“Gold and silver are money. Everything else is credit”
– J. P. Morgan, 1912
Gold.
A shiny yellow metal.
It has always been a hit-or-miss investment – usually more miss than hit. Even though it has no cash flow, dividends, or underlying business to value, it is one of the most discussed investing themes.
When you talk about gold, there is no getting around the famous gold bugs – the true believers, including J. P. Morgan, the founder of the eponymous bank – who love it for its 3,000-year history. Add to that the hope that it will serve as a store of value when inflation takes over, and that it has an intrinsic value that fiat currencies (USD, EUR, etc.) lack. They are convinced that it will survive when the apocalypse comes.
You either believe in the ancient metal or you do not. There is nothing in between. I too am a gold bug, so take everything I say with a grain of salt.
But we have reasons to believe that the stars are aligned.
The future of gold is bright.
Chart 1: An electrum Carthaginian Shekel, c. 310–290 BC, bearing Tanit (Carthaginian Punic goddess)
Source: Wikipedia
A Brief History of Gold
But first, what is all this fuss about?
Gold was the first official medium of exchange for international trade. It was introduced around 1,500 BC by the ancient empire of Egypt. They created the so-called Shekel (chart 1), a gold coin weighing 11.3 grams, which became the standard unit of measurement in the Middle East. The word Shekel simply means “weight”.
Ever since, gold has weathered the rise and fall of empires and seen currencies come and go.
As far as gold as an investment is concerned, we have data from more than 200 years. Since 1800, gold has returned only 0.6% per year after inflation, compared to 3.3% for 10-year Treasury notes and 6.9% for US equities (chart 2).
The return was nothing to really write home about.
And yet gold is back on everyone’s lips.
Chart 2: Inflation-adjusted performance of equities, bonds and gold since 1800
Source: 30.12.2022, Taunus Trust, Konstantin Megas
Gold Moves in Cycles
There are periods in which gold outperforms the market, even for years. Because gold moves in cycles. 7-to-8-year cycles, to be clear (chart 3).
Let’s bring the Egyptians back into play.
The cycle comes from the Bible story (Genesis 41), where Pharaoh’s dream of seven fat cows and seven lean cows is interpreted to mean that seven years of high yields will be followed by seven years of famine.
It seems that the Egyptians not only built pyramids, where everyone wonders how this was possible, but were also able to predict the development of the financial markets 3,500 years into the future.
Compared to equities, gold seems to work well in times of unrest:
- 1976 – 1980, a period of hyperinflation: S&P 500 10.8% p.a. vs gold 56.3% p.a.
- 2001 – 2011, burst of tech bubble & financial crisis: S&P 500 2.4% p.a. vs gold 20.6% p.a.
It is worth noting that gold tends to experience major setbacks or lows every 7 to 8 years. After a prolonged sideways movement, gold has now reached a new high. This is outright bullish.
A new cycle and major gold bull market in the second half of this decade?
This would support gold miners.
Big time.
Chart 3: Gold and its 7-to-8-year cycle
Source: Global Macro Cycle Partners, Weekly Report
A Thing of Their Own
Gold mines are a truly special investment.
They have a bad reputation, make value-destroying takeovers, and fraud and corruption are commonplace. Skeptics also say that gold mines do not move when the market goes up because gold, the underlying commodity, is simply quiet then. But if a bear market hits equities, gold mines are also equities and will also fall. You see, you cannot win either way.
But times have changed.
Most gold companies have restructured their balance sheets, rigorously streamlined their cost structures and are now generating solid free cash flow. They are also extremely transparent about their financial results and have a shareholder-friendly dividend policy.
An exciting prospect for them?
A scenario in which the US economy slips into recession and the Fed ends its monetary tightening cycle is positive for the gold price. And a rise in the price of gold combined with an easing of fuel prices (one of their biggest input costs) would give a double boost to the profits of them.
Anyone who wants to bet on this scenario – recession and interest rate turnaround by the Fed – is well served with gold and gold mining companies.
But as I said. Gold mines are a thing of their own.
And I am a gold bug.
Chart 4: Gold mines (GDX), gold and the S&P 500 over ten years
Source: TradingView
arvy’s takeaway: Gold has been trusted for millennia – a testament to its resilience to the changing tides that transcend epochs and economic storms. It moves in cycles, reflecting ancient Egyptian wisdom, and is now reaching new highs amidst a changing financial landscape. The focus is now turning to gold mines, which we are watching closely, bearing in mind that they are a thing of their own. The shadows of past mismanagement are fading as they streamline their operations, strengthen their balance sheets and strive for transparency.
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