The Battle Between Banks and Bullion

Activity in both gold and gold equities has dominated much of the market interest during the past few quarters. But the recent gains in financial stocks and bullion’s retreat (prior to this week’s Fed-induced surge for gold), demonstrates that investment in gold was clearly a flight to safety.

This epic battle between banks and bullion was perhaps most evident on March 10, when the Dow Jones Industrial Average climbed nearly 400 points after Citigroup (C) told the world that it was profitable in the first two months of 2009. Similar news from JPMorgan (JPM) added to the renewed enthusiasm and speculation that the bottom for the banking sector may have passed.

Bullion and gold equities reacted to the news immediately, with gold falling from $942 per ounce to $891 in two trading sessions, notes Wendell Zerb at Canaccord Adams. The S&P/TSX Global Gold Index fell 9.7%, further supporting the flight-to-safety argument.

The analyst said in a research note:

Clearly, the impression that the financial crisis could be over or trending in some non-doomsday direction had investors and traders exiting their defensive stance.

But is it clear waters ahead for financials and the global economy?

Medium-term concerns that confidence could wane still persist, Mr. Zerb said, citing recent U.S. payroll number that showed unemployment was at its highest level since 1983. Meanwhile, industrial production numbers out of China showed that growth slowed in January and February on exports that fell at a record pace. Japan’s economy shrank at 12.1% annually.

The analyst suggested that confidence will likely return to the market if the various stimulus packages do what is intended for the global economy – stabilize it. This should take more lustre out of gold as a safe haven investment, he added. At the same time, Mr. Zerb warned this could bring inflation concerns to the forefront, which would be good for gold.

He said:

We remain skeptical that the current round of stimulus is a simple solution to right the global economic ship. More likely, we believe that there will be further obstacles as stimulus packages re-inflate the economy.

If that’s the case, then the battle between banks and bullion will rage on.

Comments

[Robert Perrego:]

Uh - wrong. Flight to safety only half the picture. Dollar is getting hammered now and all of a sudden inflation is back on the table. Correct markets are not out of the woods yet and this may aid gold - but the gold play is finally all about inflation and the $1 trillion the fed pumped into greenbacks broke the dollar and ramped gold up and is directly inflationary. If it is all about a flight to safety then why did both the equities and gold rally yesterday? The flight to safety focus on gold just ended. Now it is once again an inflation watch.

Mar 19 09:35 AM

[Conan the B...:]

Right on Bob.

What moved up more yesterday, Banks or gold?

Banks are up again today, gold has to prove Inflation is just around the Bend. If Oil participates, then inflation will Indeed be around the Next Bend and definitely faster than any real Economic Recovery.

Mar 19 09:48 AM

[mr freddo:]

I agree with Mr. Perrego. Gold is being used as an inflation hedge and a flight to safety instrument. In a deflationary environment, gold has not been stellar, but it has held value better than other asset classes. The inflationary move by the Fed yesterday has gold and gold stocks flying today.

Disclosure: Long GLD, GDX, SLV

Mar 19 11:30 AM

[Will DiJohn:]

I don't believe banks are battling with gold. Bank shares are coming off their near bankrupt values because we can see people paying on their loans. That means banks will make a profit. Gold prices on the other hand have hardly moved in the last year, up or down $100 or so; a reaction caused by short-term money with no permanent home temporarily pushing the price around. All those middle-class investors who lost money on the stock market, are catching on that it is better to maintain your wealth than to chase stock prices higher without gaining more economic performance out of the company. A P/E ratio of 20 is totally ridiculous. Who every heard of Ebay, or Apple, or Google twenty years ago? Gold will continue its slow upward trend, decade after decade. You want to be wealthy? I suggest you work for it and invest in gold.

Mar 19 11:59 AM

[williemo:]

What is anyone's best estimate at the price of Gold, in US $, by the end of this year? Could it be $1200 ? If commodities and energy go thru the roof again, won't it hamper efforts for recovery as everything becomes more expensive, before the patient is healed. In my opinion, the Fed chairman is so scared of 1930's , he's jumped the gun on this aggressive US Bond buy back program. I somewhat like the current effect, but feel it's like taking pepto bismol when you have a stomach virus......it just delays the inevitable. Maybe he's just trying to hold on to his job in a bad economy, who knows? I still would like someones take on Gold prices by the end of 2009.

