- (0:45) - The Behavior of Gold Investors
- (4:35) - The Technology Super Cycle
- (7:45) - The 4 Core Arguments Against Gold
- (12:30) - NASA Mission To Psyche: The Fort Knox of Asteroids
- (22:50) - Trade of the 2020’s: Sell Gold, Buy Biotech
Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
In the fall of 2009, I went on CNBC for an interview about gold with anchor Maria Bartiromo. The yellow metal had just gotten back above the $1,000 level and was making new highs since the financial crisis.
My primary theme was to address the reality of gold doubling to $2,000 and higher if it was truly viewed as a monetary phenomenon.
In other words, since central banks were engaged in long-term support of their economies and bond markets with measures like quantitative easing (QE), their balance sheet expansion was in effect like printing money and therefore the value of gold should go up in relation to that expanded supply of dollars, euros, and yen.
My thesis was not a precise mathematical calculation. According to “gold bugs” like Jim Rickards and Peter Schiff, the real math should send gold above $4,000.
So my idea was not based on what price gold should ascend to, but rather what price could be achieved because enough others believed it should vastly appreciate due to central bank QE and the coming tsunami of asset inflation.
The Behavior of Gold Investors
For me, it was simply a behavioral bet about what an asset bubble could achieve when a perfect storm of QE and true believers collided. It would also help if global money managers at large institutions were advising their wealthy clients and pension funds to invest in gold as a "safe haven" asset to protect against the vagaries of competitive currency devaluations.
The true believers were all over financial TV and advertising telling average folks that they needed to buy a "hard currency" like gold to preserve their wealth. In essence, turning dollars into gold was the safe bet because the former was certain to lose value over time to the benefit of the latter.
Sure enough, gold soared for nearly two years until the mania peaked just above $1,900 in the summer of 2011.
Unfortunately, I didn't make any money off of that trade because I didn't have enough faith in the idea. I was too scared of the volatility in such a euphoria-driven asset class.
And, at heart, I really didn't believe gold was worth $2,000 an ounce. After all, I had just finished a ten year stint as a currency trader at the old Chicago Mercantile Exchange, now CME Group (CME - Free Report) , and in that role I had internalized the financial revolution that Milton Friedman launched when he helped CME create currency futures in 1971 after President Nixon abolished the gold standard.
Gold became effectively de-linked from the financial system and there was no going back. Especially once central banks proved they could defend the global economy from collapse using fiat currencies. Debt, good or bad, was the lubrication for modern economies.
But there was another theme that was even more important than the mechanics of finance: technological innovation.
The Technology Super Cycle
I'd been an eager student of how technology and innovation changed history and civilizations for millennia. But nothing hit me harder than holding my first Apple iPhone in my hand in 2010.
“How and why,” I wondered, “should a piece of metal be worth more than this magical device in my hand that could do so much for me?”
And the more I expanded my knowledge of and investing in companies creating advanced technologies like computer chips and biotechnology cures, the more I became convinced of what John Maynard Keynes concluded nearly a century ago: gold was simply an obsolete antiquity, a “barbarous relic.”
Soon I was convinced I could trade gold -- but as a gold bear, shorting the yellow relic using inverse ETFs.
And gold went down from above $1800 to under $1200 from 2012 to 2015.
I thought it might keep going under $1,000 soon, but in 2016, central banks had to restart their QE money printing engines and gold put up a good fight to spend most of its time above $1,200.
Fine with me. I was so immersed in studying semiconductor companies like NVIDIA (NVDA - Free Report) and biotech companies like CRISPR Therapeutics (CRSP - Free Report) that I didn't care what investors did with gold.
And in 2017, I summed up my ideas in special report for Zacks Confidential...
The Technology Super Cycle
In that report, I was trying to answer two burning questions I had about the economy that I knew were related to technology and innovation:
1. Why was government productivity data so muted in a world of hyper-speed technological efficiency and disruption?
2. Why was inflation so tame when stock market capitalization and investor wealth were soaring?
I dealt with both questions by searching for simple, convincing data and reliable economic sources. Once I found those answers about "weak" productivity and "missing" inflation, I used them to support my personal theory that we were in the midst of a Tech Super Cycle, driven by areas like advanced "big data" and mobile computing, Artificial Intelligence, networks and sensors (IoT), and Biotechnology.
To get a copy of that report, just email Ultimate@Zacks.com and tell 'em Cooker sent you.
