Nothing really has gone wrong with the fundamental gold story since it reached its current price in the summer of 2011. This period was, as we remember, one of feigned panic amongst the media that the United States would actually default on its Treasury obligations. The more fundamental story was that a few domestic and international rating agencies had taken one of the ‘A’s from the U.S.’s credit rating. In any case, gold had been rising fairly steadily and kept on doing so, accelerating to slightly about $1900/ounce a few weeks after those news items hit. Then the Fed fooled the markets and did not institute a formal QE 3. Instead, it opted for Operation Twist. Very shortly after gold peaked, when bullish sentiment was so rampant that JPM’s analyst was predicting $2500/ounce by yearend, I wrote a post titled Gold on Hold; The New Play May Be in Munis.
In fact, that title was more prescient than it had a “right” to be. On Friday September 23, GLD closed at $159.80. That is roughly its current price, and is approximately its average price since then. Meanwhile, even though the muni bond market had already experience a strong uptrend, the plain vanilla muni bond ETF “MUB” has returned about 6% in total tax-free dividends, and its price has also risen about 5%. (The more aggressive muni funds that use leverage have done much better than that.)
This trend has now gone too far, in my view. Munis look, as they say on the Street, fully priced. Gold, OTOH, has what strikes my eyes as a marvelous chart pattern (from FINVIZ covering the futures market; cash markets and GLD are very similar though not identical):
The first chart covers a little over a year and shows a series of higher lows, “pushing up” toward overhead resistance around $1800.
The second chart is a thing of bullish beauty. The summer 2011 spike was just too high, and since then, the bullish uptrend has, I hypothesize, simply been marking time for gold to go from ahead of itself to a bit undervalued.
Chartists, please take note that these charts are on an arithmetic scale, not my preferred semi-log scale. Thus they visually “overstate” the apparent surge in the percentage move up in gold’s price at the recent higher levels.
The difficulties that gold mining companies have had in increasing either their profits or their proven reserves over the past couple of years demonstrates that even the past few years’ rise in gold’s price has not been “too far too fast” regarding the basic economics of gold mining. It would appear that yet higher prices could easily be sustained before an acceleration in the output of gold from the earth would begin to seriously affect the supply-demand equation; and even then, there is so much more gold above-ground than could possibly be mined yearly that this should be a secondary factor in the pricing of gold versus dollars.
My view is that the path of least resistance for gold is up, thus completing a rounded bottom the left side of which begins at the price peak in summer 2011 and which in this scenario bottomed last spring. A collapse to lower lows would obviously invalidate this hypothesis. A break above around $1800 would support it.
More mystically, just as the Dow hung around 100 for many years, then hung around 1000 for many years, and now has been hanging around 10000 for over a decade, gold has a similar pattern. For it, the pattern involves multiples of 40. FDR fixed the price at $35 in the early 1930s, but soon enough its free market price went into the $38-44 range. After the dollar-gold link was broken in 1971, gold reached equilibrium around $400. It traded around that level for a quarter-century between summer-fall 1979 all the way through the entire Greenspan era. Thus the dreamer in me envisions a move to equilibrium around $4000.
The above is clearly pure speculation, but my long-standing analogy between gold and the stock market’s multi-decade surge from the Reagan through the Clinton years allows me to think that somehow, some way, $4000 may happen in the not-too-distant future. If this does occur, it will almost certainly not happen for gold (silver) alone. Many other asset prices would move up as well, some faster, some slower.
Interesting times as Federal Reserve actions coincide with an age of — supposedly— deleveraging.