Peter Brimelow Says Recent Bearishness Proved To Be Contrary Indicator

In his latest Marketwatch column, Peter Brimelow credits what he calls the "radical gold bugs" with being right on gold's turnaround. Physical demand from Asia was what turned gold around. The more timing-oriented players turned skittish, if not outright bearish, at about that time.


He points to a certain irony with respect to gold exploration:

[O]nce gold gets to a level at which average gold deposits are viable, the discoverers of somewhat better ones make fortunes. So do patient prospectors amongst the junior gold names. It is a great time for what some deride as "rock hounds."

This is what happened during the circa-$300 plateau in gold that occurred 1993-96, when it was considered a healthy price.

So gold miners are partying like it's 1995, when gold was about a quarter of what it is now. That speaks to one serious bout of margin squeezes.

And yet, from what I've seen in the gold-exploration market, the stocks of junior explorers reporting very good drill results aren't getting much of a kick right now. There are exceptions, but not very many. Indifference seems to have settled into that nether region.

Deflation Talk As Contrary Indicator

The National Inflation Association, looking at the recent deflation talk, concludes it's a contrary-opinion signal to buy gold because two previous spates preceded strong rises in the price of the metal.

The largest spike this decade in articles about deflation came in May of 2003. At that time, the Dow Jones was 8,500, the price of gold was $350 per ounce, and the price of oil was $30 per barrel. The Dow Jones went on to rise for four years straight reaching a high in 2007 of 14,198 up 67%. Gold went on to rise for seven years straight reaching a high this year of $1,248 per ounce up 257%. Oil went on to rise for five years straight reaching a high in 2008 of $147 per barrel up 390%.

The second largest spike this decade in articles about deflation came in November of 2008. At that time, the Dow Jones was 8,000, the price of gold was $725 per ounce, and the price of oil was $50 per barrel. Since then, the Dow Jones has risen as high as 11,257 up 41%, gold has risen as high as $1,248 per ounce up 72%, and oil has risen as high as $88 per barrel up 76%.

NIA has come to the conclusion that the mainstream media talking about deflation is the most accurate contrarian indicator out there. The false threat of deflation in 2003 came at the beginning of the biggest rise in asset prices in U.S. history. The false threat of deflation in 2008 came almost exactly when stocks, precious metals, and commodities had reached their bottom. NIA believes that the threat of deflation today could mean that the biggest move to the upside for gold and silver in history is right around the corner.

One possible trigger for serious inflation would be the PRC selling some of its U.S. Treasuries. The most likely buyer would be the Federal Reserve, which would jack up the monetary base and likely lead to a ramp-up of the money supply. It could lead to serious inflation.

Janes Turk's Take On The BIS Gold Swap

James Turk suspects the hidden party behind the BIS gold was was Portugal, becuase the Portugese government recently announced that they will be posting collateral against derivative transactions in order to reduce funding costs and that same government has long been active in the gold market. The revelation that commercial banks were on the other side of the trade made him modify his theory:

Before it was announced that the BIS completed the swap with a commercial bank, the mainstream interpretation was that a troubled sovereign borrower or perhaps even the ECB itself needed liquidity, so they used gold to borrow currency. But given its two-sided nature, there was also another potential reason for the swap even if it received little attention – the BIS may be running out of physical metal for its interventions in the gold market. So it needed to get its hands on some physical metal. Consequently, it swapped currency for physical gold (or perhaps to deliver on calls it had sold and was exercised).

Then after the BIS announced that it had completed the swap with a commercial bank, many observers – including me – were perplexed. If it were a traditional swap, the commercial bank would have 380 tonnes of gold in its possession, which is a highly unlikely proposition. Commercial banks are not in the business of owning gold; they are in the lending business. Clearly, if any commercial bank had owned gold, which is highly unlikely I might add, the gold would have already been loaned out....

Now consider for a moment, what if that gold loan had been made by Portugal to Citibank or some other zombie bank? It wouldn’t look very good on Portugal’s balance sheet to be owed 380 tonnes of gold by a near-bankrupt institution. Given that Portugal is taking steps to “to reduce its funding costs” as the FT reports, it would be logical for it to get rid of that gold loan.

The best choice of course would be to demand repayment of the loan and put the 380 tonnes of gold back in its vault. That action though would drive the gold price sky-high, given the dearth of sellers of physical metal at current prices. Sky-high prices would blow-up the gold cartel and its efforts to continue capping the gold price as it operates its staged retreat, letting gold rise every year but not too much so as to not draw everyone’s attention to it and the resulting consequences of ever-depreciating fiat currencies. So enter the BIS.

