Sentiment is in the dumps. I get it. Lots of people crowded in at $2000 last year and now they feel like bag holders. Well, the good news is this. You should be just fine. The bad news is no one can tell you when.
Over the last 2 years, I have been sucked into FinTwit and probably logged 3-5 hours a day of listening to videos and reading information. I absorb all of this like a sponge. And I also see patterns.
- Guy puts out forecast or numbers to be hit by x date using crystal ball techniques
- Guy misses target
- Crowd throes tomatoes and calls him a charlatan.
I’d like to avoid all of that mess, and enjoy talking with all of you about the big macro pictures. Here, I wanted to discuss some thinking and challenge our thesis that “gold is going up”. I did a thread yesterday with some charts I wanted to import here to give you a much bigger picture of the road ahead. I actually deal with lots of hate mail and worried Wandas about daily price action – and frankly, I needed to write this so I can copy and paste it a few hundred times a month.
What I first wanted to do was give you an aerial view of where we are in this cycle. IF you believe in the cup and handle formations, or that gold is going up, you might want to pay attention.
Then we have 2008…
Then we have now…
The “big picture” thinking is that if you bought gold or gold/silver stonks during these pink times, it hurts to look at price going down daily, but look where it is going. I feel this move up could be a truncated year or two and take us to $2500-$3000. I then posit some reasons in the thread for this, but the big picture here is….
Where this hurts is when people like me get cute and buy call options on things with time decays. If you time this wrong, you can get smashed. This is both horrifying and exciting, all at the same time.
But let’s look at some reasons we are being told that gold is no longer anything to look at.
Challenging our thinking
I am on FinTwit for fun. I like the daily interactions with the guys. I don’t know any of them in RL, but maybe someday I meet some at a PM conference. I’m a regular guy, not some billion dollar hedge fund manager. I do have an MBA and have investments in other areas than PMs, so I speak sort of like a power investor rather than a risk-based management money guy. I am a fan boy of PMs, and I do realize sometimes these run up and need a cooling, so I’m not a full time pumper. But when you see silver at THESE levels, you see the opportunity for a move up.
Could it break down from here? Certainly. I do not have a crystal ball, and won’t pretend to.
So what are the reasons gold is not at $2500?
- BTC taking market share
One thing you see a lot now from the Kitcos of the world is that perhaps BTC has taken over gold’s position as a hedge against the dollar? I can admit that SOME money that would have gone into gold has gone into BTC and cryptos, but I don’t think it’s a ton. Why?
Remember set math in like 7th grade where you find the union of two sets? My marketing classes in my MBA might have told me to think of gold marketed to different people than BTC is. Meaning – one set is over 45, wealthy, managed money, bankers and the other set is 20 somethings on stimmy checks who need a massive score just for a down payment on a house.
Gold is a $12T market and BTC is a $1T market. It would be stupid to say there is no intersection here, as it is clear there is SOME. Might I suggest this is not your 70 year old retiree buying BTC, and it is not your 21 year old buying gold. I believe that intersection is somewhere in the 28-40 range where you have those that can see both angles and may be invested in both. That green area is estimated to have cost gold about $100-$200 in price right now.
This is possible.
2. Gold is dead, boomer!
I think one of the most errant ways of thinking out there is to line up the race car that is BTC against gold which is a tow truck on the raceway.
I felt in my interview with Jim Forsythe that I made a very strong case that BTC is speculative property. This enrages BTC people. But I need to ask you something. Would you be pouring your life savings into BTC right now if it was to move up 3% per year? Or, would you be chasing something else that can get you a 10x in a year like Doge? The truth is that gold and BTC are part of different asset classes and do different things.
What I would tell you is that if you got in at $50 BTC, you are a visionary and made a lot of money speculating. This is a GOOD THING!! I am complimenting you! But ultimately, it is too volatile to be a long term store of wealth and too valuable to ever be money. Wait, Nate, you just said it is TOO VALUABLE! Watch and learn, son….
- In a highly inflationary time, the value of the currency is depreciating at an alarming rate. It’s lack of scarcity reduces its value and you need to unload it the second you get it. By holding it, it is DEVALUED by the day.
- In a highly deflationary time, the value of the BTC is appreciating at an alarming rate. It’s high level of scarcity increases its value and you never can spend it. By spending it, you risk unloading it while it is going up in value and would regret the trade. So you would not ever want to SPEND this money. Meaning, it sucks as money.
Now – I personally feel bitcoin has paved the way for gold and silver to be on the blockchain with Kinesis. So, I appreciate bitcoin’s academic contribution to society – but it is neither a good long term store of wealth or currency. It is a fantastic speculation with high risk.
The stock of gold goes up about the same rate as population which makes it the perfect money. It is neither inflationary nor deflationary. The problem with gold as a money is this:
- Having to lug around metals
- Having gold as a national money limits countries’ abilities to wage war
I’m seeing a popular meme going around which shows gold is up like 3% in 10 years and all these other things passed it by. What this is, is a math trick called “framing” where the marketer presents you data in a specific window or timeframe to present to you what they want you to see. They also use the last year to talk about how gold is down 27%.
Then I tell them, “do 50 years” where gold is up like 50x. Or, I ask them to do 5,000 years, to point out the time length that this has been money. I get crickets on all of this. They want to frame the last 10 minutes as their race car outperformed your tow truck. The problem is, they do different things. Now, I want you to take that tow truck and haul a big load up a hill in mud. Do the same with your race car. The problem is, your overlords are pointing to the race track and are not understanding gold doesn’t compete with the race car there. It competes on the muddy hill hauling tons of a load.
The truth is, all of this stuff is subjected to market forces – which may have times of playing catch up, or times of front running. What you have seen over the last year is a bull flag, of sorts, which is the formation of the handle of the cup and handle.
And this is the gold chart…
So, while you may like to make fun of the boomers for the last 16 months and tell me gold is dead, I can look at this as a matter of perspective. The charts above also will tell you that if you had bought anything in the pink areas on the flagging way down, you are handsomely rewarded for when the handle fully forms to the upside. Since none of us know when, precisely, it will move up, we are accumulating on down moves, perhaps selling into some rises, and rinsing and repeating.
We do not know precisely when it will move up. But the time is either here and the bottom was 1675, or the bombers are coming out this afternoon and will take us to the low before the move up. What I tell people is if they believe in the thesis, plant your garden and go about your daily life.
The premise that gold is dead sort of hinges on the arguments of the 10 year return of gold and most notably, the 27% downturn of gold in the last year, despite massive inflation. One could make the argument that gold saw this inflation and ran up to $2089 anticipating this, and is now finding market harmony at its fair value, as it ran up from $1453 to $2089 in 4 months (50% move) and overshot. Anyone who has spent 5 minutes understanding markets understands how homeostasis is found.
Also, this sort of negates how all cultures sort of prize gold as wealth. Perhaps a reminder might help you understand the difference between how 8 billion people see gold and how some governments WANT you to think about gold. Gold limits their ability to overspend. Gold may be dead, to you, based off of what some maxi crypto hype machine may WANT you to believe, but this is reality.
3. Gold will never be money again
Well, you might be right. What we have seen over the last few hundred years is that governments tend to repeat the same mistakes over, and over, and over again. They grow in size, grow in scope, grow in power, then need to tax people into oblivion to pay for everything. In order to fund everything, they have to continuously spend more than they have. The idea of the gold standard is to limit the power of the governments’ abilities to grow this way.
In my country, gold and silver are the only money mentioned in our Constitution. It’s still there. What we have seen from our forefathers was the desire to limit government’s power. And over 200+ years, lawmakers have found ways to skirt this restriction. This is how our money has evolved….
This is essentially how they gaslit us over 100 years to have people accepting garbage paper as currency. What I have shown below is the value of the dollar in gold grams over the last 100 years. This clearly shows the devaluation of the dollar’s spending power.
