Thursday, December 31, 2009

Happy New Year

I want to wish everyone a Happy New Year as this one winds down. I started only recently, and appreciate you reading this blog as only a new-entrant can. My hand should become surer as time wears on.

For gold, it's been quite the happy old year. According to the blog "Gold Prices Today," the afternoon fix for gold on Dec. 31st, 2008, was $856.40. There was no afternoon fix this year, but spot gold has closed out at $1,096.50. That makes for a gain of $240.10, or 28.0%, during a tumultuous but exciting year for the metal. Gold did better than the Dow's 18.8% gain on the year, and the S&P's 23.5% gain.

It's now over. Undoubtedly, 2010 will bring more surprises, but now's the time to set all that aside (except for dedicated workaholics.) All the best for this eve.

Treasuries Prices Falling

As reported by the Wall Street Journal, the surprise drop in unemployment claims has pushed down prices for U.S. Treasuries. The U.S. dollar index has risen in that timeframe, and gold prices have dropped somewhat: as of the time of this post, spot gold's below $1,100 - specifially, at $1,097.80.

That's life in a recovery world, one where we see gold and Treasury prices falling in tandem.

A Case For U.S. Dollar Undervaluation

The case is made by Ivan Marchev in a Motley Fool article entitled "Why I'm Bullish on the Dollar;" it deals with the U.S. dollar/Euro relationship. His case is that the greenback is undervalued with respect to the Euro on a purchasing-power parity basis. Fair value on that ground, using German and American purchasing power levels, would be about US$1.25 for the Euro. Since the Euro makes up for about half of the U.S. dollar index, being bearish on the Euro is tantamount to being bullish on the greenback.

The implications for gold, he believes, are bullish long-term because his bear case for the Euro is based upon the need for the European Central Bank to keep inflating. On the other hand, he's short-term bearish on gold from a buying-opportunity perspective. He believes that gold would be a good value if it drops to US$1,000/oz, ane even more so if it drops to $900. He believes that a drop to the latter price is "possible if the turmoil on the Old Continent accelerates, and the euro drops to $1.25. Gold was below $900 in March, when the euro last traded at that level."

What he doesn't seem to realize is that a decline of that magnitude, in percentage terms, would match the financial-crisis decline from February 2008 to November of that year. Without a similar crisis, I don't see gold falling by that much.

Gold's recent troubles are the subject of a brief Seeking Alpha write-up by statistician workhorse Bespoke Investment Group. The article notes that, after gold broke below its 50-day moving average in mid-December, it's had trouble rallying above that average.

"Fun Fact" From

As reported on their Website, sales of U.S. mint products over the Christmas week were disappointing...with two exceptions: 1 oz gold and 1 oz silver Eagles.

A Portent: Value Investor Goes For Gold

As reported by Forbes magazine, noted value investor Jean-Marie Eveillard has gone for gold in a big way. What makes this portentous is the fact that gold is not exactly a value investment. As gold skeptics never tire of pointing out, gold does not generate a return. There's no cash flow, no dividends, no earnings from a hunk of gold. Moreover, gold underperforms stocks in the very long term. Forbes columnist William Baldwin makes both these points. Gold mining stocks do generate returns, but only when the companies' proceeds are sufficiently above all their costs to do so. Even if gold goes up, a cost squeeze can make for losses. Suffice it to say that gold miners are cyclicals, and their earnings are volatile.

Eveillard is frank about his reasons. The funds he's a senior advisor to, except for one that's a pure gold fund, have "insurance" levels of gold in their portfolio. They're using gold for hedging purposes, not because of any bullish call. He himself recommends that investors only put 5-10% of their holdings into gold, and pegs 10% as a good maximal insurance level for a fund. Beyond that 10%, a manager begins to speculate on gold's rise.

One of the abiding characteristics of value investors is that they're in it for the duration. They buy on the assumption that an investment they hold will be held for years, as it will take that long for the market to revalue it properly. Every value investor knows that gold generates no return, and that every dollar spent on gold is a dollar that can't be put into a company that does generate returns. Deciding to hobble one's portfolio with a no-cash-flow investment for insurance purposes, means that one has decided that the insurance is worth paying for. In Eveillard's case, he's betting that the Fed has (yet again) erred on the side of too much easing.

