To The Moon

Gold $Gold - main 2412(GCmain)$ is starting to come on the radar for more and more people (after rallying some 60% off the October 2022 low), with financial pundits, hedge fund billionaires, and even mainstream media starting to talk louder about the shiny metal.

But what’s gold got going for it anyway? And after rallying more than 30% YTD, has gold got anything left in the tank — are we too late?

• Central Bank Buying: around the world central banks have been buying up gold (diversifying reserves, managing risks), the last 2 years saw more gold purchased by central banks than the previous 5 years combined.

• Geopolitics (1): first, there are numerous geopolitical hotspots threatening to boil-over (Russia vs Ukraine/Europe, Iran vs Israel/US, North vs South Korea, etc); gold has gotten a clear boost from the geopolitical risk premium.

• Geopolitics (2): second, the 2022 Russian invasion + resulting sanctions proved to anyone who might ever find themselves on the wrong side of the USA that they ought to rethink reserves management and as such both boost and repatriate gold holdings to avoid sanctions risk.

• China: for China it’s a combination of the above factors, but also their property market is in a deep and drawn-out down-turn; this has seen retail investors turn to gold as stocks slumbered and monetary stimulus gets stepped up.

• Fed Pivot: the prospect of lower yields and a weaker dollar, potentially catalyzed by Fed easing further add to the case — easier monetary conditions and ample liquidity is generally good for gold.

• Fiscal Fears: whichever butt lands in the seat after the 5th of November, it’s clear that neither party wants to bother with fiscal sustainability, and if anything fiscal irresponsibility seems to be a bipartisan issue!

• Inflation Resurgence Risk: the bullish outlook for commodities (in my view), seeming resilient growth, and rush to rate cuts puts reacceleration and resurgence risk on the table into 2025.

• Sentiment vs Positioning: one the one hand, Consensus Inc. sentiment gauge shows widespread bullishness and CoT futures positioning reports show speculators are heavily net-long (both highlighting the strong momentum in gold prices), but paradoxically; ETF flows and positioning show retail appear to be lukewarm on gold (see bonus chart below).

• Technicals: perhaps the biggest part of the story is just plain old technicals (price tells us a lot of things), gold broke out from a major long-term basing process (aka Brobdingnagian base) — you always want to pay attention to this type of price action as it can foreshadow a long-term and significant trend change. For instance, check out the chart below and the example in the early/mid-2000’s.

So while real yields remain relatively high and the US dollar relatively resilient — and risk sentiment more broadly seems healthy as stocks punch on to new highs… i.e. all things that usually stand against gold, it sure does have a lot going for it.

The pessimistic slant is many of the factors highlighted above that benefit gold, are kind of bad… kinda potentially, like, really bad. In the words of Rick Rule, "I don't own gold because I think it might go through $2700. I own gold because I'm AFRAID it's gonna go to $9,000. Or $10,000."

And while I don’t try to skate too far ahead of the puck and try keep an even keel, it does raise the key issue for investors of diversifying your diversifiers (e.g. 2022 taught us the downside of relying on just bonds to diversify vs stocks, as both stocks and bonds went down while commodities rallied).

Many morsels of food for thought here today!

Key point:  While gold hype is on the rise, history may well rhyme this time as multiple tailwinds fill gold’s sails.