Gold is a favourite for old fogies like me but spanning the digital age gap as an early adopter of ‘online’ in the 80s I grok and love Crypto. Crypto is a kind of digital gold or you might say gold is a kind of boomer Bitcoin.
People dismiss gold as a barbarous relic and governments de-emphasise its importance as a relic. So what is the point of a dense yellow metal only good for trinkets, electronic contacts and dodgy dentistry?
Why do governments keep huge piles of it in extremely heavily guarded vaults.
The answer is simple. Gold is for war. In war your paper is at a big discount and practically worthless if you are losing. Governments renege on their paper promises after wars, either by not paying out, restructuring them into dust or simply inflating the value away. In war, Gold is what you pay with.
I am up to my armpits in Gold, not an asset I have ever put much into up to now, because its crystal clear to me we are in for a lot of inflation. The market does not agree which is very unsettling. I’m an equity guy so to watch Gold trade I’m left wondering if its much of a real market at all. It goes up like a rocket and drops like a rock, the sort of thing you would expect from a penny stock. Gold is probably like a penny stock because there is so little real gold in play its actually less liquid than Bitcoin. The Comex contract trades about $1.5bn a day (9/24/21) while Bitcoin traded $42bn while the gold EFT traded about $1bn on Friday. Bitcoin trades 5% of its marketcap while Gold turnover a fraction of that.
Conversely Bitcoin has a $900bn market cap while Gold has approximately a $8 trn dollar market cap. Meanwhile £148bn of gold is mined every year versus 13bn of Bitcoin.
So Gold can be judged as illiquid and Bitcoin as super-liquid but if you take Apple you see that on the same day it turned much less of its market cap than gold but multiples more than gold.
One way to look at this is that gold as an asset sits a long way from the market. While colossal amounts stagnate underground little is accessible in the market itself. There are lots of middle men promising proxies to gold but to actually hold it directly if actually really difficult. To me this is what holds Gold back, the illiquidity, the centralisation, the difficulty of ownership. Gold is clunky and surrounded by middlemen.
But….
Like all tangible commodities it will rise in notional value with inflation and can only fall if technology finds a more efficient way or discovers a cheaper source of production. Gold is not going to get cheapr to make any time soon and without Inflation is here and here to stay.
With Gold we are dealing with an illiquid asset and that is why it pumps and dumps because the whole trading volume is equivalent to a couple or 3 Nasdaq bigcaps.
So where does this get us? It means that Gold isn’t going to be an instantly reacting asset. Its effectively caged by a set of systemic factors that make it less reactive than you might expect. This leads to turgid trading because it will only go up as the value of money goes down and that is slow even though its effects are extremely damaging to wealth over extended periods.
The markets are clear, they are saying ‘deflationary recession’ ahead. I can not make that work in my head.
This alone makes me want to hold lots of gold, but it is a tiresome thing to be thumped by the market that sees it otherwise.
So what to do?
The answer is in the chart.
Here you have inflationist fighting deflationist over the price of gold and equilibrium is starting to form. Im Bullish, but confused why everyone isn’t also, yet in the end, I never consider myself right, only in search of a trend and an outcome.
The market contradicting me takes the shine of my bullishness but every time I look at the fundamentals I want to buy more.
So now I am left looking at Bitcoin, banned in China, Casino’s: clamped down in China. Kids banned from playing computer games and discouraged from being too educated and encouraged into physical fitness in China, rich people being clamped down on in China, China companies told not to IPO in the US and more and I wonder why?
So I look at gold and if it suddenly goes vertical I might start thinking about the market catching on to long term inflation. However, I won’t, I’ll be thinking ‘gold is for war.’ China takes 10 years to do anything and they may have just started on a course of action to buttress itself for a more American perspective on how they deal with other countries, if that is the case it wont be inflation that will launch Gold to the stratosphere and if that is how the gold price goes I’ll be looking past minor inconveniences of economic problems to a much bigger picture.