YWR: Gold on the launchpad

Disclosure: Personal views only. Not investment recommendations.

I’m not much of a chart guy when it comes to investments. I respect that many investors representing a lot of money use them and so they influence the market, but often people get burned with technical analysis. When I see investors seek out a technical analyst to tell them what they think of a chart it reminds me of a villager asking a shaman to rattle some sheep bones in a tray mixed with blood and spit and to then stare at the mix of moving averages and oscillators and tell them what it means. “Aaaaghhh…..hmmmmmm……yes….the prophecy has been foretold…..It looks favourable for you…”

But every now and then a chart comes up which catches my attention. Usually, it is a chart combined with other data points such as sentiment and positioning. The last big chart that struck me was Bitcoin during the lockdowns in March 2020. After the 2017 euphoria Bitcoin had crashed 80% and was left for dead. After the crash it stabilised around $2,000 and oscillated sideways for two years. But Bitcoin wasn’t dead. As Chris Dixon at a16z was pointing out developer and startup activity continued to grow even as the Bitcoin price moved sideways. To me it was a great set up and I bought my first Bitcoin and Ethereum. I totally underestimated the move that followed.

Source: a16z presentation on potential of crypto.

Now there is another chart which has my attention, and it’s gold. I’ve followed gold for a long time and learned painfully that it can do nothing for long periods of time, and then move explosively when no-one is ready for it. Take in the long-term chart below starting in 1995.

Let’s recap the story so far to really appreciate the set up. The chart begins with the drawn out bear market in the late 1990’s when the Bank of England famously sold all of its gold reserves between 1999 and 2002 at the complete bottom. Classic. Then there was the epic 2002 to 2008 commodity bull run which got everyone involved in commodities. Then comes the GFC crash in 2008 with QE and TARP and gold comes roaring out of the gate stronger than ever and goes to an all time high of $1,900/oz in 2011 with the experts then predicting it would rise further to $10,000/oz.

But in hindsight, it had already been a 10 year bull market with a 600% move off the 2001 lows and at that moment of peak excitement, it was actually time for gold to take a rest. Meanwhile US equities, which had been dormant for 10 years, were teed up to start their bull move. What followed was devastating for gold bulls. Everything they predicted around escalating US government budget deficits and expanding Federal Reserve balance sheets would come true, but the gold price would enter a painful multi-year bear market with a decline of 44% to $1,046/oz in 2015. From there the pain continued as the gold price chopped around $1,200/oz for another 4 years doing nothing until the end of 2018.

At that point nobody wanted anything to do with gold. Not only was gold still down 30% from the 2011 highs after 7 years, but there was also the opportunity cost of having not been in tech, which was shooting the lights out, or Bitcoin which was the new gold. But at the end of 2018 there was the Powell pivot, where instead of raising interest rates further, Powell paused. This was followed by the Covid Crash, more monetary easing, and by August 2020 gold had put in a surprising 60% move and managed to break through $2,000 an ounce.

The gold bulls were elated. Gold was back. It had been a painful bear market but now it was time to rock and roll again. Momentum traders piled in. But not so fast. After August 2020 gold went back to sleep again and lost all momentum. After the new all time high in 2020 it declined and has spent the last 2 years once again doing nothing and driving everyone crazy, while inflation exceeds 8%. Gold is supposed to be a hedge against inflation, but nothing is happening. What’s going on? Meanwhile Bitcoin put in an exhilerating move to over $60,000. The Bitcoiners were on top of the world and even started to make fun of gold and call it Boomer coin. Oh boy….

So where are we now? I look at the chart below and I see the build up of a massive multi-year launchpad which when it starts to move is going to take us through $3,000/oz and most likely higher. Those years in the desert from 2011 to 2018 shook almost everyone out of gold and only the true believers remained. Then this 2 year stabilisation right at the all time highs is powerful. After the 60% move in 2019-2020 gold is resting right at the highs and coiling for another step higher. Maybe it continues around this level for a few months longer, but to some degree the longer it takes the bigger the move is going to be. That’s at least how it looks to me, but there are a few other indicators which also suggest an explosive move could be about to unfold.

Indicator #1. The Frank Holmes indicator. Back in 2010-2012 at the peak of gold and commodity bull market there use to be a conference called the Hard Assets Conference and I used to attend it in San Francisco. Hard Assets would rent out the convention halls at the Marriott in downtown San Francisco. The set up was one big room where the key note speakers would talk about the upcoming bull market in gold, silver, and uranium or the collapse of the US dollar, the rise of emerging markets, or whatever bull market trend was actually about to not happen and in the other big room were booths rented out by the mining companies to raise money from investors for projects. One of the favorite speakers at this event was Frank Holmes, the owner of US Global Investors, a mutual fund company based in San Antonio, TX. Frank is a great speaker and would always put together compelling slides to go along with his presentations. US Global Investors had several commodity and precious metals funds, and Frank was ultra bullish on gold, which made him an ideal speaker for the Hard Assets conference. I remember lots of Frank Holmes presentations. Unfortunately, gold was not about to go to $10,000 and the ensuing bear market in gold after 2011 was difficult for Frank and his mutual fund firm, which had been very reliant on gold and commodity funds.

