 1976, Blue Öyster Cult

Because the world needs more op-eds that quote 1970’s prog rock lyrics.

This is a weird old sector of the market, because at the very centre of the whole mining industry (base and precious) is gold, a metal that’s not just worth money when collected into lumps but also elicits strong emotions from both opponents and proponents on social, political, macroeconomic and even cultural levels. Beauty will always be in the eye of the beholder and others can look upon my own market and financial position and sneer (if they so choose), but I have always considered myself to be a long-term bull on the price of gold without being anyone’s idea of a hardcore goldbug. I can point to several examples of that mindset, but perhaps the most obvious is the way in which I’ve rattled on about the gold/TIPS ratio for the last 12 months (which worked to an extremely tight correlation until just a few weeks ago and is still out there on the longer-term chart, but not going to force-feed you with that one every weekend). No goldbug would care about the real economy and the way in which the US Dollar affects gold…it’s gold that affects the dollar, right?!?

Therefore I’m not a goldbug, but before this goes any further please do not take me the wrong way and think that I’m disparaging them either. I’m not against those ladies and gentlemen who are goldbugs, because even if we focus in on so-called “hardcore goldbugs” there are still a wide range of lifestyles and philosophies that go under that heading. I’ve met many such people who will then go on to make well thought-out, cogent, intellectually sound integral arguments as to why they are hardcore. And that’s fine, but it has to be stated that they aren’t the only ones. It isn’t just a bunch of intelligent, out-performing high IQ people in the room when hardcore goldbugs get together because for every presentable one there’s a complete fruitloop waiting to tell you about his (rarely her) collection of coins that are next to the gas masks and the shelves of dried tofu in the home-made nuclear bunker dug at the bottom of the garden. The cogent bugs out there suffer (normally in silence) as the mainstream financial community riffs on the stereotype and a bad name in the wider financial community. But hey, I’m a mouthy blogger with his own issues, we all have our cross to bear.

But like that old saw about stopped clocks, even goldbugs get the market right on occasion. It doesn’t happen often because normally goldbugs are right about gold’s move (up) for the wrong reasons (anything but currency debasement/moneyprint/world conspiracy theory/etc) but gold becomes truly face-rip bullish when the driver is its Fear Trade capacity. As noted on the blog last week, I’m in strong agreement with that guy Will Rhind (1) who, before going on to pitch his PGM ETF to the world, nailed the current market scene succinctly by stating that it’s similar to that we saw around the market crash of 2008/9. Perhaps not in severity (in fact certainly not) but the way in which the normal release devices have operated, first the bond weakness, then the dollar weakness, the knock-on to broad market equities and then the wholesale flight to quality (stage 1) is a near-carbon copy. We live in a financial world that has become addicted, junkie-like, to the heroin of cheap money. The Fed has been trying to wean us off with the methadone of carefully jawboned and flagged rate hikes but when the crunch came, it was telling that the correction was set off by 1) The Munchkin stating* he didn’t care about the price of the US Dollar and 2) The Fed reacting to the first bearish wave by doing its classic least-worst move of flagging an acceleration of rate hikes (anyone else remember the late spring 2008 Paulson/Rubin show before the hammer came down on Lehman’s? I do). Monday came and it was déjà vu all over again, just that it all happened under the control of algos and machines…so a bit quicker and more surgical in nature.

We saw the flight to quality and that, ladies and gentlemen, is not to gold. Not yet anyway, au contraire at the early stage of the fear trade the move is always the same, liquidate to USD. That forces the price of gold lower in these first stages, not helped of course by the trade desks that suddenly find themselves with the need to sell all sorts of vehicles for cash because they were asses-out-the-Ferrari-window on margin and are covering at any cost. If it were a normal negative day at the office that’d be more than enough, the checks and balances calm thing and we’re back to laying big bets he next day. But last week? No folks, that was very different. Not only did we witness the two biggest Dow point drops ever, but they only became those in the last hour of the nasty days. Throw in a rebound day in between that was feted as “We Fight Back” and lasted precisely 24 hours and we have a situation where fear is the only thing.

Which means stage two of the Fear Trade kicks in, the one where gold benefits because the “normal” flight to quality of the US Dollar goes out of favour. It’s worth remembering that in the height of the 2008 financial crisis, when IndyMac first went down and started the final domino effect that saw Lehman go under and the near-collapse of the whole caboodle, gold dropped by 27% between July 2008 and late October. You could have bought an ounce for U$712 and just two years later you were paying double that. I’m not saying this is as serious as 2008, I am saying that the move into the dollar won’t be the last one because suddenly (and for the first time since) the fear doesn’t stop just by hiding inside USDs, the fear IS the USD.

And the goldbugs will be proven right. Money that’s now hiding out in dollars will want another place to hide and gold is one of the quickest and most secure options and though small compared to the amount of fearful cash out there now, it can mop up quite a bit of liquidity without getting badly bent out of shape, based on previous “stage two fear” moments I estimate that a large scale influx of frightened dollars into the bullion market can be handled with something like a 10% gold price rise in USD terms. That would be a fair deal for the big money, preserving capital and holding tangible , fungible assets at a reasonable premium (and there’s always a chance to sell to the greater fool later), not bad at all for the big money. However, 1,300 x 1.1 = a U$1,430/oz gold price and I’m sure there’s not a single one of you in this audience today who doesn’t understand what that kind of spot price would do for a portfolio laden with junior mining stocks.

I’m often nervy when I get too bullish, nervous above all about sounding like just another “To the moon, Alice!” clarion call from the nutbar end of the bullion world. Not this time folks, this is the time to join the goldbugs, declare your own goldbuggery proudly and tell them that this time, they’re going to be right. For a while at least. It’s why I’m deploying capital in extra trades and it’s why I’ll be longer the juniors this time next week. Gold’s going higher in 2018 and the early downtick in the metal we saw last week is right in its playbook, so for all intents and purposes as from today consider me all-in mining stocks for 2018.

*As freakin’ Treasury Sec! The single most stupid statement out of this administration since it began and yes that includes every single utterance from the mouth or Twitter account of Donald J Trump.