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I used to be a “Gold Bug” 20 years ago.
So I can tell you for a fact Gold can be a religion for many people. I’ve been there. I’ve seen it.
And I’m feeling kinda Gold-Buggy again now too!
Here’s the thing: What’s the difference between being bullish on an asset and the asset becoming a religion?
Risk management.
I don’t care how high you think something goes. If you own it, I assume you believe the price is going higher.
The real question is, where are you wrong?
If you can’t identify what the market could do to prove your bullish thesis invalid, it’s no longer market analysis.
It’s just religion.
What Is a “Gold Bug”?
The NYSE Gold Bugs Index includes 15 of the largest and most widely owned Gold companies.
Here’s your fun fact of the day: The word “BUGS” in “Gold Bugs” stands for “Basket of Unhedged Gold Stocks.”
Not a lot of people know that.
In there you’ll find the usual suspects: Barrick Mining (B), Newmont (NEM), Agnico Eagle Mines (AEM), Alamos Gold (AGI), Kinross Gold (KGC), and others.
Here’s what that index looks like today, closing out July at its levels in more than a decade:
I have a hard time believing the Gold Bugs Index isn’t going to at least retest those former highs from 15 years ago.
That’s still 50% higher from here.
Dow/Gold Ratio
Back when I was a Gold Bug, the popular chart among the community was the infamous Dow/Gold Ratio.
The Gold Bugs would refer to it as the “Paper Money vs Real Money” comparison.
When you price the Dow Jones Industrial Average in Gold rather than U.S. Dollars you get a “real” look at the stock market.
Don’t shoot the messenger. This is just what they say.
This chart flips all that on its head and focuses on Gold as the numerator and the Dow as the denominator:
So, as this line goes up, Gold is outpacing stocks. When this line is going down, stocks are outperforming Gold.
This looks like a major base to me, with plenty of upside.
That doesn’t mean stocks can’t do well.
In fact, stocks have done very well over the past few years while Gold prices have simply outperformed.
That’s why the line has been going up. That can continue.
In fact, I think it does.
And if Gold is doing well, that basket of unhedged Gold stocks should do well.
Everybody’s Wrong
Gold is just an investment, or a trade, depending on your time horizon.
Gold is not a religion.
It can be to some people. But that’s only for those who can’t separate profits from zealotry.
Gold is not a hedge against inflation.
That’s a lie. We know. We’ve done the math.
Just because this one time 50 years ago when inflation was hot and Gold did well doesn’t make the metal a hedge against rising prices.
We know it’s not.
It’s just another asset.
Gold is worth about $22 trillion in total market capitalization right now, with Silver closer to just $2 trillion.
The total U.S. stock market is worth about $60 trillion, the Bitcoin market just over $2 trillion.
I think it helps put all these assets in perspective.
Trust me, I know.
Back in the day, it was cool to be a Gold Bug. Everyone was making a lot of money. The parties in Vancouver were off the charts.
Then came 2011. Many of us left the cult. Others decided to stay. Some are still there.
Scary thought.
Don’t let any asset become religion. Ride the trend, and when it’s over, get the hell out!
Runs in Gold don’t last forever. But, historically, they do last a long time.
Gold prices just broke out of this 10-year-plus base early last year. If you’re betting against Gold, you’re betting this is the shortest cycle in history.
I’m betting the cycle is just getting started.
And I’m buying Gold mining stocks this week.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs