Gold Holders - Be Patient

In the wake of the Fed’s announced record monetization, some gold bugs remarked about the significance of the date and decision. Moreover, the airwaves were littered with commodity bulls (not the familiar faces). There were a few non-gold bug analysts on live television showing currency from Zimbabwe and relating the Fed decision to what has transpired in Zimbabwe. Hyperbole aside, Fed policy of currency debasement and inflation of the money supply is hardly anything new. News is important in that it highlights and reinforces trends. It doesn’t create them.

Keen market watchers and seasoned Fed observers were hardly surprised at the Fed action. We all knew it was coming. The question was when. Remember, news highlights trends. Commodities had been forming a bottom for five months. Just two weeks prior we wrote about our positive near term view on commodities. How about Gold? It rose from trough to peak over 40% in just four months. It seems that only the shorts were surprised.

Now to expound upon last week's missive, reflation isn’t always so advantageous for the precious metals, especially gold. That holds true for both the economy and markets. With stocks and commodities now recovering, money is to be put to work in those markets and also potentially diverted away from gold. We aren’t expecting a full-blown correction in Gold but rather a consolidation that, for a matter of time diverts attention (like an idling engine) away from itself as it prepares for major liftoff.

This is a temporary respite in a bear market and in an economy stuck in deflation. The first period of deflation (and strengthening dollar) in the Great Depression lasted three years. The Yen increased nearly 100% from early 1990 to early 1995. This bout of deflation isn’t even one year old yet. In other words, don’t expect commodities to enter a cyclical bull market anytime soon. There isn’t enough demand on the horizon. The recession and accompanying deflation should last into 2010. It may be a while before both run their course, thereby allowing an inflationary recovery to begin in earnest.

In conclusion, be aware that the current rebound in stocks and commodities, though large, is just a temporary recovery. A single news event won’t change that nor alleviate the current deflationary pressures on the economy. Finally, holders of gold and gold shares should be patient. The major breakout will occur this year, though not within the time expectations of the gold bugs.

Comments

[Conan the B...:]

Your site has a nice layout.

First of all, my own TA suggests an upward breakout by Gold before July of this year.

Second, it matters little whether the commodities themselves do a number to the upside, stocks in that trade will move up in anticipation.

Reflation or Inflation(I think of it that way), will promote the price of Gold. The current pullback is both rotational and due to a lessening of risk aversion. IMO

Mar 24 10:33 AM

[Cesato:]

As good as it seemed the last rally in Gold looks to have run out of stem. It may not be different than any other impressive rally we've seen in Gold before. Today, rather than analyzing technical indicators, we should be looking at fundamentals that won't support Gold any longer short term. On the one hand risk aversion is slowly dissipating and to prove it the DJIA is going to close above 800 today, a 1500 points rally since the 6500 (around) lows, that is a convincing turning point. On the other hand Governments are increasingly working together to force the market to stabilize so that confidence gets back and then panic fades away. Remarkably, Corporate America is humbly giving the market a hand (as it should have been 2 months ago) and the US Goverment appears to be willing to deliver the message to the fraudulent executive staff that got us into this mess in the first place (you can read AIG and 80% of the investment banks, if you will) even though taxpayer's money is unlikely to be recouped from those scammers. Additionally, with deflation fears going away, it is unlikely that inflationary pressures coming from increased demand and higher commodity prices hit the market short term, Oil is going nowhere beyond the USD 60 level and regulatory measures taken so far will keep market bandits (speculators) in the sidelines for a little while. All the above scenario will be valid until when inflation numbers (still under control) begin to creep up as a result of the increase in Money Supply and stabilization of the demand with the supply side of the equation having been destroyed, however if won't happen just yet, so sell the rally in Gold and buy back later in the year somewhere between USD 820 and USD 850 may be USD 785.

Mar 24 10:50 AM

[D. McHattie:]

I say this as a bit of a gold bug who is trying to play devil's advocate on his significant position in GDX.

I would expect the consequences (increased prices) of inflation (growth in cash and credit) to occur on the items on which this new cash and credit is spent. This new money will place upward pressure most immediately on the prices of debt (mortgage, business loan, consumer loan) because that is what the new money is first being spent on.

None of this new money created by the fed is to allow investors to buy gold. They did not do a bailout of gold owners. They are not buying up gold backed securities.

While this is not negative for gold, it is also not immediately positive. It is only eventually, as this new money works it's way into the hands of employers and then consumers, that upward pressure will be placed on such things as gold and agricultural commodities.

So perhaps what needs to happen is the institutions, sovereign wealth funds, pension funds, hedge funds currently holding the securities they are selling to the fed then take the cash and buy gold (and, hopefully, gold miners).

Does this reasoning make sense and is it likely that those flush with this new cash will spend it on precious metals?

Mar 24 11:46 AM

[billyboy54:]

On Mar 24 12:00 PM SHARK$BUCK$ wrote:

> gold bugs must be given respect


Yes, I read Harry Schultz' newsletter last year, and he advised holding AT LEAST 30% of portfolio in gold and gold stocks.

I took that to heart, and as of this date, I have 6% more money than I had at the height of the market in Oct 07, even with having withdrawn some money last year.

And just YTD, my portfolio is up 10%.

Can you say the same ?

Mar 24 03:34 PM

[Vox Rationalis:]

"This is a temporary respite in a bear market and in an economy stuck in deflation. The first period of deflation (and strengthening dollar) in the Great Depression lasted three years."

CPI shrank during each of the years from 1929-1933, during which time the money supply decreased; M1 by more than 25% and M2 by an astonishing 36.5% (Friedman and Schwarz). How do we compare today? Since December 2007, M1 is up 15.6%, M2 is up 12.2% (FRED). Now, how exactly is this like the Great Depression?

"The Yen increased nearly 100% from early 1990 to early 1995."

By what measure? Wait, I found it - compared to the dollar? Between year-end 1990 and 1995, PPI decreased by 7.9% and over 1991 through 1995 CPI increased by 7.0% (BOJ). Hate to break it to you, but increasing consumer prices doesn't happen during deflation.

"This bout of deflation isn’t even one year old yet."

And you've presented no evidence that this situation is similar to either of those in any way.

Mar 24 09:14 PM

[MGA_1:]

I think the other metals & commodities need to play a little catch up before gold begins moving again. I actually expect it to go down a bit more, but with more spending and financial turmoil on the horizon, gold should be looking pretty good (silver too)

Mar 25 11:13 AM

[REBEL:]

Gold Investors - It takes some willpower to stay with Gold as an investment. Every time it starts to take off, the Fed pulls another "fast one" on the rest of the world and brings real money, (AKA Gold), back down. But eventually they will run out of ways to fool the public as to what has real value - and then Gold will skyrocket! The Fed can fool some of the people all the time and all the people some of the time,
but they can't fool ALL the people ALL of the time.

Mar 25 04:02 PM

[Vox Rationalis:]

PM REBEL wrote:

> Every time it starts to take off, the Fed pulls another
> "fast one" on the rest of the world and brings real money, (AKA Gold),
> back down.

What a load of hooey. The Fed couldn't care less about the price of gold. Go ahead, give us an example of one of these "fast ones."

Mar 25 10:02 PM