This is an asymptotic equation. The inverse of this, or another way to present this data is an exponential function of the value of gold in dollars. This is what this can look like in the 10 years ahead.
My thinking is that gold is money at the nation state level, or else central banks would not be buying it in record numbers right now.
It is also pragmatic to assume it is not practical to buy a loaf of bread with a gold coin worth almost $1800. But, people still use it as a store of value in times of currency turmoil.
Thanks to bitcoin, we now can use the blockchain as a ledger. Kinesis Monetary System and others like it (Lode, Cache) can give you a claim to gold/silver in a vault.
IF you like BTC/ETH, you can ride up the speculation, and if you see a pullback coming, you can quickly convert it to gold/silver there and hold as a store of value rather than riding BTC down 90%. When you see the next BTC cycle, convert back.
I personally feel that in the near future, many will start to come to understand the problems with fiat printing. Some may speculate with BTC, some may use gold as the legendary safe haven that it is. Both may catch a bid, but one element to this is that BTC, and no other cryptos, has ever seen a recession. This isn’t FUD, it’s fact. It could go up 20x, or down 90%. Gold will serve to PRESERVE your wealth.
It is the Mater. Not the race car.
I don’t think governments may ever go 1:1 with gold again. Perhaps a 10% fractional reserve? Perhaps the THREAT of this by China and Russia? The fact that many countries are buying gold right now tells me currency problems across the world are heating up. Gold serves as a hedge against disaster, and why old cultures have owned it literally for thousands of years.
How this may play out – bottom in or nearly in
It’s pretty hard to deny the daily beatings as short term manipulations in the market. When I first heard about this 2 years ago, I thought, “what the hell are these people thinking” as I pictured a bunch of tinfoil hat JFK conspiracy theorists. And then I saw the literally dozens of news articles like the below.
What you are able to see is there are a lot of people out there who can play the short term chop very well. We saw the move up, with the consolidation. How do people make money off of consolidation? By goosing the markets and allowing prices to run, then pulling the rug out – monthly on options expiration for metals.
I detailed the theory in my recent Palisades interview – that showed 16 months straight or so where the metals were smashed around options expiration. Banks sell calls on gold and silver, and price rises through the month. A few days before options expiration, banks paper the market with contracts then pocket the free premiums. This is a broken mechanism, and there are calls to change the pricing. I made note this is how the pattern has been going, and I played the pattern for 9 straight months successfully. Last month I had a trade of $6,000 profit for 2 weeks.
I have been tracking the “recovery” this month, and it appears there was none to mention. Out of the last 16 months, the lowest I saw was like $1.30. This month, none. To me, this is telling me a bottom is near. They didn’t allow the rise this month, and what this APPEARS to be is trying to chase everyone out to then buy back positions for a profit to go long. At the SAME TIME we are seeing nation after nation buying gold, and BASEL 3 net stable funding ratio to take effect on Jan 1.
This, to me, looks like the end of this pattern where bankers were letting price run, then smash op ex every month.
The recovery never started. I have been writing about this for the better part of 8 months, and this past week I heard Eric Sprott has also come on board with how this price smashing scheme works. So, my theory now has billionaires paying attention. SWEET!
But why would this pattern break? Silver at the bottom of the trading channel. Expected recovery allowed by the banks for people to go long has been QUASHED. To me, this signaled THE BOTTOM. But, today, bombers can come out. We COULD see a papering of a LOT, with a massive buy back at the end of the fishing line. Run ALL of the stops down to $19? Buy back and go long then? VERY possible. My hope is for $21.44 and $1750 to hold. This would give a double bottom to silver and keep gold above the line of death. From here, I see blue skies, but we’ll see!
You have to also understand that 2021 had record investment demand for silver, WITH massive levels of inflations and sales – and silver is in over 1,000 products and is second only to oil in its usage in products. It is the highest conductor of electricity. It is used in solar panels – 20g per solar panel and EVs – with 5 million being sold at 5 oz per car. 5 straight years of mining deficits. And you are telling me that silver is REALLY worth 33% less than its high this year?
I think not.
