Saturday, December 19, 2009
To shift slightly, physical gold demand in North America is still rising - and the holiday season is one of the causes. As this Toronto Star article puts it, bars of gold are becoming "the ultimate stocking stuffer."
Speaking of gifts, there's an article on a tradition in Gary, Indiana: a bunch of kids raise money through fund-raisers, buy a gold coin, and drop the coin into a Salvation Army kettle. The child chosen to give it is one who's suffered a personal misfortune in the past year. This year, it was a .1107 troy ounce Austrian "Philharmonic" coin.
Friday, December 18, 2009
Gold timers' behavior this week leads contrarians to conclude that gold's correction is not yet over.He's careful to note that this analysis is short-term in nature, and says nothing about the fate of gold a few years out. However, it does suggest that the current correction is not yet done.
That's because optimism among the gold timers quickly jumped earlier this week in the wake of just a couple days of strength for gold's price. And then, after gold bullion plunged anew to fresh correction lows, their optimism didn't fade.
Both are bad signs, according to contrarian analysis. The first suggests an eagerness to jump back on the bullish bandwagon, and the second suggests that the bullishness is being clung to stubbornly. If sentiment follows the contrarian model, on both counts it will be just the opposite at the correction's ultimate bottom....
I should add that a continued gold drop is consistent with a continued rise in the U.S. dollar, which would be consistent with an unwinding of the greenback carry trade.
However, in recent months, gold's gone on tears when its relative-strength was higher (less bullish) than it is now. This Stockchart.com chart shows it - look at the line at the top:
I think 5,000 dollars is a reasonable expectation of where gold is headed over the course of the next several years, based on monetary and fiscal policy that is in place. Now if the government were to reverse course - if they suddenly brought the budget into surplus, and if the Fed aggressively raised interest rates back up to a reasonable level, say 5%, 6%, or 7%, not just a quarter-point every few months - then gold would probably not get to 5,000 dollars."In other words, despite the recent rally in the greenback, the underlying fundamanentals haven't changed. The U.S. is still heading down Inflation Lane, and will continue to do so unless there's an unprecedented tightening in fiscal policy and/or unprecedented adroitness in the Fed. I've read at least one professional goldbug who welcomes the current decline, because it gives a chance to buy more at lower prices.
There are two interpretations. It could be said, as did this blogger here, that gold speculators are "in denial." But, it could also be said that the speculators are there for the long haul - that their hands are stronger than those of the stereotypical minimum-margin plunger.
Also in the Business Insider, Joe Wiesenthal includes a chart showing that gold hasn't acted like an investment in the grips of an all-out bubble: its rise hasn't been that strong yet. He also passes on CIBC's conclusion that gold is not in a bubble.
Jim Puplava of the Financial Sense Newshour podcast has pointed out that there's one way for the majors to compensate: buying junior-gold companies with feasible "elephant" deposits, or ones that have at least a million ounces of gold (probably, several million.) He predicted that 2010 will be the year of mergers and acquisitions in the junior-gold sector.
His prediction makes sense for two reasons: first of all, financing is harder to come by for juniors. Secondly, M & A activity, in general, increases some time after production has peaked. The trusts came into their own in the middle of the original Great Depression (1873-1896.) M & A activity ballooned in the 1980s, about a decade after the U.S. economy began spluttering. Consolidation makes sense in those times for two reasons: prospects for direct expansion don't look that encouraging, and existing companies's prices have been beaten down (because of pessimism) to bargains. A study of the M&A trend, done about twenty years ago, revealed that the only acquisitions which made business sense were of companies whose assets were bought at a significant discount. A funny conclusion in a way, as it implied that a good corporate acquirer uses the same rule that good value investors follow.
Since the coin of the realm is "assets at a discount," it follows that a takeover-candiate junior has to have a market cap that values its gold reserves at an enticingly low price. These companies were easy to find a year ago, but not so much now. Also: Puplava's criterion has to be kept in mind. Unless the property's reserves show a solid seven figures' worth of gold in ounces, it's beneath an acquirer's notice.
This Globe and Mail report shows a bend with the new wind: an expert quoted modified the earlier $1,110-$1,140 trading-range forecast by adding a contingency: gold will be in that range provided that the greenback doesn't keep rallying. Also mentioned is that Indian physical-gold buyers are holding off purchases because they expect the price to drop further.
Thursday, December 17, 2009
This report from a PRC news outlet explains it: the greenback's becoming the safe-haven place to be, once again.
The market's opinion is pretty clear cut: The time for gold as the ultimate safe haven isn't here, at least not yet.
