Like probably every other major market
move in world history, the bull market in gold is generating
ever-increasing interest. Not surprisingly though, while
the raw price data is absolutely indisputable, there
are a myriad of varying opinions on whether gold is
going higher or lower and why.
Differences of opinion on the markets are fantastic
and ought to be celebrated, not feared. Investors and
speculators have a natural tendency to feel threatened
when others advance opinions contrary to their own.
Instead these differences should be viewed as priceless
learning opportunities. The more perspectives from which
we can view any market, the higher the probability that
we will make the right trading decisions.
Differences of opinion also make markets. If
everyone felt the same way, we would all be buyers or
all be sellers and there would be no counterparties
with which to trade. The markets would grind to a halt!
In addition, a mono-opinion market culture would be
extremely dangerous, breeding stupendous bubbles as
everyone tried to buy and shockingly brutal crashes
as everyone tried to sell.
The diversity of opinions is the spice of the markets,
creating a thriving intellectual wonderland that truly
is the ultimate marketplace of ideas. Personally I am
always excited to learn about different market opinions,
whether aligned with or contrary to my own, as studying
them inevitably deepens my own understanding of these
fascinating markets in which we sojourn.
I am launching this new series of essays in the spirit
of this marketplace of ideas focused on gold specifically.
Rarely do 48 hours of my life pass by without subscribers
and clients writing me and saying something like, "Adam
you say gold ought to go higher in the years ahead but
[Insert Name Here] says that due to [Insert
Reason Here] gold is going to [Insert Outcome
Here]. What do you think about this?"
My hope is that this series of essays can provide a
forum to critique and analyze contending gold perspectives.
I want to do this with a gentle spirit, trying to foster
mutual understanding rather than sowing the seeds of
conflict among competing schools of thought. I have
immense respect for everyone playing in the challenging
market arenas, whether I happen to agree with their
worldview at the moment or not.
Since I will be analyzing ideas and technical approaches
advocated by other analysts and speculators, I think
it is only fair that I subject my own ideas to the glaring
spotlights first. Since 2000 I have been an outspoken
gold bull, unapologetically long-term bullish. I have
written countless dozens of essays
on gold and have been blessed with great realized profits
trading this gold bull to date.
On the very trading day before gold carved its multi-decade
secular bottom in early April 2001 I concluded an
essay with, "History, economic fundamentals,
and logic dictate gold is amazingly undervalued and
due for a monstrous rally. My capital will be ready
for the coming gold rush!" The next day gold briefly
fell under $257 but has never looked back since.
My gold worldview is long-term bullish as I believe
gold is in a massive secular bull market that ought
to gallop higher for many more years, perhaps a decade,
before it fully runs its course. As in all other bull
markets in history though, this long-term bull has been
and will continue to be punctuated by periodic
corrections as prices flow and ebb, taking two steps
forward before one step back to regroup.
Why do I believe gold is in a bull market likely to
run for many years yet? Please allow me to briefly outline
10 major reasons. I have also hyperlinked in some previous
essays that explain some concepts in much greater detail
if you would like to dig deeper to understand my bullish
outlook on gold.
1. Supply and Demand.
The ultimate arbiter of any price is supply and demand.
When demand exceeds supply, prices are forced to rise.
The rising prices work on a chronic supply/demand deficit
from both sides, providing an incentive for producers
to increase production while providing a parallel incentive
for consumers to decrease consumption. Eventually the
rising prices bring supply and demand back into equilibrium
where production and consumption are balanced.
In gold's case, its global demand is growing much faster
than its global mined supply, so the only economic resolution
for this deficit is higher prices to bring supply and
demand back into balance. I'll discuss the reasons why
gold's demand is rising below, so for now let's focus
on why its mined supply just cannot rise fast
enough to meet demand growth.
