Gold – “The Barbarous Relic” – Now in a Bull Market!

by Victor Sperandeo with the Curmudgeon

Full Disclosure:


Both authors of this post are gold investors: 

·       The Curmudgeon has owned gold coins and bullion since 1980.  He's owned precious metal mutual funds, ETFs and individual mining stocks since 1981.  However, one very large gold bullion position was stopped out on October 31, 2015 (end of month hedge fund liquidation) after spot gold closed below $1080/ounce.  That position has not been replaced yet.

·       Victor has been a gold investor going back to the 1990's and added to his position along the way.  He also bought Silver at $15.50 several months ago and does not intend to sell it for years.

All opinions expressed herein are those of Victor Sperandeo unless otherwise noted.


In a book titled A Tract on Monetary Reform1 written in 1924, famous economist John Maynard Keynes wrote:

“In truth, the gold standard is already a barbarous relic. All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices and employment, and are not likely, when the choice is forced on us, deliberately to sacrifice these to outworn dogma, which had its value once, of 3 pounds, 17 shillings, 10 1/2 pence per ounce. Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age.”

Keynes remarks about gold were restricted to the "gold standard," which limited government spending and printing fiat paper money.  It was not about gold or the metal's value.  Keynes never said a negative word about gold that Victor or the Curmudgeon could find.  Gold, like all assets, goes up and down for fundamental (and sometimes technical) reasons that cause an imbalance in supply and demand.

Note 1.  This is the book in which Keynes most famously quipped that "in the long run we are all dead" and where he called the gold standard "a barbarous relic" as noted in the above quote.

We've previously covered the Drivers for Gold Price Movements, which we update in this post along with other important factors which impact the price of gold (and silver).

Precious Metals Overview:

Gold is primarily money (or a “store of value”) as 90% of its production is hoarded.  It's also thought of as a commodity as it has industrial uses. the yellow metal conducts electricity and does not tarnish. Those qualities make it the metal of choice for a wide variety of industries.  You can view a stunning slide show on the Many Uses of Gold here. 

Silver is approximately 60% an industrial commodity and 40% money. This ratio changes over time and is just a rule of thumb. 

One of the primary determinations of demand for precious metals is the U.S. dollar, as it has a great influence on all commodities priced in dollars.  Hence, gold and the dollar are inversely correlated.

Gold's History over the Last 5 Years:

Let's briefly recap gold's price history from its cyclical peak in September 2011 along with the dollar and related commodities.

The Dollar Index Futures (DXY) made a long term low on 5/6/11. Virtually all commodity indexes made a high five days earlier on 4/29/11.  The Diversified Trend Index2 (DTI) - a long/short commodity index Victor created - also made an all-time high on 4/29/11. 

Note 2.  Readers can track the DTI daily via the Wisdom Tree WDTI ETF.

Gold continued to rally for several more months after commodities peaked and the dollar made its intermediate term low.  On Sept. 6, 2011, gold reached an all-time high of $1921.50.  The yellow metal then started a multi-year decline which ended late last year.

The February 2016 Gold futures contract (which had the largest "open interest" in December 2015) made a closing low on 12/2/15 at $1054.50.  Meanwhile, the March Dollar Futures contract made a closing high on 100.24 on 11/30/15.  In retrospect, those dates marked a major trend change for both gold and the dollar.

Fast forward to this Friday 4/29/16, when June Gold futures (again, we quote the futures contract with the most open interest) closed at a new intermediate high of $1290.7 (+22.4%).  That same day, the June Dollar Index futures closed at a new intermediate low of 93.054.

Technically, gold is now in a bull market. It is above its 200 day moving average (MA), which is SLOPING UPWARDS.  Also, gold closed above its last intermediate high in October 2015.  Please refer to this chart of June 2016 gold futures:

Conversely (and as expected with inverse correlation to gold), the U.S. dollar is now in a bear market.  It recently made new intermediate lows and is below its 200-day MA, which is sloping downwards. 

In addition, virtually all gold and silver mining stocks, ETFs and precious metals mutual funds have rallied stupendously this year (some up over 80%) and by any standard would be considered in very strong up trends.

In an April 29th note to subscribers, the staff at Dow Theory Letters wrote:

“With most of the metals embarking on new bull markets we now officially recommend increasing your metals holding to 20% of your total portfolio by buying more gold, silver and platinum and/or their ETFs, which are GLD, SLV and PPLT.”

The China Factor:

As we've noted in previous posts, China is a very important factor effecting the gold price.  China continues to buy huge quantities of iron ore, copper, oil and gold. According to the Wall Street Journal (on line WSJ subscription required),

“China now buys about an eighth of the world’s oil, a quarter of its gold, almost a third of its cotton and up to half of all the major base metals. Its buying power has made the country integral to global commodities trading.”

Note:  Please refer to "Shanghai Gold Benchmark Price – New Kid on the Block" which claims the Chinese gold auction methodology is far more transparent that its London, UK counterpart.

China is buying gold bullion and taking delivery, for nationalist reasons and also for investment.  They want to have the Yuan partially backed by gold in order for it to become the next world currency (replacing the U.S. dollar).

Also, China spent a tremendous amount on building its infrastructure to get the country back on track to increasing GDP growth which had been on a downward trajectory for the last year.

