After reaching about US$1142 last night, gold fell almost $30/oz on the strength of the U.S. dollar. As of the time of this post, spot gold's slumped to $1114.90. Both this report and this one ascribe the drop to the continued rise in the greenback. The former report mentions dollar short covering as one of the causes of the U.S. dollar's strength, and the latter points out that investment demand for gold remains strong.
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...)
Thursday, December 17, 2009
Wednesday, December 16, 2009
Cautionary Note In Motley Fool Article
It's by Amanda Kish, and it warns of real froth entering the gold market. She points out that, once an investment becomes popular due to its recent gains, the easy money is no longer there.
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.
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.
A Tantalizing Possibility...
...is held out by a Commodities Online article by Stewart Thomsen. Orgainzied as a list of points, most of which are trader's talk, it points out that gold skyrocketed at the same time as the greenback rose, in 1979. It's a bullish article which claims that "'Gold is pouring from weak hands to strong'" right now.
Left unmentioned is the fact that the 1979 gold explosion was the climax of the 1970s bubble.
Left unmentioned is the fact that the 1979 gold explosion was the climax of the 1970s bubble.
Sprott Hedge Funds Outperform Their Peers
in large part because of their gold and gold-stock component.
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.'"
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.'"
Nouriel Roubini Writes, "Beware Of Gold Bubble"
As webbed by the Globe and Mail, Roubini warns that the case for gold is contingent upon either inflation coming back or financial crisis resuming. Those two forces are what's pushed up gold in the last few years. After summarizing the case for gold, he points out the risk of the global recovery becoming anemic without inflation re-emerging. That combination would be great for the U.S. dollar and bad for gold. He also mentions the risk of the U.S. dollar carry trade unwinding, which would also push the price of the greenback up and gold down.
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?...
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?...
Gold Decline Slightly Reverses
As futures on the three major U.S. averages rise on hopes for good tidings from the Fed, gold's price is also up after yesterday morning's decline. Spot gold spent the afternoon muddling along in a trading range, which changed to the upside at about 4 AM ET. This MarketWatch report quotes an expert as saying that it's bargain-hunting, and mentions that the greenback's been falling somewhat.
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.
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.
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