That conclusion is one that gold bulls will nod at, and probably like. However, value investors have a track record of buying too soon relative to their calls. More than a few were buying stocks with both hands in October-November of 2008, because the valuations were compelling at that time. Many of them got temporarily blindsided in February and March of this year, when the valuations became even more compelling. As is often the case in the value-investing world, their judgement was vindicated in the end...but the ride was bumpy in the interim.

Given this habit, it's safe to say that what M. Eveillard expects re reflation will take a few (or several) years to come to fruition. It's also safe to say that he's early in expecting the effects of over-reflation to kick in. Gold enthusiasts, please take note: when value investors are on your side, it means that the long-term story comps out, but...

...they buy too soon.

After Dip, Gold Climbs Back Above $1100

Yesterday, gold made what chartists call a "double bottom." A spike downwards just after 10 AM ET ended almost exactly at US$1,085/oz. Right after reaching that level, it reversed and settled into a trading range just above $1,090. That range was climbed up from last night and early this morning; gold made it above $1,100 at about 2 AM ET. As of the time of this post, spot gold's at $1,102.00

This Wall Street Journal Online article credits the rise to a somewhat weaker U.S. dollar and rising crude oil prices; gold tends to be positively correlated with the latter. A Bloomberg story webbed today looks at gold's rise over the entire year: the metal's clocked in a greater than 25% annual gain, a period that includes this month's plummet. This is the ninth straight year that gold's had an annual gain. The three experts all quoted in the article, unusually for now, were all strongly bullish for 2010.

"Whither the greenback?" That is the question, in the minds of bears as well as bulls; in the minds of the nervous as well as the enthusiastic. In essence, chart-watching is a search for regularities and precedents. The reason why chart-reading fails from time to time is that new conditions intrude. Look at this weekly chart for the U.S. dollar index:

A basic reading of the thing reveals a five-week uptrend from a bottom that was higher than the early-2008 low. Despite the plummet in early December '08, the greenback made a higher high at the beginning of March '09 than at mid-November '08. The moving averages - the red and blue lines - are not acting consistently with a new bull market, 'tis true, but the red and black lines in the graph below the price chart (the MACD lines) are. The RSI line above the price chart is in the middle range, suggesting that the greenback is not overbought at this time.

I'll admit that the above chart is ambiguous, as is the daily chart, but, prima facie, the trend looks bullish for the greenback. In and of itself, that trend doesn't imply a bear market for gold even if followed through upon. Gold was at least 10% lower when the U.S. dollar hits its lower bottom in March of '08; the difference resulted from gold rising in terms of other currencies too. However, a rising U.S. dollar does hobble any resumption of a gold uptrend: the '08 greenback spurt-up accompanied a near-30% decline in the U.S. dollar price of the metal. (Gold bottomed at slightly over $700/oz in November of 2008.)

I'm not predicting a similar move, which would take gold down to the $900 region. The last plunge was in the face of panic buying of the greenback due to the financial crisis. Unless another one's in the offing - a deflationary financial crisis - the U.S. dollar won't act in the same way as it did in '08, and gold won't suffer as it did in '08. The current upturn in the greenback is predicated on recovery, which will not induce panic buying except for a once-only unwinding of the U.S. dollar carry trade. That unwinding may have already taken place.

I merely make these points to suggest that it's not very likely that gold will rocket upwards in early '10. The reasons given by gold bulls take some time to have their impact.

Wednesday, December 30, 2009

The Future of Gold, From Two Bloggers

The gold market has entered the radar screen of Lila Rajiva, a libertarian writer more concerned with propaganda and the intersection of war and statism. Some time ago, she co-wrote a book on markets with goldbug mainstay Bill Bonner.

From a statement from Martin Feldstein, she interprets that there'll be a "concerted effort to push the gold prices lower..."