Unlike almost every other business, gold mining is
totally dependent on highly local geology. Obviously
you can't build a gold mine unless there is gold to
mine! Since gold is so scarce in the natural world,
it is very difficult to find a site with enough gold
to mine economically. And even if you manage to find
such a site after endless exploration, you are totally
at the mercy of local and national governments, all
of which are corrupt and love to extort profits from
captive mining ventures.
And if you manage to find a suitable gold-mining location
and can jump through all the flaming bureaucratic hoops,
you still have to raise tens or hundreds of millions
of dollars to build roads, put up buildings, sink the
shaft, and buy the necessary capital equipment. And
even if you somehow manage to secure financing, it still
takes several years at best to spin operations up to
So not only is gold mining an extremely tough business
plagued with geological quirks and government harassment
and enormous up-front capital costs, but even if you
can overcome all of these stellar hurdles you won't
be selling any of your gold for years. Thus, no matter
how high the gold price travels, it will literally take
years for producers to find new deposits to develop,
mine, and sell.
Gold mined supply is therefore very inelastic
(unresponsive to price) and highly constrained over
anything short of a half decade or so. Today's higher
gold prices will take at least several years for producers
to respond to, and only after these producers
believe that this bull will be persistent enough to
make a big bet on it. The rate of mined gold supply
growth will not grow very fast in the coming years for
2. Long Valuation Waves.
The general stock markets move in great 33-year cycles
known as Long
Valuation Waves. For the first half of these cycles,
like from 1982-2000, stock valuations and prices rise
in massive bull markets. But in the second half, like
from 1966-1982 or 2000-20XX, stock valuations relentlessly
revert back down to long-term averages. We are in
this brutal valuation wave winter today.
While stocks make horrible long-term investments during
the latter half of these Long Valuation Waves, thankfully
commodities and hard assets thrive. Commodities also
move in roughly third-of-a-century cycles over time,
but they tend to oscillate 180 degrees out of phase
to the equity valuation waves. Thus, secular commodities
tops like in the early 1980s coincide with secular equity
bottoms. And secular equity tops, like 2000, coincide
with secular commodities bottoms.
Our current Great
Commodities Bull launched in 2001,
just after the secular top in the general stock markets
after a mighty equity bull lasting for half of a 33-year
valuation cycle. Market history is very emphatic in
demonstrating that the 17 years after this parallel
commodities bottom and equities top should be great
for commodities but very poor for equities. This precedent
suggests commodities should be strong and equities weak
for another decade or so from today.
And indeed commodities capital investment was neglected
for two decades prior to 2001 so production is low while
demand is skyrocketing, particularly out of Asia. Just
as with gold specifically, for commodities in general
constrained supply growth accompanied by accelerating
global demand guarantees higher prices.
Why languish in a secular stock bear when your investments
can thrive in a secular
commodities bull? As more and more investors come
to realize this, their demand for gold and other commodities-related
vehicles will only grow greater and greater. We may
as well bet on the horse most likely to win in the next
3. King of Commodities Investments.
Out of all the ways to invest in a Great Commodities
Bull, gold is the single easiest and safest. Physical
gold is easy
to buy, requires no upkeep, and a great deal of
wealth can be secured and stored in a relatively trivial
volume. Unlike many other major commodities, physical
gold is not perishable and can be stored indefinitely.
Gold has always been the ultimate commodities investment.
For pure investment purposes, every other commodity
falls short of gold. You can hide $1m in gold coins
in an old unused pipe section in your house and no thief
will find it in a million years. If you buy $1m in wheat
though, you will have to purchase land and bins to store
it, and insects and humidity could wreck it in less
than a year if it isn't stored perfectly. Oil may be
the king of commodities in general, but try to get zoning
permission to build a giant tank to store $1m worth
of crude oil in your backyard!
Silver is ultra-volatile and one of the greatest speculations
in history, but it is inferior to gold as a store of
wealth. In addition to its brutal gut-checking price
volatility, its value-to-volume ratio is vastly
lower than gold's. $1m worth of silver weighs far more
and takes up a great deal more room than $1m in gold.
