Friday, November 27, 2009
So, by the looks of things now, the early morning plummet was only a panic-induced spill creating a buying opportunity.
That kind of thinking, I have to say, is speculative. Although I think it likely, gold isn't destined to go to $1500. There are lots of fully-valued industrial stocks that would be undervalued at today's prices if we get 3-4% economic growth in 2010.
However, the post does show, in its own way, that "$1500 is the new $1200."
This is a normal and healthy correction that has begun in Gold. If you haven't been here before, Gold corrections are not for the faint of heart. This one's starting out sharp and nasty. I think the stock bear has awoken from his/her slumber. Gold is different than the stock market. Gold is not just an anti-dollar play. Gold is a safe currency that yields the exact same as U.S. T-Bills (i.e. zero) but without the built-in depreciation risk.The rest of his post looks at corrections in late '05 and late '07, and estimates that the current drop could push gold down to around $1050 or so and take 1-2 weeks. This estimate is based upon the assumption that this drop will resemble the two previous corrections.
Spot gold prices are up over 40 percent year on year. Yet, according to the World Gold Council, demand for gold in the third quarter of 2009, dropped by 34 percent year on year. Of course, demand in the third quarter of 2008 was exceptionally high due to the financial crisis. As well, relative to the third quarter average of the five years to 2007, demand for gold in Q3 2009 was down 4 percent.Her timing proved to be good: gold took a plummet early this morning.
"Everything" includes gold. The price of gold went into a veritiable freefall early this morning, plunging more than $60/oz before the bottom kicked in. It can indeed be said that gold was overbought earlier this week.
But, subsequent to the plummet, gold's recovered to above $1160. The midnight to 3 AM ET drop - yes, it was that fast - proved to have a bit of panic to it. The gold-stocks link is still there, as Wall Street will find out shortly.
Thursday, November 26, 2009
Near the end is a clear statement of a vital plank in the goldbug mindset:
Because a politician follows the political calendar, s/he only concerns himself/herself with the time horizon leading to the next election.The full article, with an explanation for each factor, is here.
Anything requiring decisions beyond the date of the next election will be the responsibility of whoever is on the next watch. If the politician in office today is in office after the next election, a shrug of the shoulder indicates that worries of that kind can be dismissed for now to be dealt with later.
So major and difficult, but necessary, decisions are inevitably deferred. In their place spending money gives the appearance of concern and of doing something to fix the apparent problem. Aren’t those elected officials doing what we elected them to do? It certainly looks as if they are.
More cynical observers would characterize these actions by the political class and their senior bureaucratic minions as buying time hoping that something positive might magically emerge.
Those who are super cynical would even conclude give-away programs are designed simply to bribe the voters in order to curry goodwill for another term at the levers of power.
What all this means is that there is no discipline or inclination to do anything of real value in fixing the core economic and financial problems....
The only quarrel I have with his list is his claim that "[c]urrency traders will be most reluctant to allow a sudden rise in the US dollar to cut the legs from beneath the carry trade of which they are participants." The yen's performance during the days of the yen carry trade show that it is possible for the carry-trade borrowing currency to rise. Such rises tend to be sharp because carry traders scramble to cover their shorts in the currency. [Effectively, a carry trade borrow is a short sale of the currency being borrowed in. Smart carry traders hedge the short with forward or futures contracts, but not all do.]
Thankfully for gold buyers, used really is as good as new. Thankfully for the U.S. mint, there'll be a resumption of Eagle sales in mid-December.
212 sold, 191.3 to go.
This report goes into why the purchase was made: "Sri Lanka's reserves had fallen to dangerously low levels as security forces pushed their final offensive against separatist Tamil Tiger rebels." As for the reason why the Sri Lankan bank picked gold, I'm sure you can guess at it.
As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world.The author has a point, even if his case is easy to laugh at as yet another "vast market in China" fantasy. The PRC government is mercantilistic, which means that it has assumed responsibility for its subjects' well-being. I don't see how this official exhortation can be shot down as a mere ploy. At the very least, it taps into Chinese resentment at the U.S. government devaluing away its massive obligations, much of which is held by "China."
It is encouraging citizens to put at least 5% of their savings into precious metals.
The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.
This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it's cheaper per ounce).
The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?...
The rest of the article is here: "Gold, silver investment frenzy sweeps China."
