Gold's lackluster performance has disappointed many gold investors, including myself, though the tide appears on the brink of changing in everything but the price. For the last couple quarters, we have heard how central banks are getting ready to unwind their unprecedented monetary efforts of the past. A global recovery has been the mainstream consensus since the new year, and stocks have not disappointed those touting the recovery.
The economic recovery justification, however, at least appears to be withering. Last Friday's job numbers showed the lowest participation rate since 1979 and disappointed on the headline number, with only 88K jobs created, against a 200k market expectation.
Meanwhile, the U.S. jobs picture is not the only one deteriorating. Canada's payroll numbers tanked on Friday, shedding -55K jobs, the equivalent of a half million person job loss in the United States, given Canada's population at a about a tenth of the size. The unemployment rate in Canada rose 0.2% to 7.2%, and any expectation of near-term rate hikes by the Bank of Canada went out the window.
Then there is Japan. The new Japanese central bank head, Haruhiko Kuroda, announced a $1.4 trillion dollar quantitative easing package last week, with a firm commitment to increasing Japan's domestic inflation rate.
The Bank of Japan (BoJ) is set to quantitatively increase their balance sheet to be about on par with where the Fed presently stands, an approximate doubling of their current asset holdings. Moreover, the BoJ is dead set on qualitative easing, including a possible extension of their average maturity and increase in the risk profile of the assets they are tolerant to hold.
The Japanese yen has collapsed as a result, and is one of the few currencies that gold continues to perform well in:
(Graph shows the percent change of gold priced in Japanese yen over the last three months. Click for live version)
The global stage for central banks appears to be one of easing once again. Traditionally hawkish banks like the Reserve Bank of Australia are even calling their currency appreciation "overvalued" and are backing off any hints of monetary tightening, suggesting possible easing instead. The bank of England is likely to up the ante on their quantitative easing efforts, even as their new Canadian governor Mark Carney takes charge at the end of June.
Then, of course, there is the European Central Bank, which is looking for new ways to introduce monetary stimulus against negative performance throughout much of the region. What they will do is still uncertain, but the overall dovish trend among policy makers is evident.
If the monetary tide and expectations for easing are soon to change, should gold's price performance not follow suit? All out currency wars are the perfect environment for gold, so perhaps the signs of war and weak performance should be heeded as entry points.
Those who believe currency wars are not going to evolve based on the G20 statement or other claims that central banks are merely supporting their domestic economies are simply missing the point. One way or another, the domestically targeted efforts of central banks are going to have global impacts on exchange rates, which will then require more "domestic" monetary effort. Japan has already led the charge, initiating a massive decline of the yen versus the dollar in the name of supporting Japan's domestic inflation rate. A stronger dollar's impact on real debts, however, is difficult for a massive debtor nation such as the U.S., and also impacts trade, thereby requiring the Fed to conduct more "domestic" support themselves. In the end, the currency war goes on the same, and gold prices will not notice the difference between intended and unintended currency wars.
Gold can be purchased by buying physical, going long ETFs like (NYSEARCA:GLD) and (NYSEARCA:UGL), or even shorting the short ETFs like (NYSEARCA:GLL) or (NYSEARCA:DZZ). My preference is to purchase put options on short gold ETFs. Given the historically low volatility in gold, I expect options prices are undervaluing the future momentum the metal will receive.
Disclosure: I am short GLL. 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.