The financial markets can at times be characterized by the presence of animal spirits and the recent parabolic price move in gold fits this order with speculators and hedgers in the commodities markets being the purest representation of the last frontier of American capitalism, a zero-sum game, with only winners and losers. This blog explores that more.
First and foremost, we must determine if allocating capital to gold does in fact fit the definition of investment or does it better align with pure speculation? If the true value of any asset can be deduced down to the free cash flow, then how can we correctly estimate the intrinsic value of gold and qualify it as an asset when there is zero free cash flow generated and its inclusion in portfolios produces nothing? How can investors identify the disconnect between price and value, without the ability to estimate the intrinsic value of gold within a reasonable degree of certainty?
Conversely, speculators are not to be concerned with the intrinsic value of securities and are instead fully price-focused with an emphasis on expectations of the future. Thus, the allocation of capital to gold should be clearly defined as speculation, fully price focused hoping to predict the future. There is nothing wrong with being a speculator and solely price focused so long as you know who you are and are managing risk accordingly.
Considered as a store of long-term value, gold’s inclusion in portfolios has always been rationalized for a confluence of reasons that include; a product of the monetary debasement of fiat currencies, ballooning government debt, weakness in the US Dollar, protection from market calamity, preservation of principal as an inflation hedge along with looser monetary policy by way of central banks around the world further inflating asset prices for zero yielding securities as lower interest rates reduce the opportunity cost of holding gold.
When we apply our proprietary technical analysis to gold on a medium/long term basis, the market price appears to have reached a terminal extreme where the strength of the trend is becoming directionally unsustainable and a reversion to the mean with a steep retracement in price is becoming more probable. Adding weight to the evidence, on a near-term basis we have identified a clear shift in control from the bulls to the bears for taking profits.