It swaps currency for the gold loan at the commercial bank. In other words, the 380 tonnes of gold is now owed to Portugal by the BIS, improving considerably the quality of Portugal’s balance sheet. After all, who would you rather have owing gold to you? Some commercial bank like Citibank or the central banks’ own central bank, the BIS? Clearly, being owed gold by the BIS instead of a zombie bank would be one way for Portugal to “reduce its funding costs” by improving the quality of its balance sheet.

He ends by saying lack of transparency means we'll never know the real reason(s) behind the swap.

David Rosenberg Still A Gold Bull

As reported by The Pragmatic Capitalist, David Rosenberg is still bullish on gold; he believes the current doldrums represent a buying opportunity. Rosemberg bases his optimism on more skeletons emerging from the financial-system closet.

Watering down financial regulation bills in the U.S.A., kicking the can down the road via less-than-onerous Eurozone stress tests and reduced capital stringency as per Basel III does not alter the deleveraging game that much and the rounds of market instability that will come our way.

The investment demand for gold remains quite solid at a time when production growth is still anaemic – the World Gold Council just released data showing that investors bought 273.8 metric tons of gold via ETF’s in Q2, the second highest tally on record (and brings net investment in these finds to over 2,000 tons value at just under $82 billion).

That last point about increased gold investment demand has been dented a little by recent outflows, but not by much. Even after those outflows, GLD's current holdings are more than 165 tonnes greater than they were in mid-January.

Howard Katz Takes Alan Abelson To Task

Howard Katz claims last Monday's rout was caused by Alan Abelson saying unkind things about gold in his Barron's column of last week. Katz make this point that's worth remembering: contrasting two periods of American history and the fate of real wages in each.

First, consider 1866-1896. During this period the U.S. was on (or returning to) the gold standard, stocks were flat, the real wages of the average worker rose by 90% and foreigners poured into this country because the streets were (in a very real sense) paved with gold. Second, consider 1980-2010. During this period the U.S. issued trillions of paper dollars (yes, trillions). Stocks went to the moon. The real wages of the American worker fell (the only generation to be poorer than its fathers) and foreigners are denigrated as “illegals,” and used as an object of hate. In which period were Americans rich and in which are they poor?

With regard to gold as an investment, Katz says it's time to sit tight; he cites a well-known quote from Jesse Livermore to that end.


Regarding real wages: remember Henry Ford's famous five-dollar day? Back in the time when he offered it, 1914, five dollars meant a quarter of an ounce of gold. Back then, no income tax was paid on wages of that size. So, a worker in Ford's plant would have gotten a quarter of an ounce of gold tax-free for a day's hard work. At today's prices, that's more than $350 per day take-home. A six-day week meant 1.5 ounces of gold per week, or about $1,700 at today's prices.

$1,700 per week, take-home. At current tax rates, that would be around $3,000 per week gross. If no vacation time, $3,000 a week is $156,000 per year before taxes. For skilled labour, albeit with a six-day week and eight-hour day. Yes, the five dollars was for eight hours of work.

Sounds a lot more impressive than the nominal value, doesn't it?

Moses Kim Expects Parabolic Gold Soon

Unlike Dennis Gartman, Moses Kim is convinced that gold will go parabolic sometime in the near future. He thinks that now is one of those times when supposedly maniacal forecasts will turn out to be right.

I am a big believer that Pareto's law applies to markets. In other words, 20% of inputs will drive 80% of outputs. I honestly couldn't care less about productivity numbers because what's coming is no demand-pull inflation. I am much more focused on the dollar, bond rates, bond/dividend spreads, TIC capital flows, and the stupidity of governments around the world. Of all these variables, I am most confident in my prognostication that politicians will become increasingly foolish as the economic crisis on our hands becomes more complicated.

I have been preparing for the gold rocket launch for many months now. I am probably different from most people in that I focus more on the likely flow of capital than inflation when trying to figure out gold price movements. What I foresee is a flood of capital going from bonds into gold. The bond market is so huge that even a small percentage of capital flowing from bonds to gold will result in a volcanic eruption of epic proportions. So the potential rocket launch in gold depends largely on the bond market.

You all know where I stand. US government bonds are the biggest bubble I've seen in my life. If you are trying to rationalize 10-year yields at 3%, then you are probably the kind of person who rationalized bubble home prices by using the "there's a fixed amount of land but a growing population" argument. In other words, your mind is stuck in the 5th grade. I advise you to think rationally for a second and consider the credit quality of a country that has to monetize its debt in the face of falling tax receipts and a stalling economy. Are you really on the right side of the trade going long bonds?

