Gold has been interesting to track of late... It's a not-small position for us that, since we added it, has been very profitable to own -- until this year, that is, and certainly until the past month or so.
GLD YTD:
In our view gold is going through what you'd call a distribution phase... Meaning, some, likely-large, holders have decided to pair down their positions, and days like today -- up over 1% at the open, down over 1% as I type -- suggest that distribution is still in play.
So why, if the structural probabilities for gold offer significant gains over the next several years (which they do), would large holders of it want to pair back their exposure.
Well, different investors operate on different time horizons, and anyone who frets over the potential of further Mid-East escalation (hence stubbornly high oil prices keeping near-term inflation and interest rate prospects elevated) -- anyone, that is, with a relatively short time horizon -- would indeed be taking any pop in price (like this morning's) as an opportunity to pair back a bit... Particularly when headlines like the following flow through:
- Gold is the only reserve asset with no counterparty and no sanction risk. Multiple central banks are rebalancing out of US treasuries at the margin, and into gold. Which is a durable long-term shift that provides a headwind for the dollar and a tailwind for gold.
- China in particular: The PBOC's reported purchases understate the real buying. The State Admin for Forex, state banks, and import quotas act as a managed channel, and that action is policy-driven rather than price-insensitive. Although they are opportunistic on dips.
- US Debt/GDP is ~120%+, deficits run ~6% in non-recession years, and interest expense is massive -- with zero political stomach to cut spending on either side of the aisle. As I've expressed aplenty herein, structurally higher inflation against the Fed monetizing the debt to keep borrowing rates (on the short-end of the curve) low, is how the US inflates away its debt problems, which is a resoundingly bullish scenario for gold.
- And, frankly, every major currency wielder (Japan, the euro area periphery, the UK) faces the same math.
With that said, do you see value in holding a portion of gold in physical form? I recognize there are differences in liquidity, holding cost, and security to consider. From time to time I put on my tinfoil hat and view having some physical gold as insurance against the financial system itself. Is that flawed thinking.
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