Every few decades, maybe less often, gold seems to detach its shiny self from the greater economy and go berserk. Prices went vertical in the early 1860s (American Civil War) and again in the early 1930s (Depression). They're taking off again, this time in the absence of war or depression or a genuine crisis, like the end of Oprah's show.to
Governments may try to inflate the debt away. If it doesn't work, they will have only two choices - service the debt or default. The chances of a default are very slim, of course. But note that the volume of credit default swaps linked to the United States, Japan and Britain, which measure the cost of insuring against bond defaults in those countries, has doubled in the past year.As the gold bubble continues to form, more and more skeptics are going to be joining the party. They'll be holding their noses like Mr. Reguly, but they'll be joining.
Defaults, real or potential, are not kind to currencies. The rise in gold prices may be just getting started.
Interestingly, gold's still positively correclated with the stock market. 'Tisn't just gold that's down: so are U.S. stock futures. As long as that correlation holds up, I have to say that things look good for gold overall. The market still seems to be convinced that a falling greenback, and/or what else makes for a gold bull, is good for stocks (and vice-versa.)
Of course, the question remains: if that correlation be broken, then which market will suffer? Will gold sag, or will the stock market?
Wednesday, November 25, 2009
The authors predict:
...The euro will rise to about $2 over the next two to three years, before surging rapidly above $3, [according to] Wiedemer, whose risk assessment firm advises hedge funds and businesses.
At first, Treasuries will keep their safe haven status. A year or two of double-digit inflation and interest rates will then trigger a sell off in U.S. government bonds and batter stocks, says the book published by John Wiley & Sons.
This view is extreme even among those economists who expect the dollar to decline in coming years....
Extreme indeed. The greenback's being bashed an awful lot lately; given that the Euro's breached the $1.50 resistance level, that bashing makes some short-term sense. On the other hand, markets are notoriously refractory. Consider: if I can secure a foreign-exchange account that offers 3% overnight leverage, and if my timing is superb enough to win a gains cushion for the account, I can sit back and expect to make more than ten-and-a-half times my initial capital. [32% gain * 33.3-to-1 leverage.] That seems way too good to be true.
If the Euro rises above its previous record of $1.60 and stays there, we have more fuel for the emerging gold bubble.
M. DuPlessis, however, is more skeptical. He thinks that gold is due for a pullback, which will create a buying opportunity.
I can't place Mr. Bonner as one of the durable gold bulls who fears a bubble, as he still is bullish - but his misgiving show how others of his stripe may shy away from gold due to its huge run-up.
HANOI, Nov 25 (Reuters) - Vietnam's central bank has granted quotas for the import of 10 tonnes of gold since lifting an import ban earlier this month and 6.8 tonnes had already come in, state broadcaster VTV said on Wednesday....And, as Vincent Fernando reports in the Business Insider, "Panicked Gold Buying Forces Vietnam To Devalue Currency":
...The dong has been under substantial pressure all year due to Vietnam's rapidly expanding trade deficit, which hit $8.7 billion during the first ten months of 2009. Inflation has also been picking up, hitting 4.35% in November.How long before we see a conspiracy theory floating around that casts goldbugs as the conspirators?
Yet it appears that gold arbitrage may have been the straw that finally broke this currency's back:NYT: The immediate reason for the dong’s weakness, traders say, is that demand for dollars has risen because the spread between gold prices in Vietnam and in foreign markets has widened. Vietnam lifted an 18-month old ban on gold imports Nov. 12 in a bid to curb panic buying that had sent the dong plummeting.
Diner's Club, then being a charge card, required the holder to pay the balance at the end of the month. (So was the American Express card back in the days of old.) Frank McNamara invented the first charge card, but another fellow came up with the first credit card.
Mike Phillips got the idea when he was still with Bank of America. Originally known as the BankAmeriCard, it quickly became MasterCharge and now MasterCard. Through one of the market's ironies, the later entrant (Visa) became the dominant name.
Mr. Phillips actually "dropped out," and became a member of a hippie-type commune. Along with his buds, one of which sported the name "Jug O' Candles," he threw together the "Seven Laws of Money" in the 1970s. They're here on this Webpage.
In and of itself, this forecast isn't that surprising because Sprott has long been associated with the goldbug world. More surprising, at least to me, was a report from Bank of America/Merrill Lynch with the same number (although with no specific timetable.) According to this report, available as a .pdf file, gold's in three stages of a bull run. The first stage was caused by the credit crisis, and the current (second) stage is being driven by greenback devaluation. The target for the second stage is $1200, which has almost been reached. The third stage, according to the report, will be driven by commodity gains resulting from global recovery. That stage should push gold up to $1500.