There will be monumental paradigm shifts in the years ahead. Everyone is asleep, but I think this is going to change fairly soon. The big changes, which will be evidenced by huge moves in gold, are still ahead.

Essentially, he's counting on government officials acting maladroitly and then adding fuel to the fire by panicking.

More Buying-Opportunity Counsel

Gary Tanashian has an interesting take on the conspiracy crowd: he says it's a reflection of impatience and a casino mentality that's more at home in the stock market.

There is an opportunity to own value shaping up. I suspect the usual casino players will fail to capitalize while the minority capitalizes once again. Missed the last buying opportunity this space identified in euros? Well, another opportunity is on the way. Who will capitalize and who will be immobilized by fear? Gold in USD is also presenting an opportunity. In fact, name me a major developed society that is not tramping out its currency for the purpose of manufacturing politically expedient economic growth and I will show you a society of relative value from an investment standpoint. There are those in ascension and it is no coincidence that those are targets for my investment dollars in the big picture.

For now, gold is a monetary value anchor. In a world of eroding confidence in politicians and policy makers who use official paper and digital money, gold represents value; nothing more, nothing less. Still, it is always great to exchange confidence paper for value when value goes on sale. You do not buy gold when everybody loves it. You understand who you are and if you perceive that your personal situation is in need of this value anchor, you buy gold when the public hates it. You buy it when the speculators (ultimate casino patrons) are dumping and you-know-who is buying or buying to cover.

He holds up October 2008 as a classic time to buy, and says gold going into a serious intermediate-term decline would lead to another opportunity.

Peter Brimelow Says Rising Bearishness, Except Fro The Usual Suspects

As Brimelow relates, a lot of market times have turned the frown on gold.

Most observers are very negative. At JSMineset, "Trader Dan" Norcini gloomily noted on Tuesday evening: "Technically, the market fell out of its trading range that has been in place since May. ... Bears have now gained control over the market"

The Aden Report declared in its weekly update Wednesday evening: "The gold price fell to a three-month low yesterday in both dollars and the euro. ... It's clearly in a D decline, and it's weak by staying below $1,200, basis December. If gold now stays below $1,180, it's very weak and it could test the $1,135 level. In a worst case, it could test its rising 65-week moving average, now at $1,080."...

MarketVane's Bullish Consensus is back down to 61% Bulls. On July 19 it fell to 60% (and gold then staged a modest rally). Lower readings were last seen at the height of the crisis in December 2008. The Hulbert Gold Newsletter Sentiment Index is at 9.2%, which is its low for the year.

However, the habituants of Le Metropole Café are still bullish - some insistently so - on confidence that physical demand will keep the market from sliding further.

Gold Hand-Down Favourite At Agora Conference

According to Peter Cooper, the consensus at an Agora Financial symposium has a fairly good track record. 2008's saw a consensus against stocks before the financial crisis erupted.

This year, the consensus is for gold. In a nutshell, the argument says we're in a re-run of the mid 1970s; inflation will come roaring back in a few years.

The re-run of the mid to late 70s school of thought is right. We have had the financial accidents of 1973 and 74, and the gold correction of 75. We are perhaps in mid-76, another very hot summer or was that 75?

The policy response to the financial crashes has not been so different this time. It took time in the 70s too for inflation to gather speed, and we saw a big deflation of house prices in 74-75. It is no different this time.

However, by 1977-8 inflation was picking up speed and it topped out in 1980 with gold at $800 an ounce – eight times higher than its correction in 1975. Adjusted for inflation then that would put gold at $5,000 an ounce by 2013.

We have not even seen the start of the ballistic up phase for gold. The past 10 years is only base-building for the rise to come.

Gold bug Jim Sinclair has $1,650 by next February and this forecast looks perfectly possible after the usual summer down for the gold price. Remember when he made that prediction the gold price was nearer $400 and then it looked outrageous....

The "new '70s" thesis is fairly credible if John Williams' alternate measure of inflation is used. At the very least, because his inflation-calculation methodology is the same as that used by official sources in the 1970s, it's the best metric for comparing this decade to the 1970s.

Gold Trading As Currency

In a commentary over at EquityMaster.com, Asad Dossani says the reason for gold quintupling in five years has little to do with it as a commodity and lots to do with it as a currency. Despite the gold standard being gone, lots of gold holders still expect it to act as a store of value and gold is priced accordingly.


Dossani makes a good point when he says gold cannot be printed, which keeps its value up, but gold is not supported by any major central bank; the latter fact adds to the metal's potential downward volaility.

"Something has to give."

