Sunday, August 31, 2014

My Longer Term Case For Gold

I know that a few people think that I'm one of those tinfoil hat fringe blogger, every once in a while talking about gold and other armageddon and apocalypse scenarios. Personally, I believe in market cycles and deep value investing. I can see how it makes sense and works. In essence, I don't care how I make money, I just care that I do. Whether you believe me or not, I'm going to lay out some long term views on gold.

First off is of course Tiho. He recently wrote 2 posts regarding gold here and here. The first article is more recent and talks about how rare the current drawdowns and annual loses of gold is. The second article compares the US stock market to gold in terms of performance, which ends up showing a rather ominous mirroring.

Essentially, each of them have 1 graph, which is the same. That is the 3-year rolling annual returns of Gold as an investment.

The graph only starts from the 1970s because that was when gold was finally broken from its currency peg and entered the free market.

The argument here is in the 70s, gold reached a bubble twice, and 3 year rolling performance was just as bad as the current one. This is very unusual because usually when there is a deep upward spike, there is a deep downward spike because of overcorrection. We are seeing a deep drawdown although there was not any significant spike to the upside, at least not like anything we've seen twice in history already! This is quite unusual.

Jesse's Cafe Americain is a pretty good resource if you're really into the precious metals. I don't personally follow it because I find that too much information, especially in the gold realm will create biasness.Nevertheless, a good article deserves some attention.

What they have noticed is that the Coppock indicator has just recently flashed a buy signal. The last time the signal generated a buy signal was back in mid 1998 when gold was bouncing around $300 the entire year. Sure, it might have been a bit early and gold only finally bottomed out in mid 2000, but this indicator is really for the long-term investor. The Coppock indicator is best used as a tool to help see the major trend change of a long cycle, which seems quite likely now.

If rolling returns and a fancy indicator isn't your cup of tea, then perhaps a regression with standard deviations might be a bit more convincing. No magic voodoo going on here, just mathematics. Gold is now trading close to the bottom of it's 2nd sigma lower band. What does that mean? The probability that gold goes up is much much much more likely than it going down. Since they are linked, Silver is performing very similarly as well.

Apart from these longer term "technical" cases, the fundamental reasons to own precious metals still stands. I know that I am really swimming against the tsunami at this point of time, but I continue to accumulate precious metals through BullionStar on down days whenever I can afford it. I have created a Silver accumulation plan back in June and I am currently on target. Although I have very strong convictions for precious metals in the long run, my investment horizon is not long enough for me to make a huge bet on it. Therefore, unlike some tactical allocaters with allocations to precious metals in the range of 80% and upwards right now, I am limiting my allocation so that I can diversify my bets in case I need to redeem my assets early. Of course, since the fundamentals case has probably strengthened, it still makes sense to double down and accumulate even more if prices drop.

One of the toughest things about being a long term value investor is that you are often much too early before the fireworks happen. It is not glamourous, nor is it easy to buy into a horribly performing asset and to "miss out" on the rally going on in the asset class that is the flavour of the week. While it does go against human instinct and it is painful to go through, I think that the pain of being wrong and having losses, especially when you shut down your own logic, is much more painful.

Only time will tell.

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