Gold Is Unloved But Still Not Cheap

(This is an excerpt from an article I originally published on Seeking Alpha on March 8, 2014. Click here to read the entire piece.)

Friday’s U.S. employment report delivered strong results yet again. It helped increase expectations of a Fed rate hike by June as iShares 20+ Year Treasury Bond (TLT) and SPDR Gold Shares (GLD) both traded sharply lower.


iShares 20+ Year Treasury Bond (TLT) kicks into a lower gear as the rally seems to be coming to an end
iShares 20+ Year Treasury Bond (TLT) kicks into a lower gear as the rally seems to be coming to an end

SPDR Gold Shares (GLD) looks headed for a retest of 5-year lows
SPDR Gold Shares (GLD) looks headed for a retest of 5-year lows

Source for charts: FreeStockCharts.com

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I continue to like using the relative changes in Google trends on the search terms “buy gold” and “sell gold” as one measure of market sentiment. {snip}



I interpret these data to mean that gold is relatively unloved and even uninteresting to the general public/market. {snip}

As a gold bug, I am highly intrigued by the possibilities of buying gold as a contrarian. After all, my stubborn holding of gold for so many years has been partially based on an assumption that by the time an inflation threat looms its ugly head, gold will already be very expensive, and I will not be smart and/or quick enough to buy just ahead of event. Yet, despite this apparent disdain for gold, gold is still not cheap on a relative basis. {snip}

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The S&P 500 price in gold has seen much better days
The S&P 500 price in gold has seen much better days

Source for data: Yahoo! Finance and The World Gold Council

So no wonder buyers are still not breaking down the doors to buy gold.

There are other good reasons as well. Fundamentally, inflation is simply not a concern for anyone in most developed economies. Central banks are still fighting disinflationary forces and deflationist psychology, both lingering from the financial crisis. {snip}

The balance sheets of major central banks continue growing and growing, and meanwhile we gold bugs are astounded that gold is not double or more its current price. {snip}


In total, these central bank balance sheets continue to grow linearly
In total, these central bank balance sheets continue to grow linearly

Source: “Low Inflation in a World of Monetary Stimulus” by Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe (March 5, 2015)

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Deflationary fears are so pervasive that across the globe, investors are willing to pay the government to hold their money
Deflationary fears are so pervasive that across the globe, investors are willing to pay the government to hold their money

Source: “Low Inflation in a World of Monetary Stimulus” by Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe (March 5, 2015)

Of course, the market is also demonstrating its disbelief in the ability of central banks to hit their inflation targets. Lowe also shows how across the globe headline inflation is below many inflation targets across the globe.

Again, it seems like a sound contrarian move to buy gold exactly when no one thinks inflation will be a problem, but the devil is in the details and the timing. {snip}

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In contrast to gold, the U.S. dollar is VERY loved right now
In contrast to gold, the U.S. dollar is VERY loved right now

Be careful out there!

Full disclosure: long GLD, net long the U.S. dollar

(This is an excerpt from an article I originally published on Seeking Alpha on March 8, 2014. Click here to read the entire piece.)

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