Is There Still Life in This Old Metal?

Today I want to take a look at the gold and oil markets.

Not because of the North Korean sabre-rattling, but simply to ask whether these two old school assets will continue to hold their value and relevance in a new school, new-fangled, high tech economy.

Gold is money, say the gold bugs. Everything else is phoney.

If that is the case, there are a lot of people living phoney, but highly realistic and extravagant lifestyles.

Young kids are getting rich on electronic gold these days. Bitcoin, ether, and a hundred different ‘ICOs’ (initial coin offerings) are the latest way to take advantage of the excess of US dollars floating around the financial system.

By the way, if you’re interested in this ‘future money’, check out Sam Volkering’s latest project.

Who needs gold when ‘fake gold’ does such a better job at making you rich? Phoneys, all of them. Stinking rich phoneys.

It’s a good thing the authorities are only concerned about consumer price inflation, and not asset price inflation. And try as they might, they can’t detect the inflation they want anywhere. So they keep interest rates low, the monetary spigots open, and asset prices bubbling away.

The supply of US dollars continues to flow around financial markets, without making it into goods and services markets.

If you have an idea for a product then, make it a financial one. Don’t waste your time servicing consumers. They’re tapped out. Too much debt and all that.

But there is plenty of money supply waiting to meet demand in financial markets, so get to work there if you can.

And oil?

Does anyone need that anymore?

In 10 years’ time, everyone — apparently — will have an electronic car, and service stations will turn into apartment blocks. The sun, wind and the rain will provide our energy, and fossil fuels will remain in the earth where they belong.

A few weeks ago, the CEO of oil giant Shell announced that he had just bought an electric car. With his ego and small social circle, he assumes everyone will do the same. As a result, he is preparing his company for lower oil prices ‘forever’.

So, gold is an anachronism (again) and oil is not running out. It’s just not needed.

I can’t remember where I read the following saying, but it’s hardly a revelation, so it can go unattributed. It goes something like this: The way to make money in markets is to find the false premise (something that the majority believe in) and bet against it.

Is that the case for gold and oil now?

Let’s look at gold first. In my newsletter, Crisis & Opportunity, I use a combination of fundamental and technical (or charting) analysis to assess stocks or markets. I’ll show you how it works.

Fundamentally, gold is up against it. The trend around the world right now is towards higher interest rates or less quantitative easing. Even if that trend is taking some time to get going, it is happening. Gold struggles in this environment.

This is a premise that the majority believe in. Is it a false premise?

I’m not so sure right now. The global economy is getting stronger. And central banks do want to remove some of the stimulus that they been injecting over the past decade.

As I said, that makes it hard for gold to go on a sustainable rally.

But if the US and global economies started to weaken again, and interest rate policy went from a tightening to a neutral bias, gold would do well.

Instead of guessing which way things will go, this is when I look at a chart for clues.

So let’s have a look at the US dollar gold price chart over the past two years.

After rallying, then tanking, in 2016, gold has spent 2017 trading in a broad range between US$1,200 and US$1,300 an ounce. That range is clearly marked by the green lines.

Source: Optuma
[Click to enlarge]

For me, the way to trade gold is simple. That is, don’t have a big bet either way until it breaks out of its trading range. Until that happens, gold is likely to continue going up and down within the range defined by the green lines.

In the very short term, I think gold is close to correcting again. The recent rally has had much to do with increasing tensions on the Korean peninsula. If the situation dies down, as it usually does, traders will sell gold as quickly as they bought it.

When gold rises on geo-political events, it’s often not a sustained move. You’d much rather see gold move higher on a monetary event. After all, it’s a monetary metal.

To sum up then, like the rest of the market, I’m neutral on gold right now. I’m bullish longer term, but I don’t know when that bullishness will play out, or if indeed it will at all.

That’s why I watch the charts. I want to see gold break decisively above US$1,300 an ounce before becoming confident that a sustained move higher is underway.

In the short term though (as in the next few weeks) I’m wary about a correction, as gold gets closer to the upper limit of its recent trading range.

Let’s see what happens…

For oil, the situation here is even more complex…and even more interesting. In the case of oil, I think it’s trading on a false premise. And that’s worth betting against.

Stay tuned for all the details tomorrow.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia