LAWRIE WILLIAMS: Gold: The Stars are all Aligning - Again

On a day where gold opened down a few dollars in overnight trade, but soon recovered to back above $1,500 an ounce in morning trading in Europe, it was good to receive the latest Things that make you go hmmm.. newsletter (www.ttmygh.com) from Grant Williams – particularly as this largely concentrated on gold and its likely future performance.  This m,orning in Europe the price has moved up a further few notches.  Things are certainly looking positive at the moment for the gold investor.

Williams, who I rate as one of the most astute analysts around and whose TTMYGH newsletters are always packed full of relevant charts and information, and who I would rate as sensibly bullish on gold, devoted most of his latest missive to parallels in the markets to major recessions of the past which invariably worked out as being very positive for gold as a wealth protector.  History does tend to repeat itself but, as Williams points out, the investment community seldom seems to take serious note of what has happened in the past and carries on regardless despite some serious warning signs.

Is this time any different?  Maybe!  Some strong pro-gold statements have been flowing from some of the most successful investors/hedge fund managers out there - notably Ray Dalio who heads up the biggest hedge fund of all in Bridgewater Associates, Paul Tudor Jones and Stan Druckenmeyer, all of whom rate among the world’s top fund managers and have strong followings.  They have all recently spoken extremely positively about gold investment.  Anecdotally, George Soros who also has a major investor following, has made a very substantial investment in the yellow metal as well.

Williams points to the investment euphoria in the U.S. of the Roaring 20s and how it led up to the Great Depression which followed it and the parallels with the current pattern of investment growth – often with investors buying on margin with the belief that the only way is up for the equity markets.  A dangerous game as investors were to find out in the Great Depression where the same pattern applied and many fortunes were lost.

As Williams points out, today shares many societal and cultural similarities with the 1920s, but beyond conflict and discomfort, the stock market has performed in similar fashion to its parabolic rise into the 1929 top.  What might be taken as an even more worrying parallel is that back in 1929, the stock market mega crash, was preceded by the stock indices effectively going nowhere after continual rises.  This caused consternation among the investors who had been used to markets rising day in day out but was just seen as being something of a hiatus which would correct again.  Well the S&P500 is currently only at around the same level as it was a year ago after a period of making successive high after successive high.  Is that a warning sign of a pending market crash?  And if so will anyone take any notice of such a warning?  There are plenty of respected commentators who will tell you this is just a blip in an ongoing bull market – but is it?

According to Williams, back in 1929 the most respected market commentator of the time, top economist Irving Fisher, stated in early October that year that stocks had reached a permanently high plateau. And only a few days later, with markets looking decidedly vulnerable that ‘the lunatic fringe were being shaken out and that all was well. The market had simply gotten things wrong.’  Well it was obviously Fisher himself who had got things wrong, and very much so with the equities market diving around 90% over the following three years.

Much of the true destruction of wealth at the time was due to the fact that much of the stock market rise had been fuelled by investors borrowing money to buy stocks in what they saw as an ever-growing market.  Fast forward to today and much the same is true.  Williams notes that margin debt on the NYSE is now not only at nosebleed levels, but that it’s reached them on a trajectory similar to that which has preceded each of the two previous major bubbles – both of which led to massive stock market corrections.

But what of gold?  Back in 1933, President Roosevelt implemented Executive Order 6102 effectively confiscating citizens’ gold holdings with the gold price fixed then at $20.67 an ounce – and then raised the gold price – or rather devalued the dollar – to a gold price of $35 an ounce, which was an effective rise in the gold price of 69.3% (or looked at another way devaluing the dollar by a similar amount). But while gold price rises were largely ‘managed’ for most of the following 38 years or so lest the dollar be seen as being devalued, that is not the case today and it will likely be mostly left alone to find its own level as it was after the 2008 financial crisis.  That should be very positive for gold if the current pattern continues. 

Central Banks are upping their gold purchases, despite many of them dismissing gold as of any importance in their official statements.  The U.S. Fed has also switched tack from tightening to easing and geopolitical tensions abound.  All these are coming together to favour further rises in the gold price.  As Williams notes “do any of you see either geopolitical tensions easing? Or U.S. monetary policy tightening, any time soon?”  There may well be the odd setback, but overall we see the gold price continue to react positively – at least for the next few months.

Williams also notes that while gold had been an unfavoured asset class over the past few years, gold mining stocks have been absolutely decimated and sees the gold stock ETFs GDX and GDXJ as offering a relatively safe way of riding any serious recovery, although individual gold mining stock prices, carefully selected, probably offer even better rates of return.  Silver too has been rather left behind and investment in it could well prove to be another way of enhancing rates of return with the Gold:Silver Ratio having the potential to come down sharply when the gold price is on the up.

13 Aug 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com