China's gold buying and infrastructure build up helped all metals to trade at new intermediate highs (except copper, but it's very close). The DJ Commodity Index is +14.64% (page B6 WSJ April 29) year to date. With Crude Oil at new intermediate highs, the CPI will increase year over year.  However, with economic growth decreasing or stagnant, a 1970s style stagflation repeat is possible.  That's all good for commodities and gold. 

Fed Rate Hikes on Hold:

2016 is an election year which has been accompanied by very weak economic growth (GDP for the last two quarters was +1.4% and +0.5%).   Many experts believe actual GDP is worse than reported as detailed in last Thursday's Curmudgeon post. As a result, the Fed is not likely to raise short term interest rates through the rest of this year, and surely not in June.   Here's why:

The next FOMC meeting is scheduled for June 14th and 15th, while the UK's Brexit referendum vote is on June 23rd. The Fed has mentioned that referendum is a huge risk to the global economy if the UK votes to leave the European Union (EU).  Mid-June is also when the Democrats and Republicans prepare in earnest for their conventions in July, which culminate with the choice of a Presidential candidate for their respective political parties.

Therefore, if the Fed raised rates in June and the market tanks, they would surely be blamed.  It might also result in Congress taking away the Feds “official independence” or pass a bill that would finally audit the Fed [please refer to “The Federal Reserve Transparency Act of 2015 (H.R. 24)”].

Question for readers: Do you really believe the Fed is independent? Many don't!

Goldman Sachs believes there will be three Fed rate increases this year. 

"We continue to expect that the strengthening of the U.S. labor market will force the Fed to hike rates three times this year, which will lead to a stronger dollar and a gradual increase in U.S. real rates, pushing gold down," Goldman analysts said in a note to clients. 

Moreover, Goldman Sachs’ head of commodities, Jeff Currie told CNBC in an April 5th interview: “Short gold! Sell gold!”

The Curmudgeon and I believe Goldman is very wrong here.   Indeed, on Friday April 29th ZeroHedge reported that Goldman Sachs was stopped out of its "Short Gold" recommendation. 

Brexit Fallout:

If Brexit happens, the damage done will be unknown and gold (as a hedge against uncertainty) should do quite well.  Personally, I believe a UK exit would mark the end of the European Union.  At a recent dinner in NYC, with 31 all-star money/hedge managers, and myself this was the greatest concern expressed.

The IMF listed Britain's June 23rd referendum on EU membership as a key risk, along with instability in China and other emerging markets, volatile share prices and a loss of long-term growth potential in developed economies.

"The planned June UK referendum … has already created uncertainty for investors," the IMF's chief economist, Maurice Obstfeld, wrote in the IMF published half-yearly assessment of the world economy.

Gold Manipulation Subsides:

Gold is also bullish because the manipulation of precious metals downwards is apparently ending, at least in the near term.  Please refer to: Deutsche Bank Admits It Rigged Gold Prices, Agrees to Expose Other Manipulators, reported by ZeroHedge for details.  This revelation comes after the Sub-prime real estate and Libor fixing scandals. 

Banks and other financial institutions will have to clean up their act fast, and will likely stay away from manipulating markets.  They have now admitted to pushing gold/silver prices lower no matter what the situation called for.  That caused confusion and disenchantment amongst gold investors.

-->Gold being real money, and thereby the avowed enemy of banks and financial institutions, should now begin to trade on its own supply/demand factors without downward price manipulation and/or intervention.  That should be good for gold.

Rinse and Repeat - Central Banks Have Run Out of Bullets:

Lastly, global central banks have run out of schemes to combat further economic weakness.  They have failed dismally to restore meaningful economic growth after the 2008-2009 financial crisis.  In fact, extreme monetary policy accommodation (including negative interest rates in many countries/regions) has not been enough to reinvigorate the world economy.

Japan's BoJ left rates unchanged at its last meeting on April 28th, rather than proceed further into NIRP (Negative Interest Rate Policy) or extend their already massive QE program.  That lack of further monetary easing caused the Yen to rally 4.3% in two days and the Nikkei to decline -4.8%.  Japanese equity buyers are showing their lack of confidence that the BoJ (and central banks in general) can alone provide what has been a highly elusive return to robust economic growth.  


The entire world seems to be in turmoil, yet the public is sold (by the likes of Janet Yellen) that things are OK and getting better. Most of the public looks to politicians to solve their problems, or as they put it “get something done.”  Yet all they really get are false promises which give the politicians more power over people's liberty.

These are indeed interesting times, and they scream -own gold!  Suki Cooper, analyst at Standard Chartered, provided a few reasons:

“A dovish Fed, weaker dollar, falling US Treasuries coupled with the absence of additional stimulus from the Bank of Japan has spurred investor safe haven interest in gold, taking prices to levels last seen in January 2015.”  

Let's end with this somewhat scary quote on manipulation of the masses (the public or “we the people”) from an Austrian-born American publicist, sometimes called "the father of public relations:"    

“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. ...We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. ...In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons...who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.”

Edward L. Bernays, Propaganda (originally published in 1928)

Good luck and till next time...


The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Copyright © 2015 by the Curmudgeon and Marc Sexton. All rights reserved.

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