Time to Buy Gold?

Raise your hand if you know of Jim Grant from Grant’s Interest Rate Observer fame.

OK, put your hand down. (I can’t see it anyway!)

Here is Grant’s latest quip on gold:

I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the Ph.D. standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder.

If you want my own current thoughts on gold, rendered down to one paragraph, I would say "see above."

If you want a bit more than one paragraph, here you go …

Has Gold Production Peaked?

Back in January, and again in August, the gold supply received renewed attention. That’s around the time some analysts were saying that gold production peaked in 2015.

The "peak gold" discussion may be why gold saw a nice run higher in bullion prices during the first half of the year.

Begged for in that production question is an answer to this one: Is the price of gold going to surge higher?

My answer: Maybe.

New spending is down because producers entered firmly into cost-cutting mode with gold’s decline to $1,060 per ounce more than a year ago.

In recent years, physical demand — particularly in Asia — has been softer than many gold speculators and commentators expected.

The anticipated normalization of Fed interest-rate policy, beginning in 2013, didn’t lend comfort to gold producers either.

But, again, gold ran higher this year … after last December’s Fed rate hike!

For all intents and purposes, I’m not sure the Fed’s interest-rate policy can be normalized. But that won’t stop them from following the market’s lead if investors take the initiative a drive up interest rates because they see inflation gauges reading hotter-than-usual.

The key there is whether inflation outpaces the rise in interest rates. If it does, good for gold. If it does not, bad for gold.

Related story: The Fed Speaks, and the Dots Jump to 3

Starts to sort-of kind-of maybe feel like producers might ought to be tempted to consider thinking about possibly capitalizing on higher prices by producing more gold to sell.

After all, assigning value — or greater value — to something has a funny way of increasing its supply.

Of course, increasing the supply of something has a funny way of reducing its demand … and thus its perceived value.

"So what gives, JR — Are you telling us the price of gold is going to rise or fall?"

Yes, I am.

Both.

Here’s my crystal ball …

And again for the bigger picture …

For those playing along at home: If you have faith in my crystal ball, you are going to play it like this:

1. Buy gold at $1,160 for an 14% gain when you …

2. Sell gold at $1,330 for a 7% gain when you …

3. Buy gold at $1,230 for a 17% gain when you …

4. Sell gold at $1,480.

OK, to be a bit more serious …

I think we’re looking at a new buying opportunity in gold around $1,160.

The Federal Reserve just hiked rates for the first and only time in 2016. They allegedly expect three interest rate hikes in 2017 as they seek normalization.

They expected four rate hikes in 2016. Then two.

One?

As Mr. Grant said, gold is currently "a very timely way to invest in monetary disorder."

In other words, if you want to use gold to hedge against disaster, by all means go right ahead. But don’t discount the power it holds as a way to bet on disorder, too.

Do right,
JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…