"Buttonwood" over at the Economist has penned a piece wondering about the disjoint between the rise in gold and low interest rates. When the U.S. dollar is looked at in terms of gold, a large de facto devaluation (80%) has taken place. Despite that, interest rates for Treasury securities are at near-record lows.

One reason why countries tried so hard to maintain the gold standard and the Bretton Woods system was to reassure creditors that they would be repaid in sound money. Since 1971 most countries have had the right to repay creditors in money they could print at will. The likes of America and Britain are now perceived as “lucky” because they, unlike Greece, can devalue their currencies and default in real terms.

That prospect did alarm creditors in the 1980s when the real yields on government debt shot up. But it does not seem to now. America and Britain are paying only 3-3.5% to borrow for ten years. That may be because deflation seems the more immediate threat. It may be because bond markets are now dominated by other central banks, which are more interested in managing exchange rates than in raising returns. But it is not stable to combine low yields, high deficits and governments that are happy to see their currencies depreciate. Something has to give.

It's been quite the disjoint, which has existed for close to two years now. One explanation for it is another disjoint, between official inflation rates and the ones calculated by John Williams of Shadowstats. The former jibes with the bond market, while the latter gibes with gold's performance. Shadowstats' alternate measure, which is the same methodology used in the 1970s, shows 1970s-era inflation in the U.S. right now.

This point doesn't deflect "Buttonwood"'s final remark, but it does explain why the disconnect has been in place for so long. Something indeed has to give, because both can't be right.

Cautiuonary Article On Gold

Lee Hudson Teslik and Rachel Ziemba, both with Roubini Global Economics, are not enthused about gold even though they point out the metal has been the best-performing core asset class this past decade. In essence, they think Ben Bernanke and the Fed will avoid both serious inflation and deflation. The third factor that tends to propel gold upwards, a financial crisis, is a factor they don't dismiss out of hand. But, they think the downside risk in gold outweigh the upside.


Someone who's critical-minded would point out the pair contradict themselves when shifting from discussing inflation to discussing deflation. They think the Fed can steer a middle course without any mishaps, which is unlikely to convince a Fed skeptic. The overall track record of the Fed shows erring on the side of inflation.

It Has Been Rumoured...

Tim Iacono, in a commentary on yesterday 6.08 tonne drop in the SPDR Gold Share Trust's holdings, passes along this rumour: "Rumor has it that liquidations at John Paulson’s hedge fund (owner of about 10 percent of the ETF) are somehow involved."


It can be safely assumed that the expected value of rumours are less than what they cost, but they do show something about the rumour-mongers. "Paulson's being hit by redemptions" piggybacks on Dennis Gartman's partial liquidation two days ago, and plays into a current bearish bias about gold. A contrarian-minded bull would be inclined to believe it because it smacks of capitulation.

Gold Bearishness Thickening, And The Contrarian View

"GuestPoster" at Investing Contrarian has surveyed the gold landscape and sees a buying opportunity. The deflationists are out in force, and many gold bulls are getting skittish. To a contrarian, that means "buying opportunity."

I have always been here before. Since 2002 (my personal entry point into the secular bull market) we have witnessed this ‘wash, rinse, repeat’ cycle play out several times. As has been noted repeatedly in the newsletter and blog, the Deflation captains – smart economists that they tend to be, with a tragic and almost comical blind spot – are helpful to the process of protecting one’s wealth over the long term with the monetary metal that is no one’s liability. After all, would you rather buy on declines that start out as well and good technical corrections and morph into emotion-fueled, savage drops propelled by the herd’s perceptions? Or would you rather buy hype-fueled runaway price increases?...

Oh and to the d Boys, that is not a picture of a bubble… no matter how hard you click your heels, study Great Depression theory and ignore the fact that monetary authorities need you and your linear philosophy in order to kick start a popular mandate for more inflationary policy. In short, Ben Bernanke is playing you, whether intentionally or not. He needs your story because his power goes out the window if inflation expectations break out. This is again denoted by the monthly EMA 100 on the 30 year treasury bond, followed slavishly on the blog....

He has a point. Widespread jitters among bulls are often a sign that a market's been oversold, and there isn't any reason why the long-term bull market has come to an end.

Still Waiting For Inflation

In a Financial Times post, president and chief investment officer of Pacifica Partners Capital Management AJ Sull says that U.S. inflation doesn't seem to be on the horizon. The monetary base has been flat for the last eight months; bank credit, despite a jump in early spring, is still below where it was in early 2009. The monetary picture still suggests the Fed was pushing on a string; the potential inflation enngendered by the earlier doubling of the monetary base has not been actualized.

