Gold for the Long Run

In another example of the MSM/Big Finance trying to tell you that up is down, Credit Suisse wants you to believe that if the price of gold drops below $1000/ounce, demand will decrease. "Business Insider" reports in Credit Suisse: The Upcoming ETF Unwind Will Pummel Gold, that:

Davis (the Credit Suisse analyst) believes if the gold price remains above $1,000/oz investment demand will remain muted but if the price drops below that level annual demand for the product could fall to between 300 and 350 tonnes. In the three years before 2009, an annual average 280 tonnes of gold was absorbed by ETFs.

For something as non-speculative as gold, and one for which the fundamentals hardly change (unlike that of an industrial company), investors are value investors. India will buy more as the price (in rupees) drops. The same is true for China. Has some hot money gone into gold ETFs? Probably. But it's a drop in the bucket compared to what the NASDAQ did in the later 1990s, forgetting the complete lunacy of 1999.

Earlier in the article, more silly stuff is cited:

If investors start turning away from gold ETFs because of improving economic data from the United States, a strengthening of the trade-weighted dollar and increases in real interest rates this could lead to an oversupply of gold in the market.

In fact, the U. S. had economic growth in 2002, 2003, 2004, 2005, 2006 and 2007. Guess what the gold price did each year? It went up, generally more than the stock averages. The non-silly part of that sentence relates to real interest rates. It is no surprise that the gold bull market ended 30 years ago when Paul Volcker jacked rates up well above inflation.

If and when gentle Ben starts practicing that sort of tough love, it may very well make sense to exit gold and start truly believing in stocks and bonds for the long run rather to be rented. I'm not holding my breath for that to occur, though.

The article does point out at its conclusion that:

The over-supplied position should begin easing as mine supply drops off, with global exploration unable to yield enough replacement ounces for those being mined. The deficit in gold supply should start widening from 2014.

Of course, the gold market knows the above. It also knows that "analysts" such as Mr. Davis are as likely as not part of an elaborate scam in which Credit Suisse is planning to buy gold after it and other firms help engineer a decline.

There will be growth in the spring.

The Fed will be behind the curve.

All that points to negative real short-term interest rates. All this is fundamentally bullish for precious metals.

Is that enough to deter more profit-taking?

That's why they play the game.

But in the scheme of things, it doesn't matter what gold does next month or next year if one is holding it as a long-term store of wealth. For traders, gold is indeed acting a little "heavy" here and there are indeed too many TV ads for it. But a lower price is a buy signal, and Mr. Davis and Credit Suisse are devils for suggesting otherwise.

Copyright (C) Long Lake LLC 2010

Gold, McDonald's, and Stocks for the Long Run

The above images are from Yahoo-Finance.

They compare the price action of McDonald's stock and the exchange-traded fund for gold, GLD over 5, 2 and 1 year periods.

Some time ago, Forbes Magazine introduced the Big Mac Index, which correlated prices of a Big Mac in different cities in different countries. This basically utilized a Big Mac as a form of currency, just as gold bulls assert that gold is money.

Interesting to see how gold and McDonald's have traded so closely for so many different time periods. Of course, GLD pays no dividend, while MCD has a significant dividend. These differences add up and provide most of the intellectual support for the "stocks for the long run" hypothesis.

So far as stocks for the long run go, Credit Suisse (click for link) has an advertisement for stocks with the veneer of academia. It goes to great lengths to come to the tortured conclusion that stocks are about as cheap as ever. The argument is that stocks over many years have returned 6.2% over inflation, and that the current mild deviation from that trendline shows that we're near a bottom. Yet if the ultimate return for stocks is a mere 5% over trendline, then stocks are way overpriced. On price to dividend, price to tangible book value, price to earnings metrics, etc., stocks are nowhere near as cheap as they have been at major market bottoms.

Also, the CS writeup assumes reinvestment of dividends for stocks but almost certainly does not account for reinvestment of income from the competing asset classes it looks at, bonds and cash in the bank. And the fairer comparator to stocks should not be government bonds but rather corporate bonds. Finally, in prior years, stocks were expensive to buy and sell, whereas bonds and cash were not.

It's sad to see the same hucksters trying to persuade the same people at this time that the stock market is cheap. Compared to what corporate debt yields, stocks are not cheap now. Government bonds are not cheap, gold at $930 is not cheap, cash yielding nothing is not cheap; not much is cheap amongst financial assets. Perhaps oil in the $30s per barrel will be proven cheap.

We'll see: that's what makes the markets interesting.

Copyright (C) Long Lake LLC 2009