Is Gold a Pet Rock or Shiny Saviour?

Have you seen the latest Marvel movie, Captain America: Civil War?

Sam Volkering, Editor of Australian Small Cap Investigator, compared the film to the supercomputer — Watson — in Money Morning this weekend.

According to Sam, ‘IBM estimate there will be 1.5 million open cyber security jobs by 2020. They also predict this will lead to a huge skills shortage.’

While this sounds good for jobs growth, it’s even better for the world economy.

If there’s an internet security revolution, Watson could make a huge impact. Hopefully it can replace our bench warming politicians.

Imagine being able to vote on policy issues using your TV remote. Watson — with its state of the art cyber security system — could collate the votes and then tell the politicians what Australians really want. Now, that’s a democracy!

This dream is still some time off.

In the meantime, let’s talk some more about movies, the global economy, and gold.

Can you handle the truth?

Have you watched the blockbuster Hollywood film, A Few Good Men?

I’m going to assume you have. It’s an absolute classic.

I watched it again over the weekend. Strangely, it got me thinking about financial markets.

Remember the line, when Tom Cruise said, ‘I want the truth!’ and Jack Nicholson famously replied, ‘You can’t handle the truth!

What struck me is the quote’s relevance to gold. At the moment, most punters believe the next phase of the gold bull market has arrived.

I don’t agree.

This is a merely a gold bear market rally. I’ve explained why to Resource Speculator readers at length. I shared a bit of my research with you in Money Morning last week, here and here. I won’t flog a dead horse and repeat old news. Instead, I’ll share a reader’s reply with you.

Hi Jason, Sorry you are not aboard the gold rally and as for Dudley read what Bill Bonner thought of his 2 rate rises yesterday!’

Money Morning reader, Bruce

An enlightening email.

Bruce, thanks for your comments, but there’s no need to apologise. The gold bull market hasn’t started.

Legendary resources investor Rick Rule says, ‘You are either a contrarian or a victim of the times.’ The word ‘contrarian’ means, ‘A person who opposes or rejects popular opinion, especially in stock exchange dealing.

Indeed, I’d expect most gold bugs would call themselves contrarians. Gold bugs believe that, when the ticking debt bomb explodes, the stock market will crash and gold will fly through the roof. Unfortunately, this correlation’s never happened in history. For this reason, if you can think logically and reject this popular notion, you’re a contrarian.

Most punters see higher prices — or lower prices — and think the party — or nightmare — won’t end. In the end, it often doesn’t bode well for the bandwagon investor. The contrarian investor, on the other hand, generally walks away with the biscuit.

Red flag: the mainstream’s bullish on gold

For example, remember when the mainstream called gold a ‘pet rock’ in July 2015?

At the time, Greece — a bankrupt nation — was lying on its death bed. The majority was shocked that gold couldn’t rally during the times of turmoil. It appeared nothing could save it, and so the mainstream turned bearish. Of course, before you knew it, gold rocketed higher. Punters who bought gold stocks at the time, on average, have doubled their money.

The mainstream quickly changed its tune. It’s now pro-gold. ‘”We’re recommending our clients to position for a new and very long bull market for gold,” JPMorgan Private Bank’s Solita Marcelli said Tuesday on CNBC’s “Futures Now.”

Everywhere you read, gold has entered a new bull market. elaborated on the story over the weekend,

“The biggest reason behind the nice pop in gold prices is the fact that the U.S. dollar [index] peaked at 100 last December and climbed down to around 94-95,” said Colin Cieszynski, senior market analyst at CMC Markets.

The rise in the price of gold has caught the attention of a number of prominent hedge fund managers, including Stanley Druckenmiller, who earlier this month told Sohn Conference attendees he was very bullish on gold and bearish on the stock market.

His reasoning behind the bullish case for gold and a bearish case for stocks has to do with the Federal reserve’s years-long ultraloose monetary policy, which in Druckmiller’s opinion has created “reckless behavior” among corporations that have taken out too much debt.

Paul Singer, another hedge fund manager, said that gold’s first-quarter rally is probably just the beginning of a rebound. His reasoning behind the rally in gold has to do with global investors losing faith in central banks.

Commodities investor Dennis Gartman said Friday on CNBC that he has become more bullish on gold as inflation picked up.

The mainstream media’s clearly bullish.  But, what if they’re wrong? It wouldn’t be the first time.

It’s not if, but when gold will crash

Remember the Global Financial Crisis of 2008/09? If you don’t, I’ll give you a refresher. Here’s a chart showing the US dollar gold price.

Source:; Resource Speculator

Click to enlarge

The chart shows that gold crashed by roughly 34% from top to bottom. It took around seven months. Moreover, when the financial meltdown hit, the mainstream was bearish on stocks for years. When gold plummets, I expect it to be no different. The mainstream is likely to remain bearish for some time.

While I can’t tell you when gold will crash. I expect we won’t be waiting much longer.

The world’s facing another banking crisis in the months ahead. But this time is should kick off in Europe. The commented on the Italian banking crisis last week,

Shares in Banco Popolare plunged 14 percent on Wednesday after a surprise first-quarter loss driven by loan writedowns — the main focus of investor concerns over Italian banks.

Banco Popolare booked loan writedowns requested by the European Central Bank as a condition for approving a planned merger with Banca Popolare di Milano that will create Italy’s third-biggest banking group.

Popolare Milano lost 10 percent to 0.50 euros, against a 3 percent drop in Italy’s banking index.

Italian banks have lost nearly 40 percent of their market value so far this year, weighed down by concerns they could need additional capital to shoulder losses from sales of bad loans that rose to 360 billion euros ($410 billion) during a long recession.

In my view, when the Italian banking system collapses, the gold price will crash. If history repeats, this won’t bode well for Aussie gold stocks. You’ll be able to buy them for cents in the dollar.

I’ve stayed clear of the gold miners for many reasons. If you’re a contrarian and a believer that history repeats, you probably understand why. There should be a better time to buy the gold miners. When this is over, gold’s going to look like a ‘dirty pet rock’.

If you want to buy the best gold miners, and at the right time, check out Resource Speculator here.


Jason Stevenson,
Resources Analyst, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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