What Are Gold’s Fundamentals ?

In a piece published in Barrons.com’s on Friday (Is Gold Nearing Capitulation?) the selloff in gold was described as “a contrarian’s dream scenario.” John Hathaway of Tocqueville Funds wrote in Barron’s: “The evidence shows strong macro fundamentals for gold, investor sentiment at a negative extreme and compelling valuations in the mining shares. It seems like a contrarian’s dream scenario to us.”

I am less sure than Mr. Hathaway is.

He cites a variety of factors as “positive fundamentals” for gold: negative real interest rates, worldwide quantitative easing, and governments’ new confiscatory inclinations, as demonstrated in Cyprus.

To which I am compelled to point out three things:

1) Gold had a huge rally came as the dollar collapsed 41% from 2001 to 2007. The Dollar is now at a three year high. Why would that be a fundamental positive for Gold?

2) Quantitative easing has been going on int he US for 4 years, and worldwide for a while. What is the basis of Hathaway’s assumption that this is a net positive for Gold? We have so few examples of this phenomena that I do not understand his analysis here (if any).

3) Cyprus is a terrible example of “governments’ new confiscatory inclinations.” Readers need to recall that Cyprus banks were paying 6% in a zero interest rate environment. These were not “risk free checking accounts” but rather high yield, high risk trades. This “confiscation” as described by the usual paranoics was nothing more than a capital loss in a high risk trade. (about 16 months of interest payments).

We looked at Gold as a trading vehicle in the past, and identified the many ways it is different than assets like equities or bonds. Back in 2011, we noted that Gold is a trade, not a religion. During that presentation at the Agora conference in Vancouver, we discussed how commodities spike and collapse versus how equities roll over and break trend lines.

History shows Gold trades differently than equities. Why? It comes back to those fundamentals.

It has none.

This is not to say gold is not affected by Macro issues. But that is very different than saying Gold has a fundamental value, an intrinsic worth. It does not…

That led to this heretical advice: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias.

I do not want to engage in Goldenfreude — the delight in gold bugs’ collective pain — but I am compelled to point out how basic flaws in their belief system has led them to this place where they are today.

Gold does trade technically, and is especially driven by the collective belief system of the crowd. When that falter, well, you know what happens . . .


Gold falls 10% this year:

Source: FT Alphaville



Everyone Should Be Thrilled By The Gold Crash  (Business Insider)

Tax Time Takes A (Big) Bite Out Of $GLD $GC_F (Stock Traders Almanac)

God is Making Gold Crash to Test Your Faith   (The Reformed Broker)

GARTMAN: In Four Decades Of Trading Gold, I Have Never Seen Anything Like This Crash (Business Insider)

Charts du jour (silver and gold)  (FT Alphaville)


Is Gold Nearing Capitulation?
John Hathaway
Wall Street’s Best Minds  | Barron’s April 12, 2013

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