It looks like $1500 is becoming the new $1200. On a ratio basis, using $1180 gold as today's price, $1500 is as optimistic now as $1200 was when gold was at $944.
[h/t: I got the report from a download link on this FreeRepublic thread, which cites a goldbug-compatible phrase therein: "The point of fiat currencies is to debase them as needed."]
FRANKFURT (MarketWatch) -- Gold futures climbed to a fresh record of $1,180 an ounce Wednesday, after a report that India is open to buying more gold from the International Monetary Fund drew even more investors into the bullion market.Another report, from the Financial Chronicle, speculates that the Indian central bank may buy the remaining 201.3 tonnes of gold that the IMF is offering for sale.
The U.S. dollar fell against other major currencies, further boosting gold's appeal as a hedge against inflation.
Gold for December delivery rose to a fresh contract high of $1,180 an ounce in electronic trading on Globex. It was last up $10.70 at $1,176.50 an ounce.
"The move higher was boosted by fund names and good interest from [Tokyo Commodity Exchange] buyers after the market responded to reports that India is open to buying more gold from the IMF," said analysts at Action Economics....
'Tis the season, and the rally makes sense given that demand. However, I'm old-fashioned enough to remember when IMF sales brough trepidation to gold bugs and a drop in the price. Here's an early 2007 piece from noted goldbug Doug Casey making light of proposed IMF gold sales. No need for hand-holding now...
Update: The Wall Street Journal's MarketBeat blog ascribes last night's rise to "an increase in Australian interest [rates] next week," which caused the U.S. dollar to fall. The Indian central bank isn't mentioned in the post.
Tuesday, November 24, 2009
He adds this caveat, though:
I remember a Market Call guest telling me that a stock, or gold in this case, can sail along at overbought positions for several weeks before it eventually corrects.He includes the now-widespread possibility of gold going back down to US$1000/oz, but also notes that the retreat from overbought could mean a decline to about $1120-30. He also mentions a similarity between gold's price now and oil's when it spiked to $147, but is too cautious to claim an outright similarity:
I’m not saying that’s about to happen to gold seeing the long-term environment for the precious metal is bullish due to a number of factors including a weakening U.S. dollar, central bank buying and other forces. But, simply based on the RSI and the shape of gold’s chart, bullion is likely to lose altitude at some point soon.The entire post is here.
It wasn't that long ago that forecasts of $1200 gold were considered pie-in-the-sky. It was only a year ago that a forecast for $800 gold would have been bullish! Now, gold's just $30-40 below the 1200 point and a forecast of 800 is very bearish Even below 1000 is quite bearish.
This kind of flip-flop is characteristic of an incipient bubble. If Capital Economics proves to be right, the bubble's likely been euchred out. By my reading of the gold chart, the CapEc guys are gold bears. Should their forecast pan out, they'll probably follow up with an even lower target once gold recovers.
However, I don't think they'll be correct. If gold laughs off all such bearish forecasts, particularly short-term bearish forecasts by long-term gold bulls, then the stage will be set for a real gold bubble.
Update, and h/t: "Tyler Durden" of Zero Hedge has posted a Scribd copy of the forecast. It actually says below $1000 by the end of the year, and as low as $800 in 2010. I've changed the original link to Zero Hedge's psot.
Near the end of the article, he mentions central bank buying:
In the present situation, a tipping point seems to have been reached in which major players like India and China are moving away from dollars. Japan has not done this. Japan is still buying dollars. The momentum is shifting away from the dollar. Central banks have started to buy gold. There has been a turn in the tide. There is no tidal wave, although one could develop. Reversing the tide seems increasingly unlikely.
If you believe in the premise behind the ZDV model, or are just curious, Prof. Rozeff's explanation of it is worth a read.
This point ties in with my own bubble hypothesis in this way: neo-goldbugs ascribe gold's bull market to the fall of the U.S. dollar and gold's utility as a crisis hedge. This double causation explains why gold's been marching up in a low-inflation environment. Add the likely New-Era story - which hasn't achieved general circulation (as of yet) - and you get a bubble which would be amplified by a return of inflation. For those who don't already know, my guess at the New-Era story is: a dethronement of the greenback as reserve currency, and its (at least partial) replacemrnt by gold. I've pegged it as a New-Era story because I don't think an all-out dethronement is that likely.
