Yesterday’s post on the Ivy Asset Strategy Fund’s current allocation mentioned their reasoning for holding a fairly large amount of gold bullion. They physically hold gold in a vault. Gold has had a lot of air play recently, so here’s some commentary. Disclaimer: I am not a gold bug and have spent relatively little time researching it compared to other investment areas.
Over the most past 20 or so years, gold has not been a good investment. It has trailed virtually all other investment assets in terms of total return. Only over the past few years has gold rallied and again become an investment of popular interest. The thinking is that old is a safe haven in times of turmoil. There is a belief that gold has some relatively stable intrinsic value that allows it to function as a hedge against inflation, deflation, and even monetary collapse.
Frankly, I have not been able to understand this thought process. At one time gold was a useful currency, but not in my lifetime. If I imagine a disaster scenario (extreme inflation, deflation, or outright currency collapse), I still cannot imagine how gold becomes a useful instrument of trade.If I have a gold bar in my safe, do I shave off a sliver to buy some food? Do I go to the local gold exchanger to trade it in for some gold coins they have minted? I just don’t get it. When I imagine a disaster scenario, which is not something I do very often, I imagine that direct barter of goods and services will dominate trade, eliminating any sort of intermediate currency, including gold, altogether. I can’t eat a gold ring, but I can trade an hour or two of labor for a loaf of bread.
Setting disaster scenarios aside, gold has not performed as expected of late. After peaking last March, gold has declined 20% in value (as of today) as the global economic crisis has worsened. The exact opposite of what would be expected if gold truly functions as a hedge.
If you are just a trader, Barron’s is currently running a story that may be of interest. A Bearish Call on Bullion, quotes the Hulbert Gold Newsletter Sentiment Index. This index is currently at a very high level, 75.2%, suggesting that a peak may be at hand if you believe in contrarian indicators.
To put this into perspective, consider that the HGNSI this summer never got higher than 64.3%, even though bullion in July was a lot higher — within shouting distance of the $1,000 level, in fact.
This is not reminiscent of the veritable wall of worry that bull markets like to climb. On the contrary, it appears to be more akin to the slope of hope on which bear markets thrive.
Some of you may object to this analysis on the grounds that contrarian analysis doesn’t really work for gold the way it does stocks. After all, isn’t gold manipulated by the monetary authorities and therefore not a free market?
This objection potentially is legitimate. However, the proof of the pudding is in the eating: Manipulated or not, the gold market performs better when the HGNSI is lower than when it is higher.
That at least is the conclusion that emerged after I submitted more than two decades of HGNSI data to rigorous econometric tests. The inverse correlation between HGNSI levels and the gold market’s direction over the subsequent several months is statistically significant at the 95% confidence level.
This doesn’t mean that the gold market isn’t manipulated, I hasten to add. More than one factor can influence the market’s direction, after all. But the results of my econometric tests do show that government manipulation of the gold market isn’t the only factor influencing bullion’s price.
Those econometric tests don’t amount to a guarantee that gold will now go down, needless to say. But they do suggest that the near-term path of least resistance for gold is down.