For investors wanting to deploy capital into the secular
commodities bull, gold is the most logical choice today
just as it always has been.
4. Ultimate Alternative Investment.
Some investors will buy gold to ride the commodities
bull, while others will buy gold to escape the equities
bear. This distinction may seem subtle, but it is very
important. Gold is a natural destination for equity
flight capital since it is the ultimate alternative
investment in world history.
Mainstream financial investments are virtually all
intangible paper. All of the stocks and bonds we own,
even all of our bank accounts, are ultimately nothing
more than someone else's promises to pay. If
these promises are not honored, then the stocks and
bonds are worth no more than the paper on which they
are printed. During the descending half of Long Valuation
Waves, after enough years of punishment investors' confidence
in paper assets wanes. Remember the 1970s?
Gold is the ultimate alternative investment because
it is tangible. It is a real physical asset that has
intrinsic value in and of itself, never dependent
on someone else's mere promises to pay. Since gold is
fully independent from the paper financial system and
its underlying fragile web of promises, it has long
been perceived as the most ideal safe haven when investors
Interestingly, as equity flight capital bids up gold
prices in the years ahead it will create a virtuous
circle that attracts even more capital. Gold, like all
investments, becomes more attractive to more people
the higher it goes. This is contrary to normal
supply-and-demand profiles, where demand becomes lower
at higher prices. In gold's case investors bidding up
its price end up putting it on the radars of even more
investors, who bid it up further and accelerate the
5. Relentless Fiat Currency
Inflation. Speaking of paper, every national
currency on the planet today is pure fiat, just paper
monopoly money backed by nothing but faith in
the issuing government. Since today's monetary supplies
have no roots in reality, governments can and do grow
money much faster than the underlying pool of goods
and services on which to spend it. The US dollar has
not been backed by gold since 1971.
When money supplies grow faster than underlying economies,
soon relatively more money is bidding on relatively
fewer goods and services. This increase in money supply
is, of course, the scourge
of inflation. Inflation is a diabolical and immoral
stealth tax imposed by governments on their unsuspecting
populaces. Ordinary people work hard for a lifetime
saving money, but when they retire they find that their
money will buy a lot less than it did back when they
As more and more investors perceive the dire threat
of inflation to their families' futures, they will naturally
migrate into gold. Gold keeps pace with inflation, buying
roughly the same amount of real goods and services regardless
of currency in circulation. In the 1920s one ounce of
gold would buy a decent men's business suit at $20.
Today one ounce of gold at $425 will still buy the same
grade of suit, while the original $20 in paper won't
even buy lunch!
While paper money supplies tend to grow by 5% to 8%
annually in the First World thanks to irresponsible
and unaccountable central bankers, the newly mined physical
gold supply rarely exceeds 1% a year in growth. This
stable and very low growth rate is why gold has been
the ultimate form of money for six millennia now. With
fiat currency growth rates far exceeding the gold supply
growth rate, it is inevitable that relatively more paper
will chase relatively less gold, bidding up its nominal
6. Negative Real Rates.
The first corollary to fiat inflation is today's brutally
low or negative real rate environments, where bond investors
either break even or actually lose purchasing power
by the mere act of lending out their hard-earned capital.
When the rate of underlying inflation exceeds the nominal
interest rates available in the markets, bond investing
becomes a losing proposition.
Free markets hinge on the crucial concept of mutually
beneficial transactions. The bond markets are where
savers, who consume less than they earn, meet up with
debtors, who earn less than they consume, to consummate
capital transactions. True free-market prices of this
money, or interest rates, provide a reasonable return
to the saver and a reasonable cost to the debtor, a
mutually beneficial transaction. Interest rates
should always be set by the free markets instead of
the abomination of the Fed.
But with today's artificially low interest rates, it
is nearly impossible for bond investors, savers, to
get a fair return on their capital. If they can only
earn 3% on their capital but inflation is running 4%,
then they actually lose 1% of their purchasing power
every year. They are punished for being savers, something
Greenspan and his minions absolutely revel in for reasons
that escape me. It is saving that should be encouraged
and debt that should be punished if a nation truly wants
to grow its wealth!
