Deconstructing Soros

At Seeking Alpha, the number of articles on gold have diminished over the last month. They no longer show up in the "most popular" list, except for this one:

It's not about gold per se, it's about gold and George Soros. Peter Cooper has deconstructed Soros' "ultimate bubble" remark at Davos to mean that Soros is talking his book while looking for a convenient entry point.

Newspapers like the normally sensible Daily Telegraph fell for his ruse, immediately jumping the gun to a prediction about a massive tumble for the yellow metal. Yet Soros said no such thing.

He merely pointed out what even the most ardent gold bug would concede, namely, that if you study the history of financial crises, then the credit-induced asset price inflation causes them moves from one asset class to another until it reaches gold as the ‘ultimate bubble’ or the last of the bubbles.

Cooper is of the opinion that the next bubble to climax is in U.S. Treasuries, which will be followed by one in gold.


As far as Soros jumping in, he already has according to GuruFocus.com. Between June 30th and September 30th, Soros increased his holdings in the SPDR Gold Trust from 4,900 shares to 2,450,320. As of Sept. 30th, he had 5.48% of his portfolio in GLD.

An Eye-Opening Report For Contrarians

It comes courtesy of BullionVault.com, and it's written by Adrian Ash. Contrarians should take note of the facts right after the first paragraph:

..."We are on the lookout for signs of basing," says a technical analysis from Barclays Capital.

"While most commodity markets have come under severe pressure over the past week, gold has held its ground impressively.

"Daily momentum oscillators are in oversold territory, while daily sentiment has reached extremes not seen since September 2008."

Only 15% of the non-professional Gold Futures speculators interviewed for the weekly DSI survey are now "bullish gold", says Barclays. Friday's poll of 22 gold-market professionals by Bloomberg News said that 11 expect Gold Prices to fall this week.

There are others in the article itself, most notably a 26-week high in relative bullishness on the part of commerical traders on the futures exchange.

Huffington Post Mentions Gold, Through Gold Skeptic

One of the talking points of gold bulls, aimed at dispelling the notion that gold's in a bubble, is the containedness of gold enthusiasm. Despite the entrance of some new gold bugs to the market, all big-money hedge fund operators except for one value investor, the bullishness is still confined to the same old crowd. Penetration of the gold story into mainstream-media outlets is most likely done through a gold skeptic. The latest example: the Huffington Post, where gold is mentioned by blogger and hedge fund managing partner Alan Schram. His attempt at debunking is brief:

In the last 30 years gold has not been a good investment, and substantially lagged both the S&P 500 and Bonds (as measured by the Merrill Lynch Bond index).

While gold may reduce your anxieties, it is an unassailable fact that gold (and oil) are not actually effective hedges against loss of purchasing power, and could lag inflation for decades. And gold is not a good insurance policy either. When the world's financial system was on the precipice in 2008, gold did not prove to be a particularly good hiding place.

Later in the post, he also mentions that GDP growth doesn't correlate well to stock-market returns. He ends, though, with the usual gold-skeptic mantra about gold having no intrinsic value.


As of the time of this post here, there were only three comments on Schram's own post; one of them was a correction to an earlier comment. A popular item at the Huffington Post often generates hundreds, and occasionally thousands, of comments. There's evidently not much interest in the gold story, either way, at HuffPo.

China Likely World's Largest Gold Consumer

According to this item, estimated gold demand in the PRC was 450 tonnes in 2009 as compared with 395.6 tonnes recorded for 2008.

The rising demand is being fuelled by increasing prices. While consumers in India, Turkey and the Middle East, traditionally locations with a high demand for the precious metal, have been put off by rising price tags, it's been quite the opposite in China. Consumers there are rushing to buy gold, attracted by buying into a rising market.

Albert Cheng, Far East Managing Director of the World Gold Council, attributes the rising demand to China's flourishing economy, which is enabling consumers to indulge in one of the country's favourite luxuries....