Despite the addition of Keynesianism, and a seeming obliviousness to the possibility of stagflation, Sull has a point regarding the monetary side of things.

Gold Trade Not Crowded

In an article published at Seeking Alpha, Jeff Clark argues the gold trade is not crowded. He uses a figure calculated by John Paulson, which divides the total amount in gold ETFs (at $1,200 gold) by the total amount available in money market funds. The ratio is only 2.7%.

Clark points out the gold trade seems crowded because gold assets and interest are high relative to the dearth years. That said, he notes an increase in the above ratio to 10% would cause the price to explode.

How Far Can Gold Go...

Dominic McCormick has written a thoughtful piece looking at gold's future, which attempts to clear up some misunderstanding about the metal as a portfolio holding. He pulls away from the gold-as-money issue, arguing that gold is a counter-cyclical asset relative to confidence in the financial system. As such, it can balance off financial assets whose value is tied to such confidence. He notes that gold is becoming more popular as an alternative investment, albeit in the teeth of a number of vocal gold skeptics. That rise in popularity leads him to conclude gold is closer to the end of its bull market than the beginning, although he does say the current bull market could go on for several years. [The metal's been been rising for more than nine years.] Given this increase in popularity, there is a chance of gold forming a blow-off top should it become a must-have asset.


One point he made caught my eye:

Critics, meanwhile, get obsessed with arguments that gold doesn’t have an income stream, cannot be valued easily and relies heavily on speculative buyers/investors. It is therefore crucially reliant on “confidence” – something they argue is very fickle. This is true, but confidence affects the return on all investments. Even a stock or a market with a known dividend can fall 50 per cent if sentiment sours and its price/ earnings ratio falls from 20 to 10 without any change in the underlying fundamentals.

The part about confidence being fickle made me wonder if those skeptics are confusing gold with the fractional-reserve system. A loss in confidence could collapse the fractional-reserve banking system far more quickly, and more completely, than a loss of confidence in gold. To the extent to which gold skeptics are fiat-money fractional-reserve system boosters, the shoe is on the other foot.

Stay The Course, TMFSinchiruna Advises

The current slump is frustrating, but TMFSinchiruna over at the Motley Fool says it's best for gold bulls to hold on and stay the course. He says he himself has traded some of his PMs, trying to sell on the upswing and buy when lower, but he only does so wtih 5-10% of his allocation. He said it's best to stand pat all told. [Marc Faber calls that kind of trading "be[ing] clever," and he strongly advises against it because of the risk of gold shooting upwards and leaving the trader buying less for more.]


TMFSinchiruna also points to a significant item at the bottom of the same entry: Zhang Monan, a researcher with the State Information Center think tank, says the PRC should gradually unload its Treasury securities now that demand for them is high. Monan also advocates moving some of the money into hard assets. [Full story here.]

Sinchurina has also linked to a real heartbreaker of a story, detailing the trouble that an old woman, afflicted with cancer had in redeeming her silver bullion certificates from Scotiabank. The Toronto-Dominion bank was more accomodating.

BIS Gold Swap Bullish, Argues MineFund.com

The gold market was spooked by the revelation of the BIS's gold swap, but a writer for MineFund.com argues it's good news for the gold market.

Rather than being negative for gold, the news is positive. Firstly, investors have never regarded central banks as strong hands for gold. Second, it confirms that gold is the money of last resort since banks were forced to surrender their metal in order to satisfy near-term cash requirements that could not be satisfied through the printing press and discount window.

Third, the gold was swapped rather than sold. Whilst the metal could make its way to the market, it is literally inconceivable. Were that to happen, the circumstances would be bullish for bullion because it would signal that the swap originators had expended their resources and were essentially in default. That would result in a profound shock to financial assets seen in spiking credit default swaps and additional pressure on embattled sovereign instruments....

In other words, gold is being used as a useful financial asset. In this sense, denigrating gold for being 'uselessly' stored and shuffled from one end of the vault to another is not unlike denigrating derivatives as 'paper shuffing' given that derivates are used to hedge.

Trouble Ahead For The U.S. Dollar

After dissuading people from playing the market right now, likening it to a casino, "The Housing Time Bomb" points to the rising Euro and says it's a portent for the greenback. If the Euro can rise despite the Moody's downgrade of Portugese sovereign debt, then that currency has something going for it. "The Housing Time Bomb" says the currency's trending up because of European government austerity programs. Since it's highly unlikely for the U.S. government to follow suit, that fundamental suggests the greenback's in for a spell of trouble.


Things might get sticky for the U.S. Treasury if the greenback slump continues. Foreign creditors will begin complaining again...