The Last Post on Gold

I go on way too much about gold. It’s starting to annoy even me.

So, I’m just going to lay out the cyclical and secular arguments against gold one last time. After that, you do you. If you want more on the cyclical framework, go here.

Cyclical weighs heavy

  • Higher real interest rates. Except for extreme moments, the correlation between gold and real interest rates plots pretty high. And real rates are going higher. You don’t have to believe they are going a lot higher, but you do kind of have to believe the sign is positive. Europe and Japan are next, even if it’s early days and they’re likely to proceed slowly.

  • Unwind of residual disaster myopia. Risk aversion from the GFC and fear of disruptive QE inflation fed a big run in gold 2009-2011. It was a bubble created by investors looking for safe haven from bubbles. The bubble popped in 2012, and is still slowly leaking today. Yeah, inflation is more likely to pick up than not, but we’re not talking about the kind of rampant, de-stabilizing inflation that was almost consensus back in 2009-10. And, sure, some people still fear systemic risk too. But synchronized global growth & better banking regulation/capitalization have been reducing this fear, not increasing it.

Bottom line: If you think the global economy is in synchronized upswing, and also you think major global CBs are going to be reducing exceptional accommodation over the next few years, it’s pretty hard to make the case that the cyclical pressures on precious metals are for higher prices and not lower.

Insidious secular forces

  • Gold is losing monetary relevance. It’s moving further from the center of the global monetary system with every passing day. Nixon closed the gold window on August 15th, 1971. That was the day gold’s utility started to die. No one is going back to the gold standard. Each new generation sees less utility in it than the one before. Much in the way science progresses one funeral at a time, gold’s perceived utility fades one funeral at a time.
  • Digital technology is accelerating this process. The rapid evolution of digital payments and assets is further reducing gold’s utility, and now, thanks to the visibility of bitcoin, at an accelerated rate. Technology is taking us further and further from the gold standard. Even central banks are starting to rethink payment and settlement systems. And this would still be true if bitcoin were officially banned tomorrow.

Where does it end? It’s always made sense to me that gold should revert to pre-bubble levels and maybe overshoot, but really I don’t know. What I do know is that as long as I believe gold’s perceived utility is declining, both cyclically and secularly, I want to be structurally bearish.

Yes, if gold falls to 500 I’m sure I won’t be able to resist coming out and taking victory laps. But, other than that, consider gold-posting done.