Gold: That's All She Wrote

 |  Includes: GDX, GG, GLD
by: Convex Strategies

Back in October of 2012, I turned bearish on gold (NYSEARCA:GLD) when it failed to break the key resistance of $1,800 for the third time since late 2011. The theme here was "prices come first, fundamentals come second." In other words, even if the fundamentals suggested significant upside, failure to breakout even in the aftermath of full-blown QE3 was a major tell that the metal had downside.

As 2012 came to a close, even the fundamentals no longer looked attractive. Selling in gold accelerated even as the S&P caught a strong bid in response to over-hyped fiscal cliff worries falling by the wayside. Yields on the 10-year Treasury approached 2%, Treasury spreads widened, the euro rallied versus the dollar, and market breadth expanded. It became a structural "risk-on" rally, and gold sunk.

This prompted me to believe that 2013 was indeed different, and would mark the end of gold's 12-year winning streak.

So far, that call is looking good. On Wednesday, gold fell another 2% on technical selling subsequent to its break of $1,600/oz and Fed Minutes that showed continued discussions to pare balance sheet expansion. With the electronic market about to close (at the time of writing), gold is down to $1,560, another major technical level.

While sell-offs in gold have been good buying opportunities over the past decade, I believe this time is truly different. Calling the end to a long-cycle like this is extremely difficult to do with precision, but I believe investors in gold and gold-related equities would be best served to exit their holdings as quickly as possible. Here's why:

A Fundamental Shift In Understanding Of Monetary Policy: I credit Mark Dow as being one of the few to fully understand the influence that Fed policy has had on money supply dynamics since 2009 (I certainly didn't).

Inflation worries peaked in 2011 as the commodity complex hit its highs, with gold topping out above $1,900. Concerns that Fed policy would lead to crushing debasement of the U.S. dollar drove real assets to nosebleed levels. In reality, while M1 has increased about $2 trillion since the Fed began its LSAP programs, M1 is only responsible for less than one-fourth of the total money supply. With deleveraging occurring in the private sector since 2009, you've got the vast majority of supply contracting, which is being facilitated by increases in M1 on the part of the Fed.

Ultimately, the overall money supply isn't growing at an outrageous rate, we're not at risk of hyperinflation, and the world isn't ending.

Unwinding Of The Fear Trade: This one is pretty easy to see, for those who want to admit it. Stocks are at record highs, the euro has surged, 10-years are above 2%, spreads are widening, and safe-haven currencies like the Australian dollar are weakening.

Tail-Risk Is Insignificant: We've heard for years now that gold is a hedge against uncertainty; an insurance policy for when the market inevitably tanks. Fine, but this first-level, Cramer-esque thinking doesn't make a whole lot of sense when the fact of the matter is we are recovering from a crisis, not about to enter another one.

It's easy to believe that another catastrophic financial crisis is always on the horizon when we just had one, but this kind of thinking works maybe once every few decades. What happened in 2009 hadn't happened since 1929; I'd venture to say that it probably won't happen again for at least another 50 years. Will we have brief, relatively short recessions like we've seen every 4-10 years since the origination of the Fed? Of course, but none that will generate the sort of economic collapse, Armageddon fears like 2009 did.

People will continue looking for the next housing bubble or Lehman Brothers, or discuss how there's so much uncertainty. But it's uncertainty that confirms we have room to run. If everyone was "certain" in the recovery, or certain that there were no risks on the horizon, we'd be at a market top.

Even in Europe, the icon of debt issues and potential crisis, the financial sector has been deleveraging and shifting toxic assets to public balance sheets, vastly reducing the risks of the Lehman-like disasters that send gold prices soaring.

Technicals And Correlations: The unnecessary worries regarding monetary policies peaked in 2011 along with most commodities. Today, we're seeing a continued shift towards taking reasonable risks as equities make record highs and the fear trade unwinds.

Though strength in the U.S. dollar following the Fed Minutes has added to weakness in gold, movements in the dollar have been largely unrelated to gold's fall since December 2012. Additionally, gold's typical correlation with stocks has broken in a way that is very apparent. These two indicators are likely causing a lot of people who bought gold near the top to rethink exactly why they own it.

Technically, today's break of $1,600 was extremely important. $1,600 was where gold began its parabolic breakout towards $1,900 in 2011, and has served as support since then. Next up is the $1,550 region, where we got near today in the Fed aftermath. Past $1,550, there isn't much until $1,400/$1,425.

There was much discussion in regard to the "death cross" that gold experienced today, which is generated when the 50DMA crosses under the 200DMA. The jury is still out the importance of this indicator, but at the very least, it indicates a major swing in long-term sentiment.


We're at a major inflection point for gold as market participants begin to recognize that hyperinflation/currency collapse is not on the horizon, and that the opportunity costs of hedging for economic catastrophe are quite expensive when equities are making record highs even as they remain relatively inexpensive.

This has been an incredible 12-year bull market, but it looks to be coming to its end. I recommend selling the widely-held miners index (NYSEARCA:GDX), and specific gold-related equities like Goldcorp (NYSE:GG). Of course, any holdings in GLD and similar vehicles should also be unwound.

Disclosure: I am short GLD via puts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.