Hedgeye Guest Contributor | Crumb: Why Investors Should Own Gold

Editor's Note: Below is a Hedgeye Guest Contributor research note written by Josh Crumb for Goldmoney Insights. Crumb is a co-founder of Goldmoney Inc. and its Chief Strategy Officer. He was previously an Executive Director at Goldman Sachs - the Senior Metals Strategist in the Global Economics, Commodities and Strategy Research Division in London. This piece does not necessarily reflect the opinion of Hedgeye.

Hedgeye Guest Contributor | Crumb: Why Investors Should Own Gold - gold cartoon 09.14.2016


Inverted Asymmetry - Gold Price Outlook

By Josh Crumb


Using our proprietary real rate, energy proof of value- model as a guide, we find that, despite an already impressive year to date performance:


  1. The USD gold price has less downside risk from current levels than commonly perceived, with skewed upside risk;
  2. Market participants often wrongly analyze gold as a ‘flow commodity’ and appear overly focused on central bank guidance of nominal rate paths – just one of three important metrics – and therefore still misunderstand the key drivers of this ongoing “money stock” rerating;
  3. Given current inflation and real interest rate expectations, data and policy surprises present much more upside than downside risk for gold from current levels; and
  4. For gold to fall back below $1,100/toz again, the market would need a somewhat paradoxical environment of collapsing energy prices yet rising inflation, with the FED hiking interest rates.


Hedgeye Guest Contributor | Crumb: Why Investors Should Own Gold - josh crumb callout


In this semi-annual outlook report, we present a hypothesis to explain this bias; we apply our unique price framework to explain price cycle inflection points in support of our alternative thesis; and we analyze the real upside and downside risks when viewing gold as an alternative money stock rather than as a flow commodity.


Ultimately, we believe that the market is still in the midst of an ongoing rerating of gold vs fiat currencies in this age of extraordinary monetary experiments, and that it will become increasingly clear that objective data are becoming detached from the reflexive manipulative-function of central bank forward guidance.

In this environment, gold should be owned and accumulated.

In our view, too many investors have been waiting all year for a ‘$100’ pull back and better entry point, but, in this context, nearly every surprise or shock bringing new information to the market presents a downside risk for fiat currencies relative to gold, especially at the zero-bound where the nominal cost of carrying currency risk is higher than the carry for gold.


However, despite our confidence from the underlying data, a biased consensus outlook still projects downside asymmetry as we approach the elusive point of FED rate normalization. The objective reality is that this asymmetry is inverted, where there is little downside price risk relative to significant upside.


In upcoming reports, we will dive further into the outlook for key variables, including interest rates, inflation expectations, and forward energy prices; however, in this report, we simply present a two-way sensitivity model to show the asymmetry of price risk from current levels.


Hedgeye Guest Contributor | Crumb: Why Investors Should Own Gold - crumb chart1

Inverted Asymmetry

Upside price risk for gold as a money ‘stock’ is driven by the downside risk in the value of fiat currency; expectations for lower year-over-year gold ‘flow’ are nearly irrelevant to prices.


Market participants often describe the supply and demand outlook for gold as they would for oil or grains, or flow commodities. And with their marginal demand framework, it may appear that a fall in near-term demand for this ‘speculative commodity’ presents a limitless floor to prices. Or as one trader put it:


“Gold has a big door in and little door out when fearful investors and gold bugs are the primary demand for this speculative asset [a ‘useless commodity’ without income or yield], and there is always infinite ETF supply to be dumped onto markets when demand turns and the market goes ‘no bid’”.


And it’s no surprise, having worked as senior commodity analysts at a bulge-bracket Wall Street institution, that this is exactly how the big Wall Street banks and the mainstream financial media therefore analyze and report on the gold price outlook.


This perception is emboldened as gold is relegated to the commodity desks, to be analyzed for year over year changes in supply and (gold bug driven) demand flow, further reinforcing the perception of a perpetual ‘no bid’ risk and unlimited inventories against expanding supply.


This is the perceived asymmetry of gold having unlimited downside and an irrational and uncertain upside, driven only by fear or greed, chasing prices higher as a bubble asset or ‘Giffen Good’ (for which higher prices create more demand).


We believe this consensus analytical framework is wrong and largely irrelevant and can be falsified by both data and logic.


Instead, it is our view that the approximately $8 trillion dollars-worth of global gold inventory is actually being valued and demanded by its holders as an alternative yet permanent money stock with potential advantages to fiat currency-based savings depending on the outlook for real yields in one’s base saving currency. Gold is simply a liquid real-asset with no time decay, no real cost of carry and no counter-party risk, yet it is scarce, has great elemental utility and an energy-intensive replacement cost.


So what if the greater value-volatility in the market price lies in the debt-based measuring systems sitting in the denominator, the far from permanent or standard units of fiat currency value? In our view, this is the major flaw in the consensus analysis of gold, the bias to project fiat currency as a universal, stable, and standard measurement against the uncertain animal spirits of gold commodity demand.