Chinese New Year demand is making itself felt too, and is contributing to the resiliency in the gold market. This year's New Year is Feb. 14th in the Western calendar.

U.S. Dollar Falls, Gold Gains

The first trading of the week opened with a slight gain for gold, which turned into a slight loss late Sunday night. Despite shedding more than 6 dollars an ounce between 8:45 and 11 PM ET, the decline stopped before $1,075 was breached. Gold then began climbing until it got back above $1,080 and established that price as a support level again. Around 6 and 6:40 AM, $1,080 was tested; it held both times. Since then, the price rose to above $1,085. As of 8 AM ET, the Kitco Gold index broke down gold's $5.40 gain into $1.60 due to a weakening U.S. dollar and $3.80 due to predominant buying.

Weaken, the U.S. Dollar Index has. After a huge gain last Friday, during which the Index jacked up from below 79 to almost 79.5, the Index has slumped back in a downwards see-saw pattern. As of 8:02 AM ET, the Index was at 79.31. Its high of the day was reached just before 4 AM ET, when gold was ensconced at above $1,080.

A Wall Street Journal Online report characterizes the above-described action as gold holding steady, with some skepticism about a rally:

Spot gold traded nearly unchanged in Europe Monday, helped by a bounce in the euro against the dollar and reports of decent physical buying.

However, speculators that exited the market last week amid a market-wide selloff still aren't reentering and are unlikely to do so while the dollar remains strong and there are concerns in the market about European debt and mixed data releases, traders and analysts said....

Traders said the gold market has taken on the attitude of sell the rallies.

The same bearish factors that have weighed on the gold market in the last few weeks - People's Bank of China tightening and the rising U.S. dollar - were cited as further causes for further declines by James Moore of TheBullionDesk.com in the same article.

A Bloomberg article expresses more optimism: "Gold May Rise for First Time in a Week as Dollar Spurs Demand." The story mentions bargain-hunters coming in, but doesn't downplay it like the one above. Experts cited, though are cautious:

“The U.S. currency is the key at the moment,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report. Still, “clear evidence of renewed and persistent physical buying” is needed for prices to rally, he said....

“The dollar’s sustained rally is spooking sentiment for gold,” said Hwang Il Doo, a senior trader at KEB Futures Co. in Seoul. “Signs of an improving U.S. economy are raising speculation that an interest-rate hike could come earlier than anticipated.”

The greenback is also brought up by a prognosticator quoted in a Globe and Mail report:

“Gold has done relatively well, looking at what has been happening in other commodities,” said David Thurtell, an analyst at Citigroup. “The dollar has been strong, and gold was always going to struggle on the basis of that.”

“It is difficult to see the dollar weakening further,” he said. “People have definitely been seeking out gold as a currency hedge, and if that hedge is no longer needed, that is going to cap some of the demand for gold.”

Caution still abounds, even if there are mentions that the current halt in gold's decline is due to bargain hunters. The U.S. dollar has just been too strong recently, and the spooking that the PBoC tightening has caused is still too remembered. Before the latter got rolling, gold was technically strong and on a roll above $1,160. Now, it's more than seventy dollars below that figure.

Further adding to worries is the state of the largest gold ETF, the SPDR Gold Trust. This Reuters report discloses that the Trust's holdings shrank 1.9% in January. Embedded therein is another cautionary forecast:

Analysts fear sustained outflows from gold ETFs if investors' attitude towards bullion sours, which could prove a drag on prices.

"Gold and silver investment demand has waned since the end of 2009, particularly as the U.S. dollar rebounded versus the euro," said BNP Paribas analyst Anne-Laure Tremblay. "In this context, most ETFs saw net outflows in January."

"Going forward, we expect gold to trend lower until the third quarter of 2010, and as a result, net investment demand generally for precious metals -- and therefore inflows into ETFs and exchange traded futures -- should be more subdued than at the same time last year," she said.

