"GOLD IS DEAD...JUST LIKE PAUL MCCARTNEY" BY ERIC FRY, 29 JULY

Gold is Dead… Just Like Paul McCartney

Long-time fans of the Beatles might recall that bizarre episode in 1969 when a global conspiracy theory emerged that Paul McCartney had died in a car accident. 

Conveniently for the “theorists,” Paul had decided to step away from the spotlight during the fall of 1969 to spend some time with his wife, Linda, and their newborn daughter, Mary.

Into this void poured an endless flood of mystical insights and pure nuttiness. The Abbey Road album cover provided some of the most memorable “proofs” of Paul’s untimely demise. One theory held that the cover photo of the four Beatles crossing Abbey Road was obviously a funeral procession, metaphorically speaking, in which Paul was obviously the metaphorically deceased.

Elsewhere in the same photo, the license plate of a nearby VW Bug provided corroborating evidence that Paul was dead. The auto’s plate read: LMW 28IF, which clearly stood for “Linda McCartney Weeps” because Paul would be “28, if” he was still alive.

Mercifully, Paul eventually emerged from seclusion to prove the conspiracists wrong… and he did so just as the Beatles were breaking up and going their separate ways. As a result, a kind of creative rebirth would soon begin for McCartney.

After his 1969 “death,” he would proceed to record another nine No. 1 hits and 14 other “Top 10” hits, including memorable ones like “Maybe I’m Amazed” and “Live and Let Die.”

For perspective, the Rolling Stones have scored only eight No. 1 hits during their five decades together. In other words, the 1969 vintage Paul McCartney had a lot of life left in him… and so does gold today.

Is Gold “Due” for a Rally?

Admittedly, the yellow metal is barely registering a pulse at the moment. Most of the wax figures inside Madame Tussauds Museum seem more vibrant and lifelike. 

But that’s simply how gold behaves from time to time. It “does nothing” for such extended periods of time that investors begin to doubt it could fog a mirror.

Gradually, they turn their back on the comatose metal and leave it for dead. But that’s usually about the time it comes to life. In this way, gold is probably less like Paul McCartney than like a cicada — the insect that lies underground for years at a time before emerging and swarming around for a few weeks.

After gold’s decade-long dormancy from 1991 to 2001, for example, it suddenly sprung to life and soared 500% over the ensuing decade. 

More recently, the gold price drifted 40% lower during the seven-year span from 2011 to 2018. But then it revived once again and rallied as much as 70% from its 2018 low.

That rally was probably the first phase of what will become a much bigger move. Now that the gold price has spent more than a year going nowhere, it has gained plenty of rest for its next major move higher.

Importantly, the last year of non-action has also fostered so much negative sentiment toward gold that, from a contrarian perspective, it is “due” for a rally. The gold market, just like the stock market, tends to lurch higher at the moments when most investors dismiss that possibility.

The present moment would certainly qualify. As the chart below shows, most folks want little to do with gold at the moment. On a net basis, investors have withdrawn more than $15 billion from the SPDR Gold Shares ETF (GLD) during the last 12 months. That’s the most rapid and sizeable retreat from this gold ETF since 2013.

To summarize today’s approximate investor attitudes, they like stocks, adore cryptos, and feel sorry for gold.

Such are the moments that often ignite a gold rally… especially if the yellow metal has a good reason to make a move, like if inflation is on the rise and/or government deficits are soaring.

Both of these trends are well-established today… and they are both intensifying.

After topping $4 trillion last March, the 12-month federal deficit has declined to “just” $2.8 trillion — a number that is equal to 12.5% of U.S. GDP. 

That’s a big number.

Meanwhile, the six-month average U.S. inflation rate is hitting its highest levels since “Dances With Wolves” won an Academy Award 30 years ago.

Historically, great, big governments deficits, coupled with great, big inflation readings, trigger great, big gold rallies. Perhaps this time is different. But there’s a reason why many seasoned investors say that “this time is different” is the most expensive phrase in finance.

Because it is.

Gold may not rally immediately, but I suggest pausing awhile longer before administering its last rites. 

I realize that gold seems utterly irrelevant in a world dominated by Bitcoin and other cryptocurrency marvels. But I suspect the “barbarous relic” still possesses some relevance in the modern era… at least as a hedge against obvious risks like inflation, or against less obvious risks like a sudden stock market sell-off or a cryptocurrency flameout.

Every generation of investors contains a bunch of folks who pooh-pooh gold as a useless bauble. But history has not been kind to gold-haters; the naysayers usually encounter moments of regret.

Gold might seem as irrelevant today as a complete set of Encyclopedia Britannica. But don’t be surprised if it returns from irrelevance to score a few more “Top 10” portfolio hits in the future — perhaps something catchy like, “All You Need is Gold” or “While My Portfolio Gently Weeps.”

Bottom line: The hedge almost no one seems to want may still be one of the best ones to own during the uncertain times ahead.

By

Eric Fry