Nowadays, they're far more measured. They were one of the prognosticators who had a $1200 target for the yellow metal, a price that's been almost reached. Their latest report, as webbed by the Market Oracle, bumps up their $1200 target to a possible $1350.
It's made clear in the story that this decision was on a business basis - the vault space is being earmarked for institutional gold clients - but it touches on one of the hardcore goldbugs' bugaboos. As many know, President Roosevelt confiscated U.S. citizens' gold in 1933. There are more than a few goldbugs who think that the U.S. government will do so again. For curiosity's sake, here's a guide to protecting gold holdings from possible government confiscation.
(The author of it considers such a contingency to be "unlikely," by the way.)
It's called "Gold Remains Poised above US$1,170 Amid Dollar Rebound And Central Bank Speculation."
Gold's slight correction from record highs led to a pick-up in wholesale demand for the metal in major bullion consumer India, traders said.The story ends with a forecast from Standard Chartered:
Any further dips are likely to be met by strong buying, they added. “People are asking for $1,150, we have a few orders at that level,” said a dealer with a state-run bank in Mumbai.
“The investment case for gold has become increasingly compelling, with central bank buying and a structural change in interest in gold as an investment at the retail level,” said Standard Chartered in a note.Yep, the old $1200 forecast has become too conservative...
The bank said although pockets of dollar strength would likely check gold's progress in the first half of next year, by the fourth quarter it is set to average $1,300 an ounce.
Monday, November 23, 2009
On Wednesday night, a friend in the hedge fund business told me about a dinner hosted by Goldman Sachs Group Inc. (NYSE: GS) in London last week where the subject of gold’s value came up. Goldman asked the room full of 15 or so major hedge fund managers to mark down on a piece of paper the price at which they thought gold would trade over the next two years. The consensus answer was an astonishing $4,000 per ounce.Astonishing indeed. These people aren't gold-stock punters, they're hedge-fund managers. If they see that kind of a rise - more than triple today's already-elevated price - then they likely smell bubble too. To keep the memory green, it was only about six months ago that a forecast of $1,200 by the end of this year was considered daring.
Money Morning is in the gold-bull camp. Also published there is "7 Reasons Gold Will Surpass $2,500 - And Inflation Isn’t One of Them." Those reasons are: gold-mine production is going down; huge deposits are getting harder to find; investment demand keeps climbing; so is central-bank demand; there's a campaign for gold-backed currencies developing; Asian demand for gold has leapt up; and, gold is in a continuing secular bull market.
He makes some good points in his article, "How much longer can gold rise?" Mr. Fleckenstein's tongue-in-cheek five-point list of what the gold market'll be like when the bubble tops is more truthful than it may sound.
For the long-gold trade to really become too crowded, certain events will need to occur:
- Goldman Sachs (GS, news, msgs) will have had "bus tours" to a bunch of mines, like the tours it and other companies have arranged for different industries, particularly technology.
- The public will have to be involved in a major way, and we'll see ads on Bubblevision encouraging people to buy gold instead of prodding them to sell their jewelry, as is the case these days.
- Banks will need to find a way to put money into gold -- because no modern mania has ever ended without the banks finding a way to lose money in it.
- We will most likely need to see a frenzy of mergers and acquisitions, and a leveraged buyout or two.
- Last, BusinessWeek will have to put gold on the cover, telling us how it's the wave of the future, or some variation of that theme.
He's right, particularly about the media exposure. Also, gold will be featured on the regular MSM [SRM for some]. Back in 1981, I bought a 1/10 oz. gold Krugerrand with some of my paper-route money because gold had been mentioned in the regular Canadian media. The line-up was the longest I had seen for a bank or trust company.
So, I can add a sixth item: huge line-ups at gold retailers, particularly banks and trust companies that sell gold, with at least one myopic kid waiting to buy. Those line-ups are noticeable enough to make the non-business media think gold is newsworthy.
He ends, however, with this call: "If I am correct, then the next phase of monetary history would almost certainly involve an informal or formal recognition of gold as a monetary reserve asset by central banks. Gold would then be revalued at a much higher level of purchasing power relative to recent history."
My own "model" is based upon market psychology, not fundamental value. As Mr. Blumen himself pointed out, it may be impossible to determine a proper fundamental value for gold because it's not used as money anymore. The main driver for its fundamental value is demand, which is unmeasurable except for past buys. There's no income derived from gold that can be used as a gauge.
