Gold investing hacks: the economic prospects of fear
Why does Gold may Save your Money in complex time. Fundamental View.
Gold is totally NOT just some speculative thing in my book! I keep the precious metal around so that if all the crazy stuff happening in the world actually goes down, you’ll have something to fall back on during a rainy day. And how much gold you should have in your portfolio, whether it’s 2%, 5%, 10% or 20% — that’s totally a matter of how scared of the world you are.
What are we actually hedging?
Traditionally people believe that gold just feels good during times of slow economic growth paired with high inflation (stagflation). And if the Fed has to really step in and support the huge dollar liquidity market through REPO or debts with massive actions while average economic signs are so-so, the market will surely see that as tons of money being printed (debt stimulation)!
The main risk gold hedges against is that the modern banking system just isn’t functioning all that well.
Also don’t forget that with the whole world’s monetary turnover being a massive $500 trillion, gold is only about $10 trillion. So this instrument is totally possible for insiders to sway — big players, banks and miners probably have a clearer picture than you and me. That’s why gold is really a fundamental investor’s tool, but can be tricky to speculate with over the medium term.
You’ve Gotta Be Cautious to Stay Safe. Technical Analysis.
At the moment, there is a clear lack of confirmation of bull run among the historically useful trend growth confirmation indicator.
Does it mean that the growth is doomed to failure? No!
So one thing folks often look at is the ratio of Gold prices to the S&P 500, and its moving average over 200 weeks. The idea is that if the ratio is above that long term average, it usually means good things for gold. And if it’s below, it typically favors the S&P 500 instead of gold.
This chart shows that Gold/S&P500 ratio from 1975 up to now. It’s got the ratio itself over time in the line, and that 200 week moving average as a reference point too.
From the looks of it, the ratio is still significantly below its average over the past 200 weeks. While gold going up isn’t completely off the table, this indicator isn’t really backing up bull possibility for now.
Historically, gold has done pretty well when this indicator was high. The chart below shows if you had invested $1 in gold only when the ratio of gold to the S&P 500 was above its 200 week average.
Using that approach hypothetically from 1975 until now, you would have made a net profit of 1.391%. Not bad for basically only buying gold part of the time based on that simple indicator!
To justify the effectiveness of this indicator, I will show a hypothetical increase of $1 invested in gold only when the Gold/SPX ratio is below its 200-week average (as it is now).
The hypothetical net loss since 1975 using this approach is -21%.
Like I said before, Gold is an absolutely incredible asset to have in any portfolio, but you’ve gotta watch out because it can get a little too hot and clumsy sometimes.
And when that happens, you need to look at some other swanky options (or combine them with Gold). Just below I’m gonna suggest one of those potential alternatives for you to check out.
What are the alternatives? Travel back in time.
It’s interesting that Gold is at its maximum while miners:
- Barrick is twice as cheap as in 2020,
- the long-term dynamics of JNUG are disappointing
- Is Newmont even worse?
The reason is that the costs of gold miners are growing faster than revenue. For example, Barrick’s costs per ounce doubled (x2) from 2016 to 2023 — from $674 to $1,335, and the selling price only increased (x1.56) from $1,248 to $1,948.
You’d think if you subtract what was from what is, then everything isn’t so bad. It’s not bad — earnings per share (EPS) was about $0.80 and remained the same. It just doesn’t reflect the rise in gold prices at all.
Rising costs are a problem for all miners, not just gold ones. Nickel mines in Australia are even being forced to close altogether. Company management constantly talks about reducing operating costs. Analysts even expect Barrick to reduce costs per ounce in 2024–25.
However, analysts tend to underestimate costs and overestimate company revenue. These forecasts almost never come true, and the cost trend only moves in one direction.
Is everything lost? Not at all. For gold miners, the “golden” time comes when gold reaches new highs.
That’s exactly what happened in 2020. For the same Barrick, the price per ounce was $1,778 ($1,396 in 2019) with costs of $967 ($894 in 2019). This resulted in a jump in free cash flow, earnings per share and triggered a sharp stock price increase.
I believe history can repeat itself, especially if costs will be really reduced. Additionally, lower rates will reduce debt servicing costs and give a boost to gold prices, which from $2,000 could reach $2,200–2,300 and stay there.
And then there may be an interesting effect: stock prices will rise much faster than gold is growing. For example, Gold will add 10–15%, and stocks — at least 30–40%: we could have better payoff structure.
That is, you can go back, in fact back in time. A kind of “time machine”. Do you want to buy Gold at $1,800–1,900?