This smells of big institutions about to run.
With the COT report, according to Ed Steer, it seems the big banks have not budged, but the smaller banks have decreased their shorts. The hold up, according to David Brady, is that the “dumb money” is still too long. He expects this dumb money to capitulate before we move up. He is worth probably a million times what I am worth, so listen to him. However, what if you have some hedge funds seeing the bottom might be in, NSFR coming to be, and nation states hoarding gold and are long now trying to front run? They have deep pockets, and they are HEDGING against the doom to come, right? Meaning – there is a possibility, albeit slim, that we do not have to wait for hedgies to capitulate. This beating over the last 2 weeks with no recovery, to me, was the final desperate act to get people out before the banks go long.
Why? It is now clear, just before this recent drubbing over the last month, that Powell has capitulated to “transitory”. After he’s gaslit all of you for 8 months that this is transitory, he retired that word a few weeks before getting bitch slapped with a 6.8% CPI and 9.8% PPI – both of which he knew were coming when he made that statement.
To me, that signaled to the banks to get the F out of the way. Rates WILL be hiked, and all be damned.
Well, rate hikes are bad, right? As Craig Hemke pointed out yesterday on his podcast at TF Metals report (you all need to subscribe!), the Fed raised rates a quarter of a point every quarter for 5 years from 2003 to 2008 and gold went from $250 in 2001 to $1923 in 2011. During those rate hikes, gold went up. I would expect the same. In fact, all through the 1970s rates kept going up and gold went up 24x during that decade.
Here is the 2003-2008 period Hemke mentions
So, IF banks see rates ACTUALLY getting hiked, THIS is the incoming bottom. Clearing out. I’m excited. Remember, if you bought anywhere in the pink above, you did good in the run to come!!
It is reasonable to assume cryptos took SOME of the wind out of the sails, no doubt. It is undeniable that short term manipulation being played during the consolidation made a lot of bankers stupid rich as PMs consolidated into a flagging pattern. It is also reasonable to see the pieces are being set now for rate hikes which could rock the stock market, but likely be good for gold. No one knows if the bottom is in at 1675 or is yet to come, but the pieces all also look like the table is set for an imminent run up in the near future. It is reasonable to suggest a $2500 run up in gold, and also reasonable to see this run fizzling out in 6-12 months after an explosive move up as the stock market may get decimated on interest rate hikes. It is also reasonable to expect that as the USD shows cracks, these cup and handles could become more frequent and violent as we can extrapolate an exponential value to gold and many other things as the USD decreases in value. IF there is a strong stock market sell off on a second, third, or fourth rate hike in 2022, it is reasonable to see the USD getting a strong bounce up and gold retreating back and basing for another run up in 2024-2026. Meaning, both the inflationists and deflationists have merits in this conversation. It is not logical to dispute a situation where a massive stock market sell off (possibly due to massive margin calls) creates a shock where the USD skyrockets. This could very well happen, but those dollars may then run to safety. Where that goes? If the deflation shock is enough, we could see inflation recede to 2% and have a 2.5% 10 year catch a bid. But that shock needs to happen to save the system, which could be an epic run up in gold 1H 2022 in an Oliver-type scenario followed by a Hunter-like scenario due to the crashing of margin selling and asset values. 2H2022 could be a tough time if you aren’t in cash – and many gold bugs could see a strong move which can then have them going to cash to capitalize on a massive stock market sell off.
Many will hold gold through it all. Probably not smart, but it is a fear play. Mike Maloney advises in his “wealth cycles” to rotate out when relative values get high. At a period of time, I may sell my gold and silver stocks to get to cash as well. I may wait out the downslide on the sidelines with cash until the dust settles.
NO ONE can tell you how this is going to end, but there are a lot of good voices out there making sense.
Notes: I have a FREE newsletter I try and put out every week or two. I do this shit for fun. Not selling anything. I actively blog here as well. If you are wanting to subscribe, simply send me an email to email@example.com. I cover a ton of different investments and macro point of view, but mostly focus on PMs.