I hadn’t heard anything about Frank Holmes and his gold funds for years until this April I was watching CNBC’s coverage of the Bitcoin conference in Miami and there was Frank Holmes on TV in a Bitcoin T-shirt being interviewed about his bitcoin mining company, Hive. “Oh wow”…. I thought. Frank Holmes has ditched gold and is now on TV in a Bitcoin T-shirt. I hate to say it, but what does that tell you? It means Bitcoin is at a short-term top and gold is about to launch. BTW. Total respect for an amazing entrepreneur!

Frank Holmes

Indicator #2. Gold and negative real rates. I’ve shown this chart a few times before. It is the price of gold alongside real interest rates. Real interest rates are shown as the 5 year US Treasury yield minus CPI. It’s not clear why gold moves when it does, and this is what is so frustrating. It can go up when inflation is low, or also when it is high. Gold can also appreciate when long-term rates are falling, or also when they are rising, but what stands out to me is that gold has been most explosive when you have inflation much higher than interest rates (negative real rates). It’s what we had during the big moves in the 1970’s from $40/oz to $700 and we have the exact same setup today. Was that 60% move in 2019-2020 all we get, or is it just the prelude to a bigger multi-X move?

Indicator 3: Gold is making all time highs in other DM currencies. It’s kind of interesting to look at the price of gold in Japanese Yen or Euros. Gold is making all time highs in Yen and Euros and it looks like a solid bull market. It’s hard not to wonder if after taking out all the other fiat currencies gold is coming for the US dollar next.

Gold in Yen

Gold in Euros

Indicator #4. Russia and China. It’s hard not to notice the potentially massive bull market case building for gold based on recent events with Russia and China. The US just confiscated all of Russia’s central bank holdings in US government securities and cut them off from the SWIFT financial system. Obviously, China with $3.2 trillion in currency reserves sees the risks this can happen to them too. Gold is a potential solution, but the problem is China can’t buy $50 billion/month in gold without the market exploding to the upside, but maybe they need to get started even if it is small.

Then there is the war in the Ukraine. Things are starting to turn in favor of the Ukrainians, and that’s great, but I worry what comes next. I put myself in Putin’s shoes and see a surprise offensive where the Ukrainian military was supposed to fold quickly and the whole battle over as soon as it had begun, like with Crimea, but instead has turned into a meat grinder where his troops are getting cut up and Russia is losing ground. To a guy like Putin it’s awful and embarrassing. The entire Western world is sending the Ukrainians money and advanced weaponry, and it is working. And to make it even worse Zelenksy turns into a worldwide hero.

Like with the lead up to the Ukraine invasion Putin, Lavrov and Medvedev are warning Western countries to not get involved, but nobody is responding. Instead the US is pushing harder and Blinken is holding press conferences saying this is a great opportunity to decimate the Russian military so it can never be a threat again.

"We want to see Russia weakened to the degree that it can't do the kinds of things that it has done in invading Ukraine," Austin said at the news conference. "So it has already lost a lot of military capability. And a lot of its troops, quite frankly. And we want to see them not have the capability to very quickly reproduce that capability."

Now the Russians are throwing the ‘n’ word around a lot (review how many senior Russians have been on the news with this message lately) and I increasingly wonder what will happen if Russia starts to get pushed back more in the Ukraine. I know it is unimaginable, but I see the same pattern as before the war. Putin is consistently giving us warnings and must feel he is being clear and patient in communicating what he will do and yet, nobody is taking him seriously. I really hope this is not what is coming, but I never expected the war in the Ukraine either.

Karma is a Switchblade Kamikaze.

On the subject of the Ukraine I had to share this. CBS NEWS had a segment on the new Switchblade drone the US military is sending to the Ukraine. It is developed by a a defense company called Aerovironment based in Virginia. It’s a technically amazing drone which is launched from a portable tube and then controlled by a soldier on the ground with a tablet. The soldier and her tablet drive the drone on a kamikaze dive bomb run into any tank, or artillery installation just like playing a video game.

The crazy thing is the CEO of Aeroviroment, Wahid Nawabi, actually grew up in Afghanistan in the 1980’s until the age of 14. Wahid remembers the scary Russian attack helicopters in Afghanistan, but also remembers how US Stinger missiles were critical in beating back the attack helicopters and turning the tide in the war. Wahid says he hopes the Switchblade will be for the Ukraine what the Stinger was for Afghanistan.

Isn’t that nuts? Imagine you are a Russian helicopter pilot flying around Afghanistan strafing targets, shooting rockets, blowing things up, etc. and then what are the chances that one of those little kids running around in the chaos below is going to emigrate to the United States, finish high school and then go to the University of Maryland at College Park, earn a degree in Electrical Engineering and then become the CEO of an advanced weapons company which 40 years later will develop a lethal drone which is going to mercilessly dive bomb Russian tanks while there is nothing you can do about it. I mean what are the odds of that? Only in America.

https://www.cbsnews.com/video/the-switchblade-kamikaze-drone/#x

The Afghani boy.

Picnics and Mountain Biking.

My in-laws are visiting and the weather is expected to be nice, so the plan is to take them for a picnic. Maybe when it’s over I’ll also get in a mountain bike ride too.

Have a good weekend.

Erik