Gold, The Simple Math
The comments below are an edited and abridged synopsis of an article by John Hathaway
The current pullback in the precious metals sector is a buying opportunity. Since trading at a closing high of $2,064 an ounce on August 6, gold has declined +/-8.34%. Gold mining shares have followed suit. It is possible that gold and mining shares could continue to go sideways/lower until the US presidential election results are known, and even into yearend as the implications are sorted out. Whatever the electoral outcome, the path towards monetary debasement is bipartisan. It is crucial for investors to focus on long-term trends and avoid the distractions of short-term timing considerations.
The strong investment fundamentals for gold and gold mining shares are based on what has been a slow irreversible drift towards significant US dollar devaluation. Paper assets, including equities, bonds and currencies, have underperformed the dollar/gold price since 2000, the dawn of radical monetary experimentation by central bankers. Until recently, gold’s strength has attracted little notice from mainstream investors. Widespread disinterest can perhaps be ascribed to the stealthy, long-term character of gold’s outperformance. In addition, the performance of equities and bonds has been positive over the past two decades, so there has been little incentive to look elsewhere.
Up for discussion: lack of crowd recognition provides opportunity; paper money supply growth will outstrip available gold; a sustainable V-shaped recovery is highly unlikely; bonds and equities have become positively correlated; the HUI/gold ratio measures investor sentiment on gold; are markets priced for destruction; and layer in gold exposure.