Another blogger, one closer to the thick of the markets, has publicly wondered: "Can Gold be the Next Currency?" An agnostic on the question, he nevertheless passes on the opinion of two hedge-fund managers who believe so.

Myself, I think the gold-as-future-currency is the "New Era story" that's going to be pushing gold into a real bubble. I explain why in an Enter Stage Right article that ended up being the inspiration for, or "version 0.1" of, this blog.

Interview With A Gold Fund Manager

The manager in question is Margot Naudie, who manages the TD Precious Metals Fund. Although it's returned 101% over the past 12 months, and has an average annual gain of 16.6% over the past five years, it only holds C$226 million. Her reflections on gold have been webbed by the Globe and Mail.

Two points of note: she says that she averages up when a gold company works out, and also says that gold miners haven't had a great record when it comes to free cash flow and dividends. As it turns out, a lot of the supposed gold-stock leverage has been eaten up by rising costs (particularly, high energy costs.)

Barrick Gold-Hedge Close Makes Deal-Of-The-Year List

It's the first of "The Best" in the Globe and Mail's annual "Deals of the Year" list:
For years, investment banks earned sweet fees for running Barrick Gold's massive hedge book. Then gold went on a tear, and hedged production became a millstone for newly minted CEO Aaron Regent. So those same investment banks proposed a massive stock sale to raise cash that would close out the hedges.

Mr. Regent, to his credit, put the dealers' feet to the fire. By pushing for the largest bought deal in Canadian history, a $3.5-billion financing, the CEO shifted the considerable risks of this deal to the brokerage houses.

Without blinking, the Street went all in, as the bankers believed an unhedged Barrick would find all kinds of buyers. They were right. Huge global demand for the world's biggest bullion play meant Barrick ended up selling $4-billion of stock....

Great for the investment bankers responsible, even though the move came almost right at the top of the market. There's an old trader's rule that says if a mjaor holdout "capitulates," then a top has been reached. Barrick deciding to end its hedging and tie its revenue to the gold price, ending more than a decade of hedges, counts as a capitulation.

Of course, calling Barrick "dumb" for doing so isn't exactly warranted. The company sold stock to close the book, pushing the price up by almost 8% on the announcement day. The stock's pulled back since then, but not by much.

Gold slides down again

This time, in the overnight markets. Spot gold dipped to slightly below $1,090 at about 3:30 AM ET, and then established a trading range. As of the time of this post, it's at $1,90.30

This Bloomberg report attributed the drop to a rise in the U.S. dollar, which rose on recovery hopes. It quote an analyst who's surprisingly bearish short-term, given that he's a long-term bull:
“Gold may fall to $900 before investors and the public at large try to buy and hold the market,” said Bernard Sin, head of currency and metals trading at bullion-refiner MKS Finance SA in Geneva. “I am dollar bullish because I believe the U.S. economy can grow.”... Safe-haven demand will probably help gold in 2010, pushing it as high as $1,300, Sin [also] said.
Another analyst was quoted, and was also short-term bearish.

The previous optimism, spurred by central-bank purchases, keeps fading. Despite the gloom, gold has passed into stronger hands. The SPDR Gold ETF [GLD] reported that its holdings increased slightly. And, the U.S. Mint's supply of fractional Gold Eagle bullion coins has sold out.

Also of note: even at today's more modest prices, the Indian central bank is still up on the 200 tons it bought. According to a report webbed at the time, the central bank's average buy price was $1,045/oz.

Tuesday, December 29, 2009

Data Released, Gold Drops...

It's become a familiar routine: good U.S. economic data gets released and gold gets driven down. As of about 9:30 AM ET, the same script was followed; spot gold was driven down from about US$1105/oz to about $1097.

Only this time, the drop mostly reversed. The reversal came shortly before U.S. consumer-confidence data was released, and has held gold above $1,100. This, despite the fact that the U.S. dollar has pared its losses in consequence.

Is the economic-data gold bear trade going sour? We'll see.