Bottom Line

This false starting point is also the primary reason that the Wall Street sell-side analyst consensus has missed basically every major price inflection point of the past decade. It is this misunderstanding and misreporting of gold as a short term flow commodity like oil or grains (useful for consumption, but high cost of storage and carry, so not a store of value like gold) leads consensus to perpetually describe gold as either ‘about fairly priced’, or headed down on an uncertain demand outlook.

Click here to continue reading.

Taylor: Expect a Bareknuckled Donald Trump Next Debate

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor in his Capital Brief to institutional clients this morning. For more info on our institutional research email


Taylor: Expect a Bareknuckled Donald Trump Next Debate - JT   Potomac banner 2


While the first debate is generally viewed as the most important, the next are very likely to be where the real war will be fought...




Though the candidates did inflict some wounds, round one was fairly tame by 2016 standards. Hillary Clinton went low on Donald Trump by bringing forward his bullying of a former Miss Universe winner, but Trump showed surprising restraint, and held back, not landing punches on Clinton on topics such as Benghazi, the Clinton Foundation, emails and...her husband.


With just under two weeks until the second matchup, though, we expect Trump to take off the gloves, ensuring a real bout when the two meet again October 9th.


With 40 days until Election Day, we’re updating our Electoral College chart, and moving CO and IA into “leaning” categories. In the last month, the polls have tightened significantly and are testing Clinton’s limitations, but she is still poised to retain an edge in the Electoral College according to Cook Political Report - who currently predicts Clinton will obtain a majority, winning the election by just under 80 electoral votes.


Click to enlarge.


Taylor: Expect a Bareknuckled Donald Trump Next Debate - electoral map

Sell Dave & Busters (25-30% Downside)

Takeaway: PLAY is no longer the only game in town when it comes to big venues to go enjoy games and grab a bite to eat.

Sell Dave & Busters (25-30% Downside) - dave and busters


Hedgeye's Restaurants Team, led by Sector Head Howard Penney, will be hosting a Black Book today (at 11am ET) to update their SHORT thesis on Dave & Buster's Entertainment (PLAY).


"Competitive intrusion," words seldom used by PLAY's management team, were first mentioned during their 1Q16 call one time, and then three times in their 2Q16 call. During the 2Q16 call Steve King, PLAY's CEO also mentioned, "there is more of that competitive intrusion coming that will affect our fourth quarter." PLAY is no longer the only game in town when it comes to big venues to go enjoy games and grab a bite to eat. 


PLAY is facing competitive intrusions in key markets, including Texas. Other markets are also getting hit by differentiated concepts that provide a fun atmosphere with the availability of food.


  • Competitive intrusions intensifying
      • Superior competition moving in on PLAY's territory
      • PLAY losing managerial talent to the competition
  • Food & Beverage sales decelerating, and will drag the rest of the business down with it
  • Discretionary games business will suffer, the margin tailwind is behind them
  • Excessive unit growth
  • Downside: 25-30%



Attendance on this call is limited. Please note if you are not a current subscriber to our Restaurants research there will be a fee associated with this research call and related material. Ping for more information.


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Poll of the Day: Whose Opinion Do You Trust The MOST?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Whose Opinion Do You Trust The MOST? - poll 9 28


CHART OF THE DAY: Why We're Confident There Will Be More #GrowthSlowing Data?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... Data? Why am I confident that it will be more #GrowthSlowing data?

  1. Because Durable Goods are going to be reported this morning and they’re in a #recession
  2. US GDP is going to be reported tomorrow and it’s closer to 1% y/y than it’s been all year
  3. Personal Income and Consumption is set to slow (rate of change) on Friday" 

CHART OF THE DAY: Why We're Confident There Will Be More #GrowthSlowing Data? - 09.28.16 EL Chart

What To Expect On Today's Fed Yip-Yap Day

Takeaway: Another "rates are up on Fed" yip-yap day.

All quiet this morning...


Ahead of Yellen and her band of Fed Speakers back to the front line of “news-flow” today – Trump/Clinton can eat cake!


The Dollar is up small (+0.1% at 95.54 USD Index) ahead of Janet’s testimony in front of the House Financial Services committee (a brilliant bunch indeed) and I wouldn’t be surprised if she tries to talk hawkish amidst acting dovish. Don’t forget that she’s a Democrat who wants to paint the economy as “good”, even though GDP will be reported at 1% tomorrow.


Meanwhile, Gold is down small on Fed Head speaker day (they don't like Gold). Another buying opportunity if you see $1315 or lower.


Anyone else getting tired of these guys and gals yet? Here's San Francisco Fed John Williams yesterday:


"It is getting harder and harder to justify interest rates being so incredibly low given where the U.S. economy is and where it is going. I would support an interest rate increase. I think that the economy can handle that. I don’t think that would stall, slow or derail the economic expansion."

Williams, retire buddy.


All in, this should be another "rates are up on Fed" yip-yap day, only because they bounced off low-end of Hedgeye's risk range.


What To Expect On Today's Fed Yip-Yap Day - Fed hawkish dovish cartoon 09.20.2016

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