One of the best books on investment you will ever read is Edwin Lefevre’s Reminiscences Of A Stock Operator. It’s a thinly disguised biography of Wall Street legend Jesse Livermore, regarded by many as the greatest trader who ever lived. I am not alone in having a great affection for the passage in which Larry Livingston (a pseudonym for Livermore) recalls a veteran trader, old Mr Partridge, with whom the firm was extremely unhappy because he was giving “very little in the way of commissions”.
Every time old Mr Partridge was given a tip to sell a stock so that he could buy it back at lower prices, he would thank the tipster politely, smile and just say, “It’s a bull market”. He didn’t want to lose his position. Livermore concludes: “In a bull market your game is to buy and hold until you believe that the bull market is near its end”. “Money is made by sitting, not trading,” Livermore said. “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
The other side of the trade
Should we keep sitting tight? Monday and Tuesday’s violent correction saw gold give back over $200, having hit a record peak above $2,070 last week. Silver lost a fifth of its value. However, to me this feels like a sell-off of the “healthy correction in a bull market” variety. One reason to think so lies in the other side of the gold trade: the US dollar. Gold is priced in dollars and so they have an inverse relationship; a fall in the dollar makes gold cheaper in other currencies. The greenback has been sinking since mid-March, when the US dollar index (a measure of the dollar against the currencies of its main trading partners) was at 103. Now it’s at 93.
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President Donald Trump wants a weaker dollar. He has said so many times. In an election year it matters even more. When the dollar is weak, assets tend to rise and so people feel richer. He wants people feeling rich. They will be more likely to vote for him. If the dollar goes to 88 – and bear in mind that it spent the entire period from 2006 to 2014 below 88 – then gold will be a good two or three hundred dollars above where it is now. On the other hand, precious metals’ collapse this week was precipitated by a stabilisation in the dollar.
The dollar has further to fall
From a technical (chartist) point of view I’d like to see gold come back to around $1,800 or just below, kiss that level and then set off to the races. If the US dollar rally continues then that looks likely. But downward momentum in the dollar is so great that at the moment I have to say I will almost be more surprised if we don’t hit 88 this year than if we do.
The euro in particular looks like it’s begun a new bull market against the dollar. Gold’s strength is not just a weak US dollar story. It is a weak fiat currency story. It is a global money-printing bonanza story. Take sterling. In the first half of 2019, gold was trading below £1,000 an ounce. It began 2020 at £1,150/oz. Now it’s north of £1,500/oz.
A global money-printing bonanza
Circumstances are different from 2011, the last time gold was this high. In 2011, the concept of negative interest-rate policies barely existed. The US national debt was almost half what it is now. The Federal Reserve’s balance sheet was sub-$3trn, compared with $7trn today. The European Central Bank’s balance sheet has tripled since 2011. The Bank of England’s balance sheet has – well, expletives are not acceptable in this magazine.
The US dollar index, meanwhile, was at 73, a full 20 points lower than where it is today. It was, as much as anything, the dollar turning up after 2011 that did for gold and especially, for gold miners. In 2011 the bull market was ten years old. The narratives were tired. This bull market is not mature – it is, what, three, four years old? When did it start? December 2015 at $1,050? Or August 2018 at $1,170? If you say the latter, then we are not even two years in. There are a lot of people out there who are new to the gold story – and it is a persuasive one. I haven’t even been asked to go on the telly yet to talk about gold. It all says this bull market is young and points to higher prices down the road. How much higher?
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