Wouldn't it be something if the much-talked-about carry trade proved merely to be the flavor of the year?
The result of these increases in the margin requirements will likely be somewhat bearish for the metals in three to six months. This is because it will require more capital to control the same amount of the commodity and will serve to dampen some of the speculative hot money which has been flowing into the metals lately.Of course, the same argument applies to hot money that seeks to short gold.
In a precious-metals bull market, silver usually fals behind gold until the bull's mature; then, silver tends to explode. We aren't at that stage yet, but the new demand for silver isn't inconsistent with such a move in the near future.
The man's been quite a success, and that tells you something. People who achieve great success in their field tend to swim with the mainstream and stick with it. Mainstream-changing, or taking seriously the perhaps-fustian promises of higher education in the thinking department, isn't conducive to career success. To put it in street terms, you gotta sing the tune.
Of course, goldbugs have their own tune and their own mainstream. Libertarian-oriented, quasi-academic, at least friendly with the Austrian School of economics, at least tolerant of conspiracy theories, cynical about governments and their effectiveness. That's the tune for gold investors, and even a gold-mining CEO content with a unionized labor force has to roll with it.
This Seeking Alpha piece by goldbug John Browne provides a counterpoint to Mr. Solsnoff's aversion to gold and the gold standard. Mr. Browne, I believe I should add, is a former U.K. MP.
Even though those numbers are above today's price, they're pretty moderate. If the banks mean "average" in the strict sense, and if their forecasts are averaged to produce a consensus, then they're saying that someone who buys gold today has a 50% chance of a 5%-or-so profit some time next year. That's not wild by any means.
As this Globe and Mail report says, Richmont hasn't been doing all that well lately due to growth-prospect concerns. Consequently, Chamandy is exploring opportunities to "enhance shareholder value." Although what he plans to do is unspecified, it's not going to be very good for Richmont's extant board.
What better cautionary tale than a business wunderkind in another line of business getting tangled up in a lackluster gold-mining company? As the story indicates, gold mining is not the same as gold itself: mining's a business, and the supposed leverage is not automatic. It may seem simplistic for me to say so, given producers' continual exploration efforts, but a gold mine is a wasting asset. The more value extracted, the more the asset is depleted.
This seems the best time to pass on the old boilerplate about exploration-level juniors: far less than 5% of all explored projects wind up as mines. What keeps the stock price of exploration juniors with all-but proven minable deposits so low, is the financing barrier. Financing is hard to get nowadays, except for "elephant" deposits in stable pro-mining jurisdictions. That's why many properties are passed from junior to junior to junior.
Update: Subject to shareholder approval, Chamandy is now the executive chairman of the board. That's what owning nearly 20% of a company, plus a track record of building and growing another company, can get you. Despite earlier speculations, Chamandy's new plan isn't to sell off Richmont or its assets: it's to grow the company, perhaps with acquisitions. Takeover rumors might be swirling in the gold-junior arena as a result.
Digressionary Update: While I'm on the subject of company risk, here's another item to consider: another junior producer, one-mine Kirkland Lake Gold, reported a wider loss in the latest quarter despite the recent rise in gold. A borehole in its Macassa mine collapsed, leaving its deposit inaccessible for three months. Most prodution crews had to be diverted to upgrading work. Kirkland's stock has more than doubled since its January low, although almost all that gain was yielded in the early part of this year. It's been in a trading range since May. Anyone who bought the stock as of June 30th would be sitting on a slight loss right now. Gold itself has gone up about 18% in that same timeframe.
Somewhat ironically, the U.S. dollar was driven up by the Fed's remarks. Conventional forex theory says that the greenback shouldn't have benefited all that much from yesterday's Fed announcement, as the FRB promised to leave interest rates at the ultralow level they're at now. As long as rates are foreseeably at 0-0.25%, there's no additional incentive for any significant capital inflows. Why change a capital-allocation decision when the ultralow yield (the incentive) isn't going to change?
And yet, the greenback's still climbing on recovery hopes. The obvious explanation comes from traders: the U.S. dollar was too oversold, or went down too fast and hard, so it was bound to recover anyway. Another reason is recovery-related: as the U.S. economy heals, stocks will continue to go up. Consequently, there'll be less U.S. demand for other asset classes, including foreign stocks, and more foreign demand for U.S. assets - especially U.S. stocks. This net demand for U.S. assets provides an additional source of demand for the U.S. dollar itself.
A plausible reason...but, ironically, U.S. stock futures are down too. As the Wall Street Journal Online puts it, "US Stock Futures Lower On Post-Fed Hangover."
