I have been bullish on gold since at least early March.

Fundamentals supporting the uptrend remain in place and enhanced.

Gold, in my opinion, is a good asset for which technicals are relevant; they remain supportive.

Profitable large-cap gold mining stocks may offer continued alpha relative to bullion.

Gold may therefore serve as a worthwhile hedge for investors long conventional assets, and may offer alpha in its own right.

Introduction

As a blogger, I turned bullish on gold (IAU) around September 2009 as it began to challenge its Q1 2008 all-time high around $1000 (all gold prices are per ounce). Since then, gold has risen at a price around 6.2% per year. This is far below the returns from the S&P 500 (SPY), as well as lagging returns from long-term Treasury bonds (TLT).

I remain bullish on gold, a stance I expressed in a March 2 article centered on bonds as the crisis began to intensify, which devoted a section to gold titled simply:

A positive comment on gold.

The key point in this section was this:

As government bonds in the developed world move to zero or negative real returns… the fundamental case for gold has strengthened.

Gold futures were then at $1587.

I devoted an article to the metal on April 6, “Gold Is Good: Why I’m Adding In A Deflationary Meltdown.” Bullion was up to $1649. The basic point was that even though the US was in a deflationary meltdown, the authorities would “print” enough new dollars ex nihilo to make gold more valuable in USD terms.

These views worked out well so far. Gold per the futures market closed Friday at $1766. Per Kitco, spot gold closed around $1744.

For the rest of the article, I will focus on gold bullion ETFs. The major ones I track are the ones from iShares (IAU), Aberdeen (SGOL) and SPDR (GLD). After a review, I sold all my GLD due to higher operating costs without commensurate advantages over, say, IAU, which is larger than GLD. SGOL currently has marginally lower operating costs than IAU, with good liquidity. I am long IAU and SGOL and may add soon, for the reasons discussed next. Later in the article, I will comment briefly on some of the gold miners.

Because gold has no income stream as stocks and bonds do, technical analysis may be worthwhile, so I’ll start with that.

Attractive charts for gold

Kitco presents several moving average charts for gold, of which the 5-year chart is representative:

5-Year Gold London Fix PM Daily with 60- and 200-day moving averages
gold Technical chart [Kitco Inc.]

I like this chart, and since I think everyone knows the short-term gold charts, I’ll present this, which is very interesting and which I look at bullishly. From Finviz, a multi-decade look at another potential giant move up from a prolonged rounded bottom formation:

The prior move on the monthly charts was about 7X, from about $260 to about $1800 (spot gold peaked around $1910). If we assume that about $1020 was the reaction low since the 2011 high (set in late 2015/early 2016), then another 6X-7X move from low to high suggests at least $6000 as a multi-year target.

Now to my opinions on why gold looks like at least a good hedge against conventional assets (stocks, bonds, cash) and potentially a source of alpha for an undetermined period.

Gold benefits from the imperative to inflate – especially in the COVID-19 era

Financial systems in the modern, post-gold standard age have run on what has proven to be a fiction, namely that central governments issue debt that has to be repaid. What we have learned is that they will work with their central banks to have the banks monetize debt as needed to keep price inflation positive. As veterans of the system may admit from time to time, keeping the money supply growing fast enough to keep prices rising makes it easier to initiate new programs without having to cut old ones. What happens is that the cuts become cuts in real spending but not in nominal dollars (if in the US).

Another reason for lots of money printing even in quiet is to keep interest rates positive and allow somewhat troubled debtors to pay off much or all of their debts via inflation if necessary.

These and related reasons seem quaint, however, with the COVID-19 crisis. In the gold standard days, similar depressions in economic activity, such as in 1920-1 or 1937-8, would see gold appreciate simply by holding its value while the price level of goods and services declined.

In today’s era, with fiat money untethered from gold and thus able to be created freely by a government and central bank working together, the general price level is closely controlled by the authorities, and gold becomes the fluctuating variable. Thus, it would be no surprise that on Friday, with the realization that a second COVID-19 wave was hitting a number of states, gold surged along with COVID-19 plays such as Gilead (GILD) and Regeneron (REGN).

This suggests even weaker economic performance than expected, which, by today’s peculiar math, means even greater money creation than thought, and thus is bullish for gold prices.

Then, we have the political situation. I will concentrate on the US, but there are more widespread problems.

With what has occurred in the US the past several weeks, in this presidential election year, who wants to bet against a long, hot summer by being bearish on gold?

Gold miners look interesting

While I continue to not be a fan of silver (SLV), as it has important industrial uses and I am not bullish on that sector at this point, the other important asset play that ties closely to gold is the larger gold mining companies (GDX) and the junior or highly speculative gold mining sector (GDXJ).

Miners are a tricky sector to value. Either gold in the ground has a relatively large value relative to bullion, or it is just a (temporarily?) stranded asset with potentially minimal or no profit potential. Is a gold mining stock an asset play or just an economic interest in an operating company? These stocks have traded both ways.

Therefore, I offer up the view that valuing gold mining stocks is really difficult, and that technical analysis, i.e., momentum investing/trading, makes sense. So, first, let’s look at a gold ETF versus SLV versus GDX (in blue) and GDXJ on a 1-year time frame:

Chart

This shows SLV lagging all the gold assets, so I will discuss it no more.

It also shows GDX marginally beating GDXJ, and in addition, stocks in GDX tend to pay a dividend.

So that leads to the thought that profitable, large-cap miners with dividend-paying ability may be worth considering.

A set of screens I have used, incorporating both technical and fundamental analysis, led me to go long the following:

This is how they have performed over the past year versus GDX (again in blue):

Chart

All have performed similarly, and very well, versus the metal.

I would point to three fundamentals favoring miners now, namely favorable input price trends of all three major inputs to their COGS, namely cost of:

The major negative would be COVID-19-related costs and related production disruption.

Note, among many other points, that none of these companies are limited to gold (or gold and silver) mining.

Risks

Gold has a relatively short history as an asset class rather than as money itself. Whether it will ever be money again, and on what time frame, are important questions I am not addressing now. But the uncertainty of what gold actually represents as a store of value is one risk.

Another risk to a major overweight in gold-related assets is a rapid return to “normalcy.”

Risks related to ETFs that purport to own bullion involve fraud or theft, or lack of liquidity of the fund from a trading perspective.

The risks related to gold miners are many.

Please consider all these and other risks before purchasing any precious metal investment in any form.