Update: Not as yet, though it was close. After reaching about $1,104, gold turned back down right after 11 AM ET and slid down to a little over $1,095 just before noon ET. A rally in the U.S. dollar was behind it. Since that re-drop, it's been drifting somewhat below $1,110. As of the time of this update, spot gold's at $1,096.80.

Useful gold primer at Investopedia

The article, "A Look Back On Gold" by Sham Gad, contains a to-the-point primer on what makes gold prices rise. Essentially, a bet on gold is "a bet against current monetary systems." It's well worth a read.

Gad's background is interesting, given what he's written. He's a value investor by trade, not a goldbug; his blog shows it.

Inflation Uncertainty

Over at Seeking Alpha, Daryl Mongomery has penned a critique of U.S. inflation statistics entitled "U.S. Inflation Reports: Contradictions and Absurdities." He starts off by noting two disconnects between the latest PPI and CPI figures, in the areas of autos and food. The nub of his critique is that two new techniques - substitution effects and hedonic adjustments - both keep the inflation rate down, even if they imply opposite conclusions utility-wise. He concludes by saying that market prices, such as the price of gold, are better gauges of what're really happening to U.S. prices.

Along that line, economist John Williams has an entire service devoted to alternate measures of economic data; it's called Shadow Government Statistics, or ShadowStats. On the homepage, Williams has a graph of U.S. inflation using the pre-Clinton (pre-adjustments) CPI measures. The graph shows inflation's pre-crisis low as slightly less than 4%, in 2002, and a high of 9% in early 2008. Currently, the pre-Clinton CPI measure has inflation at around 5%. The same measure shows the crisis low at about +1%. Had the old CPI still been used, there wouldn't have been any reported deflation at all.

From a stable-prices perspective, Williams' proprietary SGS Alternate measure is worse. It shows the U.S. enduring double-digit inflation in early 2008, and a crisis low that never got below +5%:

Chart of U.S. Consumer Inflation (CPI)

Saying that the U.S. government is cooking the inflation books makes a contentious claim, to be sure. What side you're on depends upon how venal - or desperate - you think U.S. government financial officials are. The benefits to the U.S. government from down-decking the inflation numbers are threefold: a) lower cost-of-living payment adjustments on inflation-adjusted transfer payments like Social Security, plus lower COLAs in general; b) lower tax-bracket adjustments; and... c) lower rates on Treasury securities, as lower inflation numbers make a specified nominal rate imply a higher real rate. Lower inflation numbers mean a lower inflation premium.

I should say that the same threefold benefits apply to not overstating inflation, too. Needless to say, the U.S. government and those who see the inflation picture the government's way believe that the new inflation numbers are more accurate than the old. The benefit to the government, in their eyes, is eliminating overpayments and too-low tax collections.

Uncertainty Over Gold

A long Commodity Online article by David Lew, featuring commentary by market letter writer Howard Katz, digs into the thesis that speculators have driven the gold price higher. Using demand data from the third quarter, and the still-high net long non-commercial open interest for gold futures contracts, the article concludes that speculation was the reason. Although open to the possibility that gold will continue rallying, it contains these paragraph after going in to speculators' open interest:
An important factor is that under present economic circumstances, there is less money with which to buy jewelry or to invest in commodities, gold included. This is reflected in the low level of demand in the latest reports.... Demand for jewelry which usually represents about 70% of demand for gold was down 32% in the latest reported quarter (third quarter of 2009).

The gold price could potentially fall to near $500 in a relatively short time. As an example, after gold rose sharply in 1979-1980 to $850 it was followed by a drop to near $500 in less than 2 months. It will not be surprising to see the gold price take a similar loss in a short time.
Katz is less bearish than uncertain. He also holds up the possibility of gold going to $1,500/oz or $2,000/oz if U.S. dollar weakness continues. One possibility not mentioned is gold staying about where it is.

Along this line is a point/counterpoing write-up webbed by the Sydney Morning Herald. The first expert quoted, Evans and Partners analyst Cathy Moises, has a bit of an unusual call: short-term neutral, long-term bearish. Her call is based upon gold as a crisis hedge, and a forecast that recovery is in place. As fears ease, so will the attractiveness of gold. Three other experts quoted in the report think that gold will rise next year, with the U.S.' fiscal position and Asian demand for gold cited as reasons for the bull market to continue. Interestingly, all four expect a trading range in the near term.

