Diamond Head Financial does not own gold and particularly gold miners.
In general, I shy away from investing in commodities and currencies because there are multiple independent variables determining their pricing each of which can be macro driven and therefore difficult to predict with confidence. I do not have the same confidence in predicting the price of gold as I do with, for instance, predicting that the US housing recovery likely to continue, or that Alibaba is going to go public at close to $100 billion in market value (aiding Yahoo which owns 24%), or that Paypal (owned by Ebay) is going to expand in popularity, or that Visa and MasterCard will continue to increase their role as consumer escrow companies as the world becomes increasingly cashless.
That said, I am indeed bearish gold and particularly gold miners for the following reasons:
- Interest rates are not likely to fall and may rise with increased economic activity (driven by housing, which I know first hand is recovering), making gold relatively less attractive.
- The virtualization of world economies, permanent reductions in inventory driven by technology, the emergence of a cashless world–are all driving productivity up in the midst of high unemployment to start with which is keeping downward pressure on inflation,
- Although the band-aids holding Europe together keep the region at risk until there is economic growth to raise all boats (even the leaky ones), Europe is not blowing up and GE now says Europe is improving for them. What happens to gold if Europe does begin to grow again and the risk of a collapse of the euro (which is still priced into the gold price) recedes further?
- The supercyle of a decade of over-investment in commodities is coming to an end and driving commodity prices down in the midst of economic recovery, pressuring currencies from Brazil to Turkey to Russia to Australia. In addition, an interest rate environment that returns to equilibrium rather than being propped up by the Fed is likely to keep investment flows into these currencies subdued. A strong dollar is not historically correlated with an increase in gold prices.
- Gold miners in particular seem to have problems specific to mining such as rising labor costs. Do I really want to invest in someone who digs a ditch and then overpays for other ditch diggers when the cycle peaks?
Gold historically has moved in decade-long cycles. It rose from $35 per ounce when Nixon took the US off the gold standard to $700 in 1980 when Volcker raised interest rates. The price then fell during the next two decades of solid economic growth to $250 per ounce by 2001. From there, it rose to $1900 per ounce where it peaked last year. Given growth prospects ahead for the US and world economics, driven by a housing recovery, a shale-driven energy boom, and unprecedented productivity as the world economy goes virtual, a new decade of downward pressure on gold prices may lie ahead.