My 4-Point Argument Against Owning Gold
My core fundamental argument against gold is that it has little fundamental value. Other than the jewelry business, it generates no earnings or income. In fact, there is a net cost to own and store gold that should bring into question old ideas about it being a "store of value."
So if it has only minimal industrial utility, a little more jewelry value, and then there is some nebulous part of gold's value that is still related to its old, antiquated role of money since central banks are printing so much, what's the rest of its value all about?
It's all about psychology, about the true believers who want to have a hedge against the monolithic banking system and its corrupt bureaucrats. In the end, when fiat economics collapse, the little guy with his basement full of gold bars will triumph. Or so goes the prophecy.
I recently reviewed my anti-gold thesis as a guest on the MarketEdge podcast with Tracey Ryniec...
Gold is Hot: Should Investors Be Buying?
I'll quickly summarize those 4 points here, but that podcast is free to listen to anytime:
1) Fiat central banking is here to stay. We are not going back to a gold standard, ever. And the rise of PayPal, Square and Bitcoin confirm the primacy of the digital economy.
2) Technology drives economics and wealth creation. Innovation will always trounce a heavy metal bar that costs roughly $750 an ounce to produce, offers little utility and produces net costs for storage and insurance (even in a world of low interest rates).
3) Inflation is best beaten by investing in equities, especially a broad mix of innovative companies creating long-tail revenue streams in technology and healthcare.
4) The global market has spoken. If all of the above were not true, why isn't gold back to new highs already? The market story of the past decade in gold is telling you that investors created a bubble that popped and that even extremely low or negative interest rates cannot reflate the bubble.
Gold is Going Down, And This is Going Up
Last week I wrote an article with a very provocative title after a completely new development shocked me enough add a #5 reason not to buy the barbarous relic...
Why Gold is Headed to Zero -- And What You Should Buy Instead
In the podcast -- at minute 12:30 "NASA Mission To Psyche: The Fort Knox of Asteroids" -- I share some key excerpts from that article that explain why it's not unreasonable to expect that the price of gold could be a lot lower in 10 years.
I also reveal another Biotech company I’ve made 50% stock gains on in the past month, Alnylam Pharmaceuticals (ALNY - Free Report) , a leader in RNA interference therapies with their second FDA approval last month to treat a rare disease.
In closing, I'll share the story from another TV appearance in 2009. This time it was in the first week of March, when the stock market was collapsing to levels not seen in over a decade.
It was actually my first time on financial TV and the producers at FOX Business expected me to bring stock recommendations.
But the market was still in free-fall and I didn't want to pick any stocks, for anyone, when they could easily be down another 10-20% in a week.
We had just seen Warren Buffett himself stepping up to buy banks like Goldman Sachs in the autumn of 2008, and then watching those shares fall another 50% as visions of economic collapse overwhelmed investors and capital markets.
So I decided to offer the next best and safest route: ETFs. Because I believed the one thing I could almost guarantee would be an excellent long-term buying opportunity in two key sectors of the market: Technology SelectSector SPDR ETF XLK and the Nasdaq Biotechnology Index ETF (IBB - Free Report) .
Both ETFs were "no brainers" for any investor with a 5-10 year horizon to grow their money. And because they both held a basket of the top stocks in their sector/industry, there was little company-specific risk.
Both ETFs have vaulted nearly 500% during this bull market, beating the stock averages by a considerable margin.
Of course, they both clobbered gold too with its mild 100% advance from the October 2008 lows near $700.
And I am predicting this trend will continue into the 2020's.
The Real Gold You’ll Want to Mine for the Next Decade
After you read my article Why Gold is Headed to Zero, you may conclude that gold could actually still make new highs by 2025 if we get another behavioral bubble. I’m certainly not ruling out that possibility because the event that will cause it to go below $1,000 is still ten years away, with lots of expense and uncertainty around it, subject to the constraints of outer-space travel and mining.
So you don’t have to sell your gold now. In fact, you should wait at least 5 years. I’ll be updating my thesis long before then.
But what you absolutely must do now, and over the next few years, is to invest in Biotech and Technologystocks and ETFs.
There’s more “gold” to harvest in those two growth destinations over the next decade than any asteroid mining could offer to your future wealth.
Indeed, the real money to made off of asteroids will be in the technology and medicine that support space explorers and “miners” accomplishing their missions.
To Psyche… and beyond!