Speaking of the SPDR Gold Shares Trust (GLD), I found out (thanks to a commenter on this thread at Zero Hedge) that George Soros has indeed gone long gold in a big way. His fund now has more than 5% of its holdings in GLD, or 2,450,320 shares. According to GuruFocus, all of those shares were added between June 30th and September 30th of last year. As I suspected when his comment about gold as being in "the ultimate bubble" went viral, he was talking his book.

The gold:GLD ratio, as shown in this Stockcharts.com chart, closed at a normal 10.21 last Friday. The range that day showed that GLD shares were trading at a miniscule discount to gold itself, relative to normal levels. There hasn't been any extreme readings all last week. To remind, this ratio is presented as an item of reader interest.

Moving back to the greenback, this Stockcharts.com chart of the U.S. Dollar Index show how high it got last Friday:



What I'd like to call attention to is the RSI index at the top. The greenback was pushed up to the point where the RSI got into oversold territory for the first time since Decemer 21st and 22nd. The last time it got into oversold range, the greenback slumped back. Now, the greenback is slumping to the point where the above-70 level will only be breached for a single day instead of two. Note that, at the depths of the last low, the RSI got only slightly below 50. Bottoming at that range is characteristic of a bull market - hence the caution about gold's near-term fate expressed above.


As 9 AM approaches, gold is hanging steady while the greenback continues to slump. As of 8:55 AM ET, the U.S. Dollar Index has sunk further to 79.26 after reaching 79.19 at about 8:50. That near-term low point sliced off well over 50% of the greenback's Friday gain; the cause mentioned is the $1.6 trillion budget deficit projection figure. As for gold, the allocation of its gain by the Kitco Gold Index shifted more to U.S. dollar droppage in consequence. As of 8:58 AM ET, gold's $4.50 gain was split into $2.80 attributed to the greenback and $1.70 to buying pressure. Spot gold itself, as of 9 AM ET, was quoted at $1,085.40. A run up to the $1,090 level, as reached just before the New York market opened at 8:15 AM ET, was aborted.


If I may offer a brief comment to end this post, there's a lot of caution - and even bearishness - in the face of some resiliency in the gold market. Granted that a surge in the greenback will be a game-changer, but it's widely expected at a point when the U.S. Dollar Index has reached an oversold level. It may be contrary rather than contrarian of me to note the above, but I'm fairly sure that $1,085 will hold while the greenback takes a rest.

Gold And The Amex Gold Bugs Index: A Chart Check

There are those who believe that the Amex Gold Bugs Index chart can be used as a double-check of gold itself. These people tend to hew to the Dow Theory, which uses the Dow Transport Index as a double check of the primary trend as shown by the more-familiar Industrials. Both indices have to show a pattern of higher highs and higher lows before an uptrend is deemed to be valid. If one of the indices (usually the transports) fails to confirm, then the uptrend becomes iffy. More sophisticated users of the Dow Theory use the Utility Average as a further check, believing that the utilities enter a downtrend before the other two indices do. The most venerable practitioner of the Dow Theory today is Richard Russell.

Shifting back to gold and the Gold Bugs Index (HUI), these two Stockcharts.com charts show a disquieting picture. They're, in order, the one-year daily charts for gold and the HUI:




The gold chart at the top looks disquieting in and of itself, and explains why there are so many cautious gold bulls now. The HUI chart looks worse. Gold has reached its late-December low again. The HUI has sunk well below its. Not only that, but the HUI has also sunk below its low made at the beginning of November. There's already a well-established pattern of lower highs and lower lows in the lower chart.

Using a Dow-theory takeoff leads to a doleful conclusion: the downtrending HUI is anticipating a further drop in the gold price itself.

A longer-term perspective using the weekly charts adds to the disquiet.