So we're back to the earlier rationale: the greenback is rising because an expected Fed rate increase is being discounted, even though the Fed board has given no indication that they'll follow through on that expectation.
(And it's said that the gold market is irrational...)
Wednesday, December 16, 2009
Ironically, gold's been on the rise this morning. As I write this post, spot gold's edged up to US$1136.40 despite the U.S. core inflation rate for November being flat. Today's action in gold gibes more with John Cassimatis' opinion that gold bottomed at $1,110.
However, this article at TheStreet.com says, "[a]nalysts expect gold to stay in a tight range of $1,110 to $1,140 for the end of the year as profit taking and bargain hunting restrict prices." If those analysts are right, we're seeing gold edge up to the top of a trading range right now.
Left unmentioned is the fact that the 1979 gold explosion was the climax of the 1970s bubble.
On the other hand, a Canadian value investor, Alan Wicks, says that gold miners are too overpriced for his blood. "'We just find it difficult to invest in gold companies that trade at very high P/E and price/cash flow multiples, don't pay much of a dividend, and with profitability that is anemic at best.'"
Essentially, gold bulls are betting on: a), stagflation; b), the Fed letting inflation kindle by staying too easy for too long. The best environment for gold is actually anemic growth combined with high inflation, because gold tends to outperform all other asset classes in that environment. It isn't clear that we're facing stagflation in the coming years, although stagflation did emerge in the 1970s after the Fed pumped lots of money into the system due to credit-crunch fears in 1970. This time 'round, though, the money multiplier has collapsed; excess reserves are legion, whereas in the 1970s there were little. The money multiplier stayed normal back in the bell-bottom decade, unlike this past year. Also, the opportunity cost of not lending is lower now than then - and the decision by the Fed to pay interest on held reserves means that the opportunity cost can be lowered even more. For the first time, the Fed can actively encourage banks to hold excess reserves by raising the rate it pays on them.
On the other hand, the Fed has almost always had a track record of staying too easy for too long. The early 1930s stick in our memories, aside from the economic devastation of that period, because it was the only period in which the Fed didn't ease enough. Since then, it's always been erring on the side of easing. This inclination shows up even more after credit crises, because the risk of another Great Depresssion is most acute then. With respect to this plank, the odds are definitely on the side of the goldbugs.
But will gold be the beneficiary of the resultant asset inflation? I believe it will, largely because gold has shown the same "magical" qualities that residential real estate did in the last recession: not dropping during the bad times, then rising once the bad times started to fade. We all know that some asset class is going to be the prime beneficiary of a post-overeasing bubble. In the 1990s, it was stocks; in the '00s, it was residential real estate. Gold looks a likely candidate this time 'round.
A wryer gold-skeptic argument is over at Bloomberg. It's by Claudia Carpenter and Pham-Duy Nguyen, and it turns one of the goldbugs' favorite arguments on its head. Right before the last bear market faded into a new bull, Gordon Brown ordered the Bank of England to sell about 400 tons of gold. The end of the '80s-'90s gold bear market, as the article relates, is now known as the "Brown bottom;" Mr. Brown's been the butt of a lot of goldbug jokes since the bull market got rolling. Now, though, central banks are buying gold. If central-bank timing is as bad as before, then "Gold Buying by Central Banks May Send Signal to Sell."
One quibble with that article's premise: the much-vaunted Indian central bank gold purchase was of gold that the IMF chose to sell beforehand. Which of these institutions has the lousy timing?...
This other report notes that the Euro was pushed up by better-than-expected Eurozone economic data. As I write this post, spot gold's pulled back a little from its near-term high of about US$1,135 to $1130.70.
Tuesday, December 15, 2009
On the bearish side, Mark Thomson claims "Without India, Gold could be 600$ or less." Instead of a explicit conspiracy theory, Thomson claims a kind of cabal glued together by venality.
It's an unusual argument, in terms of content, because gold bears are normally deflationists of a certain sort. In terms of timing, though, it's the kind of forecast that pops up when an investment's in an incipient bubble. A bullish run is accounted to be irrational, and a return to historical norms is claimed. If the gold bubble evaporates before it gets rolling in a serious way, those two will prove to be prescient. If gold goes into a full-blown bubble, they're likely to be the idiots of the show.
I have to say, it does take some courage to go against the trend as these two have. Not many forecasters will come out and say that an investment that's been in a bull trend for more than eight years will turn bearish within a year. Also, their faith in the skill of the Fed is touching. (It's a Canadian thing; I'm one myself.)
H/T: I got ahold of this report courtesy of this thread in the Free Republic.
As of the time of this post, spot gold has climbed up to $1,123.10. For the first time in more than a week, the price of gold has been driven up by macroeconomic news.
This WSJ column points to unused capacity in the U.S. economy as a reason not to expect a resurgence in inflation anytime soon. Interestingly, capacity utilization was at about 80% when inflation did jack up in 2007-8.
Monday, December 14, 2009
To the contrary, market letter writer Howard Katz argues that the prospects for gold are bright, and that a descent to US$1000/oz represents a real buying opportunity. His call assumes that money velocity will eventually return to more normal levels, bringing a spike in inflation. Roubini, of course, believes that the current low velocity of money is the new normal, or at least will stay stuck on low long enough to give the Fed ample time and opportunity to drain the monetary base to more normal levels.
So there we go. As of now, gold's an export trade for Canada.
On a more skeptical note, a recent Economic Times report begins with this sentence: "MUMBAI: Gold futures may extend losses this week on year-end profit-taking [and long-position liquidation], triggered by expectations of a strong dollar overseas, analysts said." At the end, it offers selling advice for Indian gold traders. And yet, this other ET article shows unprecedented Indian retail-investor interest in gold ETFs.
Nevertheless, given that gold's slid more than $100/oz, one write-up's optimistic. This Marketwatch report credits the bail-out for gold's uptick, although it quotes an expert as saying that the rise is due mainly to technical buying. As I write this post, the more obvious beneficiary has been futures on the thee major U.S. stock market averages. A Wall Street Journal report is more laconic: "Spot Gold Bounces on Dubai Debt Deal, Weaker Dollar." The expert quoted in the WSJ write-up is more in tune with gold's recent movement:
Monday's upbeat tone wasn't enough to change the bearish near-term outlook for gold, analysts said. Positive U.S. economic data this week could bring support to the dollar, while profit-taking ahead of the year-end should also keep gold under pressure, they said.
"I think we'll have another look to the downside," said [Mitsubishi gold analyst Tom] Kendall. "I think the first real key area for gold is $1,085 per ounce."
When the impending Dubai World default hit the news, gold plummeted but largely recovered. At the time, that bounce was taken as evidence of the strength of the gold rally. Now, the lack of reaction to the bailout news is taken as confirmation of a near-term bear movement. In the more abstract sense, nothing's changed: both are taken as confirmation of the near-term trend.
And yet, the Dubai World debacle was revealing; it showed that the greenback is still the king of the safe-haven mountain. For now, anyways.
Sunday, December 13, 2009
There's another point that can be used to rebut the claim that gold is currently in an all-out bubble: too many people are aware of the possibility, implying that they're still skeptical of gold. This point may merely be naive contrarianism, but contrary-opinion theory has a solid kernel of truth in it. People are publicly bullish about investments they have already bought. They want company; their bullish expectations amount to, "I'll make money with this thing and so will others once they get on board too." In contradistinction, people who are bearish don't own it and don't plan to. When everyone is bullish, therefore, everyone who's likely to buy has already bought. The only way for the price to keep plowing up is if new demand comes in from somewhere else - new money. If the investment is widely-talked about, there aren't that many sources for new-money demand.
The current level of skepticism comes from people who already know something of gold. Should gold confound them, they might well switch their opinion to bullish.
At the climax of a real bubble, there is almost no skepticism. The few that are, are hesitant and often placatory. They know full well that they'll look like idiots if the investment keeps rocketing up. In addition, too may of the ordinarily prudent have already had their disbelief-screen utterly confounded at an earlier stage of the bubble. Common sense is no longer useful, and suspension of prudency-based disbelief is well-nigh universal. The jump-the-shark moment near the top of the bubble, such as bullish profiles of the investment in the non-business media, is the last of several; the others seem to be jump-the-shark moments but aren't. Hence the near-universal silence of the skeptical, and the perception among bears that top-calling is just too risky at that point.
Historically, the pros tend to exit at the beginning of the blow-off stage. Client and/or performance pressure tempts them back in. That's why they tend to get caught along with the general investor.
We're far from this stage yet. Gold may get flattened down to three digits and stay there; if so, it won't occur because of a popped gold bubble. It'll take place because a real bubble never got rolling. The recent "bubble" talk is reminiscent of U.S. residential real estate around 2003.
While I'm on the subject, gold skeptic Andrew Butler has written a Seeking Alpha article entitied "Is Gold Bubble Popping?" A catchy title, but he's really discussing whether or not gold is overvalued at current prices. He compares gold to crude oil, claiming that there's a 74% correlation between the two since 1971. By his lights, gold should be in a range centered around US$750/oz. If he's right, then gold is about 49% overvalued - or oil's about 33% undervalued.