Mar 19 12:04 PM

[yellowhoard:]

Watch out for an IMF gold dump around $1000. Might be worth diversifying into ag near that level.

Mar 19 12:31 PM

[Robert Perrego:]

I saw an estimate for $1500 by July - I think that one was Merrill.

Have seen most eyeing $1200 or so for 2009 though.

My gut tells me $1200 to $1500 by end of year - This trillion by the Fed yesterday plus when the money from TARP, TALF and what is called a 'stimulus' bill should start hitting the economy soon. This is why I believe Merrill chose $1500 mid year - when the money is released.

The thing to watch is the velocity of money - broker dealers converting to commercial banks have had to bring their financial leverage ratios down to 11x which has destroyed a lot of money (deflationary) and banks are still not lending. Sooner or later this is going to piss off someone in DC and the banks will be pressured into getting that TARP and TALF money back into the economy and when this happens is when gold will really respond.

On Mar 19 12:04 PM williemo wrote:

> What is anyone's best estimate at the price of Gold, in US $, by
> the end of this year? Could it be $1200 ? If commodities and energy
> go thru the roof again, won't it hamper efforts for recovery as everything
> becomes more expensive, before the patient is healed. In my opinion,
> the Fed chairman is so scared of 1930's , he's jumped the gun on
> this aggressive US Bond buy back program. I somewhat like the current
> effect, but feel it's like taking pepto bismol when you have a stomach
> virus......it just delays the inevitable. Maybe he's just trying
> to hold on to his job in a bad economy, who knows? I still would
> like someones take on Gold prices by the end of 2009.

Mar 19 01:51 PM

[Steve in Gr...:]

Thanks, FPTD, for the article.

The big U.S. banks are zombie-banks, completely dependent on ongoing injections of government money.

Maybe vampire-banks is a better expression, eh?

Modification of SFAS 157 won't improve their fundamentals, only hide how ugly they are. Reinstating the up-tick rule will be ineffective. These are both just rearranging the deckchairs on the Titanic. The "leak" of the Citigroup internal memo about the Jan-Feb profitable operations is straight market manipulation. Somebody ought to go to jail for that.

The expression on Kudlow & Co. last night was "don't fight the Fed". The reality is the Fed has no power to make anything happen in the real economy. They only have the power to create inflation and they aren't even doing a good job of that.

S&P was down 1.3% today, with the financials down 6.4%. This is the market hitting its head on the 50-day SMA. Sorry, but this is the start of another down leg.

Mar 19 04:15 PM

[Conan the B...:]

Sure it is, that's probably why the PFDs of the Banks continued to move up. At least the BAC ones I own did.

Gold/Silver mining shares surged ditto other Basic Metals stocks and Oil, Bank shares experienced profit taking.

I love it when someone gives a Buy recommendation on a stock you have been promoting. So far, knock on wood, its been a really, really great month.

Slam me down, ho ho shiver me timbers.

Mar 19 05:17 PM

[mac.barron:]

My sense is that the gold market can be manipulated to a point. Beyond that point, when inflation truly kicks in and a great many the world's population decides to flee to the solvency that gold provides, the central banks, the IMF, etc. will not be able to hold back the tide.

The fact that this is now the Information Age will be a factor. people who have been sleepwalking are jolted awake by future economic storms; storms of even greater magnitude then what we have already seen. They will look for answers and gold will make sense to them too. Just think what happens when the Boomers start to really get sick of the crappy ride that they've been on over the past decade or so. When they decide to at least try to keep the value of what they have left.

Mar 20 02:47 AM

[Roger Knights:]

"The big U.S. banks are zombie-banks, completely dependent on ongoing injections of government money. Maybe vampire-banks is a better expression, eh?"

A zombie, given a transfusion, becomes a vampire.

Mar 20 03:04 AM

[Gedankonomist:]

Great! Take all your money and put it in Citigroup. You are a genius!

On Mar 19 09:48 AM paultaut wrote:

> Right on Bob.
>
> What moved up more yesterday, Banks or gold?
>
> Banks are up again today, gold has to prove Inflation is just around
> the Bend. If Oil participates, then inflation will Indeed be around
> the Next Bend and definitely faster than any real Economic Recovery.

Mar 20 04:17 PM

[Conan the B...:]

R. Jensen: You are the opposite if you put "all" of your money into C or "all" of your money into any investment.

Are you Still waiting for Enron to return from the ashes? Did you bother to read the last paragraph?

Mar 21 10:06 AM