As such, when central banks artificially manipulate
interest rates too low bond investors gradually pull
out of the rigged market. Since they can't beat inflation
in bonds, they gradually migrate into gold so they can
at least maintain their purchasing power. Negative
real rate environments are one of the most bullish
scenarios imaginable for gold investment demand, since
it drives capital out of bonds and into gold.
The Long Valuation Wave winter will drive exasperated
equity investors into gold, but the unfair and artificially
gutted interest rates will drive fed-up bond investors
into gold. It is foolish to allow a central bank to
force savers to subsidize wanton debtors. The savers
may as well just buy gold to ride out the inflationary
storm and say to heck with the debtors taking advantage
7. Central Banks Always Lose.
Of the roughly 150,000 metric tonnes of gold thought
to be mined in all of world history, today central banks
control about 20%, 30,000 tonnes. Since central banks
rightfully consider gold to be a threat to their dishonest
fiat regimes, investors sometimes fear central bank
intervention in gold. Surprisingly though, central banks
are probably the worst institutional gold traders in
One of the most foolproof indicators that a secular
gold bear is ending or a secular gold bull is getting
underway is central bank sales. Like the Bank
of England's recent fiasco of dumping gold at a
multi-decade bottom, for some reason central banks tend
to sell at exactly the wrong time. Central bankers,
amazingly enough, are human too and subject to the same
greed and fear as all speculators. It is only at the
end of long demoralizing bears when they start believing
Keynesian propaganda that gold is a barbaric relic and
think about selling.
And when they do sell, usually near multi-decade bottoms,
their gold sales are always very temporary in impact.
The only way to control a global price is to
put a gun to the head of every buyer and seller
of that particular commodity on the planet. 120,000
metric tonnes of gold, or 80% of world supplies, are
not controlled by the central bankers. Investors
buying and selling this vast majority of non-official
gold ultimately determine world prices through their
supply and demand. The central bank tail can't wag the
bull for long!
Betting against central banks on gold is the ultimate
contrarian gold play. In the early 2000s they were selling
aggressively and remember what happened? Did gold go
from $255 to $200? Nope! Instead it went from $255 to
$455 despite the heavy central-bank liquidation.
Expecting central banks to seriously hinder a secular
move is like expecting a bureaucracy to be efficient,
a very low probability bet. They are all talk with very
little if any long-term leverage in gold.
8. Information Free Markets.
For all of human history until 1995, large organizations
like governments had a vast advantage over individual
investors when it came to information. But since the
World Wide Web started growing popular outside of academia
in the mid-1990s, the inherent information asymmetry
working against individuals has vanished. Today a cheap
PC and broadband grants you information-gathering capabilities
vastly superior to those of entire empires in world
Gold is the ultimate free-market asset and currency
and thrives in eras when information flows the most
freely. Today's Information Age is witnessing the greatest
free-flow of information in world history, far beyond
the wildest expectations of empires past. Thanks to
the ease of learning about anything instantly from your
own home today, governments can only pull the wool over
the eyes of its citizens who willingly choose
to remain ignorant.
Today investors around the world can easily learn about
monetary history, stock-market history, gold, the immoral
stealth tax of inflation, and countless other crucial
core topics essential to long-term wealth building.
Thanks to the Internet governments no longer have a
monopoly on monetary truth. Investing in gold is the
inevitable outcome of learning more about the treacherous
history of markets and money, not to mention government.
The dazzling Information Age is also facilitating the
rebirth of private 100% gold-backed currencies,
this time in the form of digital
gold. Why store your transactional money in the
form of rapidly inflating fiat when it could be stored
in digital gold and hence never losing purchasing power?
As gold-backed digital currencies gain popularity, demand
for physical gold to back them will continue to grow.