A report webbed by iAfrica quotes a different analyst which concurs with Katz's conclusion that speculation drive the price up in November, for similar reasons. However, the Resource Capital Research report analyst quoted forecasts a trading range between US$1,000 and $1,100/oz.

Speaking of demand: this report from the Israeli Diamond Industry news portal has this to say about Chinese jewelry/physical gold demand:
China Daily reports that gold jewelry sales soared by over 30% during the past weekend in Beijing, with bargain shoppers heading for the city's major jewelry stores to take advantage of end of the year promotions....
I haven't seen any indication that the demand surge has been duplicated in India, however.

All in all, a picture that shows real uncertainty about gold's fate. The November run-up, and December run-down, have shaken more than a few analysts and left a lot of caution in its wake. The big near-term variable is the U.S. dollar, which took a lot of people by surprise when it surged up this month.

Gold Slightly Down Despite U.S. Dollar

As reported by a Bloomberg story, gold dropped slightly overnight. The reason given was speculation that the U.S. dollar will appreciate. However, the U.S. dollar itself is beginning to slump. That pullback has been attributed to profit-taking, and to strength in the stock market.

A Reuters report gives a different take. It presents the recent strength of the greenback as the result of a short squeeze.
There is also an indication that excessive long positions in gold futures have somewhat been cleared while many dollar short positions have also been covered, paving the way for gold to test new highs early in 2010, said Koichiro Kamei, managing director at financial research firm Market Strategy Institute.

"The dollar's recent firmness was partly due to the covering of excessive short dollar positions, and that adjustments seem to be coming to an end," he said.

"Gold's correction may also be over, and talk of central bank buying will again be the main driver for gold to rally. News of fresh central bank buying would likely trigger a rally to new record high prices for bullion," Kamei said.

The U.S. dollar is still the main driver of gold as of now. A blip-up in the U.S. Dollar index triggered a 12-dollar/oz sell-off, from which the gold market partially recovered in afternoon trading. As I write this post, spot gold's largely unchanged at $1,104.70.

Monday, December 28, 2009

Seeking Alpha Article Shows Nouriel Roubini Is Gold Bulls' "The Man To Beat"

Life is sometimes unfair, particularly for those who've stuck their neck out. It's becoming clear that Nouriel Roubini, despite his judiciousness about the gold market, is becoming Goldbug Enemy #1. That's because the followers in his wake tend to seize upon his contention that "gold has no intrinsic value;" in their glee, they chuck out the nuance in his own analyses.

Gold, in fact, does have an intrinsic value (in the ordinary sense of the term.) It's a status good. The gold-is-money argumenters, who often follow in the wake of Aristotle, presuppose this intrinsic value. That explains why gold's been a precious metal for about as long as there's been war.

In a calmer world, Roubini would just be kidded about his contention. But not in this world. Case in point, courtesy of J.S. Kim at Seeking Alpha:
Roubini claims that gold has no intrinsic value. If we look up the definition for intrinsic, this is what we find: “Of or relating to the essential nature of a thing.” The fact that people are willing to pay more than $1,000 an ounce for gold, by definition, grants gold intrinsic value. The fact that people value gold as an attractive adornment in the form of jewelry and are willing to pay top dollar for gold jewelry, by definition, grants gold an intrinsic value. If gold had no intrinsic value then why do people offer top dollar for it?

I wonder if Roubini is married, and if he is, if he bought his then fiancĂ©e a diamond ring? Using the flawed “intrinsic value” argument, if gold has no intrinsic value, then surely diamonds have zero intrinsic value as well. And if so, then why do so many people that accept the flawed “gold has no intrinsic value” argument willingly buy diamonds? Of course, the answer is that both gold and diamonds DO have intrinsic value as indicated by the willingness of people to pay loads of money for these commodities, whether in raw or processed form.
There it is, although Kim doesn't explicitly mention "status good."

