Many long-time readers and speculators know I’m very bullish on gold and select gold miners.
On the supply side – I’ve written about the ‘peak gold’ problem. (In summary – marginal gold miners have about mined all they can at the sub-$1,300 price. And thus need higher prices to justify increased production and exploration).
And on the demand side – I’ve written about global central banks and their large gold appetite. (In summary – after 2008, central banks worldwide have been very large net-buyers of gold – especially the emerging markets).
Both these reasons (and more) – in my opinion – have set a price floor under gold.
But – until the beginning of this year – I didn’t write much about gold.
That’s because the Federal Reserve was in a tightening cycle (via rate hikes and quantitative easing).
And as a speculator – I knew better than to ‘fight the Fed’. (Remember – when the Fed tightens, the U.S. dollar strengthens, and real yields increase – which makes holding gold unattractive).
Or – putting it another way – it just wasn’t gold’s time to shine.
But – my stance has always been very clear:
Eventually – one day – the global economy will slow down. And when that happens – the world’s central bankers (starting with the Fed) will begin easing. And that’s when gold will outperform.
(I also said that gold wouldn’t break out of its $1,300 range until the Fed signaled they would begin easing).
Well – it looks like that day has finally come. . .
To give you some brief context: over the last year – the global economy’s been steadily decelerating. And now it appears central banks worldwide (including the Fed) have officially ended their tightening – and will soon begin easing.
But – the easing cycle by central banks will be very different this time.
That’s because they can’t depend on interest rate cuts for growth anymore. And must instead use new ‘radical’ tools to try and stimulate the economy.
For instance – I wrote not too long ago that according to historical measures – a central bank must cut interest rates by at-least 3%-to-6% to get any growth.
But – even after the recent tightening cycle (from 2015 to 2018) – major central banks worldwide are still at near-zero rates (some even negative).
To give you some perspective – the Fed’s been tightening since December 2015 (roughly four years ago). And they have only raised their target rate (aka the Federal Funds Rate – FFR) to 2.50%.
This means that – if the Fed cuts the minimum 3% – it will automatically put them into negative rate territory (FFR @ 2.50% minus a 3% minimum rate cut equals -0.50).
Now – this isn’t just a Fed problem. . .
Why? Because almost all other major central banks don’t have any room to cut either. . .
This puts central bankers in a very fragile position – forcing them to go into uncharted territories (by using new easing tools) that could have severe unintended consequences. . .
Thus – it’s clear that during the next financial crisis or slowdown – there will be many major central banks ‘breaking below zero’ (going into negative rates).
And because the market’s now realizing this – many investors have rushed into bonds (regardless of their yields). Because they expect even lower rates.
(Remember – bonds prices and yields work inverse of one-another. So when a central bank cuts rates or buys bonds via QE – they’re pushing the price of bonds higher).
There’s already over $13 trillion in debt with yields below zero. . .
In fact – negative yielding debt now makes up roughly 25% of all investment-grade bonds (BBB-rated credit or higher).
And it’s not just government debt that’s yielding below zero. . .
For example – in Europe – more than a dozen junk bonds (which usually carry high yields to make up for their higher risk of bankruptcy) now trade at negative yields.
I don’t expect this trend into lower rates to end anytime soon. Especially as central banks worldwide are gearing up to begin easing.
So – why does this matter for gold?
Well – just take a look at the correlation between the gold price and total negative yielding debt (I believe this is the most important gold chart for speculators).
And while I don’t want to ‘confuse correlation with causation’ (i.e. just because there’s a pattern between variables doesn’t mean one or the other causes it) – I do believe this trend into lower yields and central bank easing is pushing gold prices higher.
For instance – at negative yields – owning gold is considered ‘high-yield’ (the 0% yield from gold is much more than -1% from negative yielding bonds).
Thus – I expect the more radical central banks behave (as they attempt to stimulate growth) and the deeper yields go – gold will outperform.
So – in summary – I am very bullish on gold and select gold miners (specifically the Yamana Gold Corp $AUY long dated, out of the money, call options that offer favorable optionality).
And with the tightening cycle officially over as central banks prepare to ease – I expect gold will outperform.
I don’t know how low interest rates will go (it depends on global growth and inflation). But major central banks (including the Fed) barely have any room to cut before going negative.
And because of this – I believe gold and select gold miners now offer positive asymmetry (low risk – high reward) going forward.
Thus – until the easing and negative yield trend changes – I’m very bullish and will hold my gold positions (see bottom disclosure).
Stay tuned.
PS – there are more reasons why I’m bullish on gold – specifically because I expect the U.S. dollars to weaken from Fed easing. But I’ll touch on that later.
AS A DISCLOSURE: I’m still holding the long-dated, out of money, call options I purchased on $AUY (the Jan20’20 $3 Calls @ an average price of 0.18) for my own portfolio. I’ve also averaged my cost down when able to.