9. The Rise of Asia. With
China destined to become the next superpower while the
West wanes, the locus of global economic might is shifting
to the Far East. Unlike Western cultures like us Americans
who are brainwashed into thinking of gold as a barbaric
relic, inferior to paper assets, Asian cultures still
have strong affinities for physical gold. A great example
is Indian families storing wealth in the form of intricate
As Asian citizens and investors grow wealthier, their
traditional love of gold will ultimately lead to huge
amounts of capital shunted into physical gold as they
diversify their investments. As Asia's hard work leads
to greater affluence, its per capita gold investment
consumption will utterly dwarf that of the West. While
an average (read non-contrarian) American investor may
have less than 1% exposure to gold, an average Asian
may want 10% or even 20% of his or her portfolio invested
Even if the average Asian remains poorer than an average
American in an absolute sense for another couple decades,
the combined effect of hundreds of millions of
newly-liquid investors buying small amounts of physical
gold could be staggering. I suspect that if Western
central banks are dumb enough to dump their entire 30,000
metric tonnes of gold in the years ahead, the awakening
Asian giant will collectively swallow it all up without
even breaking a sweat.
Asia is probably the single biggest gold investment
demand story in world history. It should ultimately
dwarf US equity flight capital and US bond flight capital
and could very well lead to the biggest gold boom the
world has ever seen.
10. Technical Proof.
The only sure way to understand true underlying supply
and demand fundamentals is by observing price action
over a secular period, at least several years. If global
gold demand is really growing faster than global gold
supply, then the gold price has to rise. There is simply
no other economic alternative in a free market! And
make no mistake, the gold market is free until every
single buyer and seller on Earth can be physically coerced
by a single entity.
The chart below shows our awesome secular gold bull
to date, the proof of the pudding. For about four years
now, a secular time span, gold demand has exceeded gold
supply driving up prices. If it was the other way around,
if supply, including central bank selling, exceeded
demand, this would be a downward-sloping bear trend.
Gold has climbed higher in US dollar terms for four
years in a row now, with annual percentage gains noted
on the X-axis. Bull to date the Ancient Metal of Kings
is up 77.4% as of late last year. Gold's long-term support
lines have held rock solid for its entire bull, running
parallel with its strong upward-sloping 200-day moving
average. Gold has carved five major higher interim
highs and five major higher interim lows, an unmistakable
secular bull fingerprint.
This gorgeous secular
gold bull chart would never have happened if gold
demand was not growing faster than gold supply in the
last four years. Nor would it have happened if the rampant
central bank selling since 1999 was anything more than
a temporary nuisance. A multi-year secular trend is
beyond argument, as it reflects bullish underlying supply
and demand fundamentals for gold.
Conclusion. I hope these
quick macro thoughts help clarify why I remain long-term
bullish on gold. While whole books could be penned on
each of these 10 major reasons why I am bullish, I hope
the general flavor was communicated here.
Now that I have a baseline established and my biases
are exposed and on the record, I am looking forward
to delving into contending gold perspectives in future
essays in this series. Other gold bulls believe other
things and there are even prominent gold bears today
forecasting new multi-decade lows in gold. All
of these perspectives are valuable to analyze and provide
worthy pursuits to diligent students of the markets.
If you are with me in the long-term bullish gold camp
and are interested in actively investing in this gold
bull, you may wish to consider
subscribing to our acclaimed Zeal
Intelligence monthly newsletter.
My partners and I have been painstakingly analyzing
virtually every publicly-traded gold company over the
past four or five months and are starting to delve into
our extensive work with gold juniors in the upcoming
March newsletter. Few speculations offer greater leverage
to gold's bull-market gains than the very best junior
In the meantime, it is in the best interest of all
serious students of the markets to consider perspectives
contrary to our own. Even if we reach the conclusion
that a contending gold perspective is lacking in some
way, the mere act of studying and thinking about it
will increase our own understanding. And the more we
understand, the more successful our trades ought to
Adam Hamilton, CPA
February 18, 2005
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Mr. Hamilton, a private investor
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