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Monday, September 21, 2015

Gold Once Again Being Considered Key Safe Haven Asset

It can be confusing for some not familiar with what gold is and represents, when trying to figure out if it's simply one of many commodities. For those thinking it's primarily a commodity, at this time, because most commodities considered bearish, they will consider it a depressed asset that isn't worth owning.

For gold investors who understand what gold really is, they've been baffled because the price of gold, under the economic conditions of the last several years, should have soared. My belief is the reason it hasn't is because it has been classified wrong, and that has caused the price to be suppressed.

Why gold hasn't suffered a total breakdown is because there is a significant number of people understanding it has been a form of currency for thousands of years, and to this day can be used as such.

With the global economy getting more volatile, the commodity classification of gold is slowly eroding, and it's once again being considered the safe haven it always had been. That will have strong implications as the potential for significant events grow, in which investors will flee for safety. Gold will be there waiting for them.

Impetus for gold

One thing about gold is it takes difficult times to remind the majority of investors of its store of value. When the economy is doing well, it is for the most part forgotten by the majority and lingers in the background until global events once again trigger the memory of the important role gold plays in the world.

There was a reason the price of gold soared during the last market and economic meltdown, and it appears we're closing in on the early stages of the next recession, largely because of slowing China and its Asian neighbors.

The key metrics to watch in relationship to gold price movements are volatility and fear. They work together, and one builds on the other to produce the most optimal conditions for gold; a trend that is growing at this time.

Gold has to be nudged by events to appeal to investors, and those types of events are increasing around the world.

What type of fear and volatility?

It's also important to understand there is a certain type of fear and volatility that supports gold. While I think it's not the best way to think of gold, the main driver is financial fear, not political fear.

The reason for that is the market, overall, reacts to what is happening in the moment, and the the long-term view of the consequences of specific political events isn't priced in immediately, or sometimes not understood or digested as to the potential financial consequences. One of the most recent is the tensions between Russia and Ukraine, and Russia's support of Syria in the Middle East.

Where the two can converge of course is when political events visibly affect finances. But for the most part, it's almost always financial fears alone that result in people running to gold and the price being pushed up. That is the stage being set up now, and at least part of the reason asserted by the Federal Reserve as to why it didn't raise interest rates.

On the investment side, until there is short-term pain, meaning consistent weak quarterly results, the price of gold, in general, will remain subdued. It's when the negative financial news is coupled with earnings consequences that gold will once again soar.

The reason for that is the majority of investors will only respond when they believe their capital is under siege; meaning only when events affect their money.

We can read about China and other weak Asian countries all we want. We can read about or listen to news reports about Russia and how it may respond to Western resistance to its policies. But until that is connected to the stock market in the minds of investors, it doesn't have a lot of support for gold.

This is one of the reasons those that closely watch the potential impact of political events on the economy can get frustrated with their gold investments, as they make the connection much quicker than the general investing community, and get in much earlier and have to wait for the market to come to them.

Making the connection between political and economic events

Earlier I mentioned gold being classified wrong. The reason for that is the lack of correlation between political and financial events at this time. Once gold is reclassified in the minds of investors - from a commodity to a currency - that will be a bullish trigger.

There are a growing number of news reports on the slowing Chinese economy, weakening manufacturing in the U.S., and the growing human migration problems in Europe and America. These have potential for tremendous financial upheaval, and in fact there are some ramifications already causing economic tremors, with the most obvious at this time being China, which has for so long been touted as the main driver of global economic growth.

Even now investors have been slow to see how it will impact the U.S. and other markets, because they still haven't made the connection financially. That's because while there are economic concerns growing, the latest earnings reports appear to be fairly strong, even as the macro-economic situation is looking weaker. 

Gold as money

When referring to gold as money, the idea isn't that people necessarily use it as a means of exchange of goods or services. That can and does happen in some parts of the world, but in general, that's not how business is conducted.

What I mean is gold is considered money in the sense of is being used to protect assets. After all, if it wasn't considered a form of currency, why do people always rush to hold gold when difficult and unpredictable times come about?

Remember what happened a short time ago when the stock market in China crashed, and the crazy responses by China's leaders to it. Right in their faces was the reality China's market was highly overvalued, and it wasn't reflective of its economy. In response to that, the price of gold made a quick move upward, once again confirming it's considered a safe haven asset investors in order to protect their capital. That's money, no matter how it may be spun.

Conclusion

For now a lot of people are in cash. Part of that is for safety, and a lot of it is for the purpose of waiting for opportunities to come to them.

When the next economic downturn comes, which as I mentioned, is probably in its early stages, the thought of bottom-feeding will change to capital preservation and growth, and under crises situations, very few assets perform like gold does, and that's why being positioned for a prolonged season of economic difficulties with some of our assets is a smart play.

Discipline is important under these circumstances. If you believe we are going to enter into a season of economic weakness, going long gold is a sure winner. I've been long gold and silver for some time, and I know I'll be rewarded significantly over time.

As for what to look for, historically the larger miners with significant gold exposure are the first to move, followed by juniors and then explorers. Juniors are my favorite play because they have proven reserves and have the most upside potential. You have to do your homework of course, but for the strongest upward potential, juniors will strong management in place will make you more money.

On the other hand, if safety is the major factor, the larger miners can preserve and grow your capital when the rest of the market is floundering.

The catalyst will be when investors make the connection between political events and the economy. Discovery of that will be the sustainable upward movement in the price of gold. The decision to get in on that should be what your outlook is in regard to economic conditions and how long it'll take for investors to recognize the risks that are quickly approaching.

Investing in gold shouldn't be considered a short-term play, traders need to go long and hold on during these times of volatility. I don't think we're quite there yet with investors sentiment in regard to fear, and until that escalates, there will continue to be up and down movements.

And while the Fed and interest rates, in my opinion, has already been priced in, the ongoing sport of reporting on and guessing as to whether or not the Fed will increase interest rates will continue, and that means having the stomach to endure volatility in the gold price.

Even if the Fed eventually increases interest rates, it's not going to be by much. And with the many potential triggers that could bring more fear to the market increasing in the world, I don't think there should be a fear of overt interest rate intrusion.

As events unfold and the realization the global economy is slowing sinks in, nothing will be able to hold back money flowing to gold, and that means much higher gold prices. Position yourself accordingly.

Friday, September 4, 2015

Druckenmiller Loves Gold, Hates Fed

Hedge fund master Stanley Druckenmiller has had one of the strongest performances in stock market history, generating a return of about 30 percent over a 30-year period. That is in line with another legendary investor, Peter Lynch, who produced an annual return of 29 percent.

Interestingly, Druckenmiller and Lynch both quit because of the toll it took on them to maintain those type of returns. Sorry. If we want to live longer, we'll just have to settle for a piddly 20 percent annual return or so.

For some time Druckenmiller has blasted the Federal Reserve for keeping interest rates near zero, saying it has changed the behavior of companies, which instead of using cash to build the businesses, they are using it for leveraged buyouts, mergers and stock repurchase schemes.

Interpreting this as a negative, Druckenmiller has taken a huge stake in SPDR Gold Shares (GLD), investing $323,626,000, which comes to 2.8 million shares. That's more than double any of his other holdings at this time.

when asked about why he put such a large portion of his investment portfolio in GLD, Druckenmiller said when he sees something that gets him excited, he's willing to take that step.

Talking a lot about risk/reward ratio over the years, he obviously sees something in gold that has a lot of potential at this time. I agree with him.