If gold does go into an all-out bubble, Roubini may be turned on. Permabears like he are only loved by other permabears. In the middle of a crisis, they get their moment in the sun and are often idolized for being right when almost no-one else is. When crisis hits, the "stopped clock" is the only clock to tell the time accurately. As the crisis fades, though, the adulation also fades and people begin to ask, "what have you done for me lately?" Later, "Mr. Bull's put my portfolio up X%. Why haven't you?"

In Roubini's case, his competition is Peter Schiff. Both forewarned, and both proved to be right when few others were. The fate of gold is going to determine which of the two will be "the last permabear standing," as Schiff is a gold bull and Roubini (of course) isn't.

Will Schiff wind up being "so last year," or will Roubini? We'll see in 2010, and it will be gold that tells us.

Gold And The Central Banks, 2009

The Times of London Online has webbed an article about the shift in the tide for central banks - specifically, emerging-market central banks.
There is little to beat the lure of gold, as many recipients of a lavish Christmas gift will confirm, but it is not only seasonal impetus that has put a new shine on the precious metal — for the first time in 21 years the world’s central banks have been net buyers.

World Gold Council (WGC) data reveals that amid growing concern over the weakness of the dollar, about $28 billion of bullion was bought by central banks this year, based on an average price of $978 an ounce....
Traditionally, the central banks have been the butt of goldbug jokes - particularly, the developed-countries' central banks. Gordon Brown's served as the resident fool for selling some of the U.K.'s gold into the "Brown bottom." Those who like to believe that the developed countries' central banks are as ham-handed as ever, will be pleased to learn that the central banks of France, Sweden and the Netherlands have sold some gold this year. Not to mention the IMF.

However, emerging-economy central banks aren't exactly converted to the new way of gold. As this Wall Street Journal Online article reports, most of the diversification out of the greenback went into the euro.

Gold's Still Holding

As the long weekend fades into the last trading week of 2009, gold has held above US$1,100/oz. As I write this post, spot gold's up to $1,108.40. The U.S. dollar's remarkable run-up seems exhausted, and this month's plummet in gold seems to have passed. This Reuters report quotes an unnamed Japnanese trading company manager as saying, '"Physical trade is slow, but there is general caution over volatility in the metal's prices in a seasonally thinned-out market toward the year-end."'

Another pundit has stepped up to the plate on the gold-bubble issue. David Olive of the Toronto Star repeats the gold-skeptic arguments faithfully, and quotes Nouriel Roubini copiously. A gold skeptic himself, his piece has the air of someone who wishes goldbugs would just crawl back in their hole.

This fellow's a little different from someone who thinks that gold's in a bubble because its rise has outstripped fundamentals. As I've written before, and will in all likelihood write again, gold is the asset class that (by far) elicits the most emotions. This holds true in both camps. Whatever can be said about Mr. Olive, he has stuck his neck out. Some may consider him brave for doing so.

However, his boldness should be taken as a sign that the gold bubble hasn't really gotten going yet. Pundits in the popular press don't Galbraith it up when a real bubble is climaxing. Too many of their witty like-minded colleagues have been turned into jokes at that point, and too many full-throated bulls are around to shout any skeptic down. This confluence is true of all bubbles. How many dared to call a top in Internet shares in late 1999? Of those, how many were mealy-mouthed about it? To the best of my knowledge, the answers to these questions are "very few" and "all of them."

For Mr. Olive to be right, gold has to fail to enter an all-out bubble. The November-December "mini-bubble" has to be it for the metal. He (and his quoted expert Nouriel Roubini) may be right, but the deflationist scenario has to kick in for they to be so.

Of course, I myself might be wrong in expecting a full-fledged bubble. Gold may pause for a while and start meandering up or sideways without any real conviction. 2010 might be the Year of the Trading Range for gold. In that case, the title of this blog would look a little, er, detached from reality. This action would be consistent with the muddle-through scenario, where inflationary and deflationary forces largely cancel each other out except for a mild inflationary bias. Should this case prevail, goldbugs may be happy to crawl back to the sub-basement and wait it out.