In late 2007, both charts showed a higher-low and higher-high pattern. Just beforehand, a new short-term low on the HUI was not confirmed by the price of bullion. Starting in February of '08, the downtrend in both started. Both made lower highs in July, and (of course) lower lows followed. After the October crisis, however, gold made a higher low that was confirmed by the HUI: see the early-November lows for both. The HUI made a new '09 high in late May which was not confirmed by gold itself. However, both made higher lows in the July downswing. I note that the HUI made a slighly lower low in the beginning of November, which gold itself did not. Both made higher highs at the end of November, and both made lower highs in early January.

This time, however, we already have a longer-term lower low in the HUI. Granted that it has yet to be confirmed by gold itself, but the longer-term perspective adds to the foreboding. As far as the gold market itself is concerned, the only reason for optimism is evident bargain-hunting buying as the price sinks. Needless to say, the strong rally in the U.S. Dollar Index does not give grounds for hope.


Finally, a pair of charts that show the daily and weekly HUI to gold ratios. That value goes up when the HUI is outpacing gold itself, and sinks when gold is outperforming the HUI. Those who believe that the HUI should show leverage with respect to gold would associate a rise in the ratio with a gold upswing, and a fall with a downswing. I should note that this belief doesn't stand up well to the '07 period.





Both charts show a deteriorating ratio of HUI to gold in recent weeks, leading to a low that hasn't been since since July. Some may argue that this downtrend means the HUI is undervalued relative to gold.

That's the trouble, in general, with using charts without having the fundamentals tucked away somewhere. A stock, or investment, that approaches bargain levels usually has a lousy chart pattern. Technical analysts tend to assume that a bargain-priced investment goes nowhere for a time once its bargain status becomes apparent.


Speaking of trouble: I should also point out that the above interpretation, although informative (I hope), doesn't translate all that well to a trading strategy. The very basis for the Dow-Theoryesque approach - overreaction on the upside and downside at the end of trends - clips its performance when used mechanically. Overreactions are followed by snapbacks, which a careful Dow Theorist would avoid because of lack of confirmation. A higher high has to be followed by a higher low in order to establish an uptrend. That requirement takes a real piece out of the performance, as does the opposite requirement of a lower high following a lower low. Because of those chunks, the Dow Theory tends to underperform a simple buy-and-hold strategy.

However, there is an argument for the Dow Theory despite that underperformance: people who use it not only miss out on some of the uptrend, but also miss out on some of the downtrend. During bear markets, they sleep better. When looked at in this light, the tranqilizing effect can be seen as a benefit which is paid for by underperformace. The Wikipedia article on the Dow Theory points out that a recent revisionist study has shown the Dow Theory lowers the volatility along with the return, to the point where its risk-adjusted performance beats buy-and-hold. However, this revisionism is still controversial.

The same criticism does apply to the Dow-Theoryesque schema above, if used mechanically.

Practitioners of the real Dow Theory who've come up with great calls, such as these four, have something extra: a sense of how the stock market acts when it bottoms and the guts (if watery) to apply that sense at bottom time. Call it intuitive bargain-hunting, or an intuitive flair for market turns.

Financial Sense Newshour Still Downbeat

In this week's Financial Sense Newshour podcast, what little commentary by the hosts on gold was cautionary. Starting right after the 48 minute mark in the third hour [.mp3 file] was a brief interview of Brent Cook, proprietor of Exploration Insights. When the topic of a gold bubble was brought up, Cook said that he was in agreement with George Soros: he believes that gold is entering a bubble.

His own impression of the blooming takeover of juniors by majors is a little less sangine than my own (far less informed) one. He said that the prices paid didn't make those fields much of a bargain, and that the huge fields in mining-friendly districts are basically gone. The juniors that look takeover-worthy have deposits that are harder to mine, and it's unlikely that a major would snap them up. An up-and-coming producer that wants to vault into the majors might take a chance on them.


To sum up, Cook believes there's already a bit of froth in the juniors - particularly in the advanced-stage exploration and development stocks. No wonder he believes that gold's either entering or already in a bubble.