Market psychology is more pragmatic: an asset or asset class is in a bubble because it acts like it's in a bubble. Central to my own model is a New-Era story making gold look undervalued despite its spectacular rise. In gold's case the hoped-for "New Era" features the U.S. dollar being dethroned as the world's reserve currency and being replaced (at least partially) by gold at the central-bank level. To me, it counts as a New Era story because the greenback is too ensconced as a reserve currency, and the United States itself is too ensconced as the world's only superpower and major market.
I should also make clear that I believe that gold's at the beginning of a bubble, not the end of one. The New-Era story hasn't kicked in, and gold's only beginning to move into the mainstream. (When an normally alternate investment moves into the mainstream, like gold did in the late 1970s, it's a good sign that a bubble's forming. Alternate investments typically stay alternate.) My own reasoning is explained here.
Interestingly, there are two titles as of the time of this post. The most-read link, the URL and the title bar have "Gold fears hinge on unfettered Fed, U.S. spending" The title to the article itself, evidently a re-title, is "Deficits and loose money should lead to higher gold." It's by Laura Mandaro.
Also worth looking at is the sidebar-linked special report, "The New Gold Bugs." One piece in the series, "Are new hedge fund gold bugs getting in at the top?," points out that sentiment is worryingly bullish right now, especially considering that bullion's gone up more than four times since 2001. If I'm right about the gold bubble, the gold market will either shrug those concerns off or else dip down slightly and resume the upward climb.
Another article in the series profiles mainstream insitutional investors, such as Paul Tudor Jones and John Paulson, plowing into gold: "New gold bugs making gold investments mainstream."
Sunday, November 22, 2009
While the seeds of a future bubble in gold are being sown, and the gold price will remain volatile, if only to relieve momentum-chasers of some of their money, on most measures we are a long way away from any kind of climax. Despite growing media attention, gold remains surprisingly underowned by private investors. More people talk about it than actually own it in volume. Every trend-following speculator who is buying gold today for bandwagon reasons is, I suspect, comfortably matched by seasoned wealthy and professional investors accumulating gold for traditional defensive reasons, not to mention central banks desperate to reduce their dollar dependency.This point jibes with a now-notorious video by Mark Dice:
Last year, gold took a pounding like almost all other investment classes - but, unlike all other investment classes save one, it ended with a gain for the calendar year 2008. The other class was Treasury securities, or comparable government bonds.
As of now, gold is the only asset class to sport a gain for the calendar year 2008 and a large gain for 2009 year-to-date. The approximately 27% gain in gold YTD has been in a low-inflation environment.
Central to my belief in an emerging gold bubble is a "New Era" assumption. Gold's been going up in large part because the U.S. dollar has been falling, but it's been rising in other currencies as well. Central banks are buying gold too; the Peoples' Republic of China government has been urging Chinese people to buy gold. The "New Era" assumption, I believe, will claim that the U.S. dollar is losing its status as a world reserve currency, and that gold will (at least partially) fill the gap.
I also believe that inflation is coming back. Since the crisis, several central banks have been pumping new money into the respective economies. It's only a matter of time before this money-pumping translates into higher prices - particularly, in the United States. Despite excess reserves piling up and the money multiplier plummeting, M1 money supply growth in the United States has been at double-digit levels for almost a year now. (M2 has grown more modestly.) The Federal Reserve has all-but committed to keep interest rates near zero until 2011. They'll have to, because the residential real-estate crisis is being followed by a commercial real-estate crisis and will likely be followed by an option-ARM mortgage refunding crisis. The last is due to hit its peak in 2011. Given that the residential-real-estate bubble burst came close to wrecking the financial system, the Fed will err on the side of inflationary bias for the time being. To paraphrase H.G. Wells, the U.S. economy is in a race between inflation and catastrophe.
This (politically) necessary bias will add a double-whammy to the "greenback sunset" story, and will amplify it. Given both, conditions are well ripe for a gold bubble.
This blog will track news stories on gold, post items of interest from the goldbug world, mention gold stocks from time to time, and sometimes pass on some wilder items from the hardcore goldbug scene. Special notice will be made of ultra-bullish predictions that rate mention in the business media.
Unless the gold bubble gets pinpricked early, it'll be a wild ride over the next few years. Thanks for stopping by.