Gold is at a five year low. Even the gold bugs are capitulating.
I wrote a few weeks ago about the changes at Casey Research, but one thing that hasn’t changed is that the remaining Casey employees continue to believe that gold is a good investment.
The case for a higher future gold price is simple to understand. With massive money printing by all governments, fiat currency will eventually lose a substantial portion of its value, and investors will turn to gold and other hard assets to protect their wealth.
As we have observed over the last five years, however, “inevitable” is not the same as “imminent”. Just because something is likely to happen does not imply that it will happen soon.
So why the crash? Lots of reasons:
First, according to the media, everything is fine in Greece, all the problems are solved, everything is wonderful. The ultimate fiat currency that is the Euro has been saved forever, so there is no need for protection from gold. Yup. Makes sense.
Perhaps a more relevant reason is China. For six years we have waited, with baited breath, for China to update their official gold reserves. We know they have bought a lot, but it turns out they didn’t buy as much as the gold bugs had hoped (or at least they have not disclosed as much as was expected). China announced increases in reserves from 1,054 metric tons in 2009 to 1,658 metric tons today, which is a big increase, but not up to the 3,500 level many were expecting, so gold didn’t increase as a result of the announcement.
And of course the U.S. dollar continues to strengthen, and since gold is priced in U.S. dollars, gold goes down while the dollar goes up. Gold is a protection against a weak U.S. dollar, so if the dollar is strong, you don’t need gold, apparently.
Of course if you are a Canadian, the gold price is not at a five year low. It’s actually close to 20% higher than it was five years ago, so for non-Americans gold remains a good hedge against currency devaluation.
So back to Casey Research, and lots of other gold bugs. They are now officially admitting that they were wrong when they suggested that the dip last November was the low point for gold. That’s easy to admit, because it’s obvious they were wrong. However, they continue to preach the same sermon they have preached for the last five years, and that’s the old “every dip is a buying opportunity” speech.
Eventually they will be correct, but when?
Does gold need to hit $1,000? $800?
I have no idea.
So what’s the plan?
Canadian Dollar
For me, as a Canadian, I will continue to hold gold, because the Canadian dollar is also now at multi-year lows. Here’s the Canadian dollar chart for the last 10 years:
Not pretty.
As I have said many times this year, I am holding a significant portion of my investments in U.S. denominated assets. I have a U.S. dollar RRSP and TFSA. Assuming the Canadian dollar breaks below the 75 cent level, I’ll be happy to have the U.S. dollar protection. (Six months ago the dollar was worth almost 87 cents).
What I will not be doing is buying real estate. With the Bank of Canada lowering interest rates again this week (which is why the dollar tanked by one cent on Wednesday), real estate will continue to inflate, at least in the hot markets of Toronto and Vancouver.
Consider: the average single family home in Toronto costs almost $1.1 million. By comparison:
- Chicago – $335,984
- Seattle – $627,889
A 30 year mortgage in the U.S. is 4.3%, and a five year adjustable is 3.1%, and both have increased this year. In Canada you can now borrow a five-year variable rate mortgage for 1.98%.
It’s a federal election year in Canada, so the government must try desperately to keep the housing and stock markets inflated long enough to get re-elected. But the price is imported inflation, because all of the food and other products Canada buys from the U.S. now cost more (our core rate of inflation is 2.2%).
This will not end well.
But the balloon may stay inflated for a while yet.
Keep some U.S. cash and investments. If you are feeling lucky, put some stink bids on gold companies that can still turn a profit at $1,000 gold.
And fasten your seat belts. See you next week.
Gold at 5 Year Low – Interest Rates Dropping
by JDH on July 18, 2015
Gold is at a five year low. Even the gold bugs are capitulating.
I wrote a few weeks ago about the changes at Casey Research, but one thing that hasn’t changed is that the remaining Casey employees continue to believe that gold is a good investment.
The case for a higher future gold price is simple to understand. With massive money printing by all governments, fiat currency will eventually lose a substantial portion of its value, and investors will turn to gold and other hard assets to protect their wealth.
As we have observed over the last five years, however, “inevitable” is not the same as “imminent”. Just because something is likely to happen does not imply that it will happen soon.
So why the crash? Lots of reasons:
First, according to the media, everything is fine in Greece, all the problems are solved, everything is wonderful. The ultimate fiat currency that is the Euro has been saved forever, so there is no need for protection from gold. Yup. Makes sense.
Perhaps a more relevant reason is China. For six years we have waited, with baited breath, for China to update their official gold reserves. We know they have bought a lot, but it turns out they didn’t buy as much as the gold bugs had hoped (or at least they have not disclosed as much as was expected). China announced increases in reserves from 1,054 metric tons in 2009 to 1,658 metric tons today, which is a big increase, but not up to the 3,500 level many were expecting, so gold didn’t increase as a result of the announcement.
And of course the U.S. dollar continues to strengthen, and since gold is priced in U.S. dollars, gold goes down while the dollar goes up. Gold is a protection against a weak U.S. dollar, so if the dollar is strong, you don’t need gold, apparently.
Of course if you are a Canadian, the gold price is not at a five year low. It’s actually close to 20% higher than it was five years ago, so for non-Americans gold remains a good hedge against currency devaluation.
So back to Casey Research, and lots of other gold bugs. They are now officially admitting that they were wrong when they suggested that the dip last November was the low point for gold. That’s easy to admit, because it’s obvious they were wrong. However, they continue to preach the same sermon they have preached for the last five years, and that’s the old “every dip is a buying opportunity” speech.
Eventually they will be correct, but when?
Does gold need to hit $1,000? $800?
I have no idea.
So what’s the plan?
Canadian Dollar
For me, as a Canadian, I will continue to hold gold, because the Canadian dollar is also now at multi-year lows. Here’s the Canadian dollar chart for the last 10 years:
Not pretty.
As I have said many times this year, I am holding a significant portion of my investments in U.S. denominated assets. I have a U.S. dollar RRSP and TFSA. Assuming the Canadian dollar breaks below the 75 cent level, I’ll be happy to have the U.S. dollar protection. (Six months ago the dollar was worth almost 87 cents).
What I will not be doing is buying real estate. With the Bank of Canada lowering interest rates again this week (which is why the dollar tanked by one cent on Wednesday), real estate will continue to inflate, at least in the hot markets of Toronto and Vancouver.
Consider: the average single family home in Toronto costs almost $1.1 million. By comparison:
A 30 year mortgage in the U.S. is 4.3%, and a five year adjustable is 3.1%, and both have increased this year. In Canada you can now borrow a five-year variable rate mortgage for 1.98%.
It’s a federal election year in Canada, so the government must try desperately to keep the housing and stock markets inflated long enough to get re-elected. But the price is imported inflation, because all of the food and other products Canada buys from the U.S. now cost more (our core rate of inflation is 2.2%).
This will not end well.
But the balloon may stay inflated for a while yet.
Keep some U.S. cash and investments. If you are feeling lucky, put some stink bids on gold companies that can still turn a profit at $1,000 gold.
And fasten your seat belts. See you next week.