Damn, I hate doing this, but a few words about gold. And what it means.
For the past two years I have told anyone with gold to sell out when the metal hits a high point, and to reinvest in financial assets that actually pay you to own them. Never was this more true than a year ago when the rocks hits $1,900 an ounce. I yelled sell, and the metalheads screamed buy. Anyone who listened has lost 11% of their money, and it’s not coming back.
This week gold stocks like Barrick tanked a bit and gold fell $35 an ounce on Friday alone, 2% of its value. This is not the interesting part however. Why it happened is what matters because it impacts on themes this pathetic blog has been humping away at for months.
Bullion crumbled and oil prices swooned because they are priced in US dollars, and the greenback soared. In fact it’s just had the best week in months. The immediate reason was a better-than-expected jobs report, as employers added 171,000 workers (the numbers in Canada were anemic). That beat expectations and was the best performance in eight months. It gave hope the American economy has internal strength, especially in the wake of rebounding real estate numbers. Consider the symbolism of Sandy and the human resilience it met.
That’s reason one.
Te second is political. The more people working, and the more houses sold, the better the odds voters will stick with the incumbent. So it all supports Barack Obama in a presidential race which was never supposed to be a squeaker. To the financial markets, Obama means stimulus spending, which means more corporate profits, low interest rates and liquidity. Romney, on the other hands, means less regulation, tax cuts plus fiscal responsibility (all good in the long term), but also lower government spending, austerity and slow growth.
On Friday, Obama won. The dollar rallied.
Thirdly, bullion bunnies love to spread the myth of hyper-inflation, arguing that all this government money-printing represented by central bank spending will surely make paper money worthless, and gold shine. It’s not true. The billions being created are going to buy government bonds and support the banking system. They are not finding their way into the economy. The velocity of money has been falling, not rising. If we’ve needed to worry about anything, it’s been deflation.
But what the good jobs numbers on Friday did was remind everybody when all the government largesse will stop. The Fed’s made it clear the big goal is to create jobs and hammer down the unemployment rate. As that happens it makes people focus on what happens when all this stimulus is withdrawn and the economy is self-igniting. Suddenly the numero uno reason to hide yellow wafers in your sock drawer goes poof.
The pros know this. They’re bailing.
Has gold done well over the last decade? Absolutely. And up until 2010 I’d always advocated having precious metals as part of a balanced and diversified portfolio. The book on the GFC that I published in late 2008 suggested holding up to 15%, which was appropriate (and profitable) advice. Today that weighting is zero.
This is part of the tectonic shift taking place beneath our feet. From the birth of the middle class to its demise. From the accumulation of stuff to a new definition of wealth. From rocks and houses to cash flow. Real assets are entering a period of decline, in which not only metals and commodities will perform poorly, but also real estate. It’s exacerbated by a demographic tidal wave, as millions of new retirees turn into yield pigs, turning costly houses into income.
There’s little doubt the US recovery will continue, whoever sneaks by Tuesday night. Anyone betting against it, or its currency, will get spanked.