To set the record straight I am not a gold bug. In fact I have been bearish gold until recently. The following is an excerpt from an article I wrote in April of last year - A Call On A Market Top And Why Gold Is Imploding:
As those who follow me know I have been bearish gold (GLD) and bullish the dollar (UUP) for some time now. The reason - the Fed's policy designed to induce inflation is not working and in fact deflation is going to take center stage in the coming months. That is bearish for gold and all risk assets denominated in U.S. dollars.
I used the following chart to show the breakdown in gold that occurred upon falling through the support level and of course we now know that my bearish call going forward was correct.
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Here is the most recent chart on and shows that we did in fact move much lower after I wrote that article back in April - in fact roughly 20% lower.
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In recent months I have suggested we were now building a base in gold and that we would eventually move much higher and the downside risks in gold were minimal but that those moving into gold would have to wait for a time before seeing gold move higher.
Last month I made the following comment to a reader in a blog post entitled The Fed's Betrayal Of The Middle Class:
My guess is that we see a weaker dollar but not inflation which doesn't make a lot of sense if you rely on the textbooks for an explanation. Specifically we know that China is pushing back against the U.S. with bilateral trade agreements with everyone. We also know they aren't in the market today as in times past for U.S. Treasuries and for obvious reasons - they aren't burdened as much with the need to deal with U.S. dollars as they are no longer receiving them in large quantity due to bilateral trade agreements that bypass the dollar.
We could actually see a huge bulge in dollars in the domestic economy from this dynamic. I don't think we will see it from credit expansion though as many fear. The banks are hoarding cash - not lending it - and M2 won't move dramatically higher if this situation persists.
This stuff is indeed a little esoteric and clearly not as obvious as most think it is. The Fed's QE has only inflated risk assets to date and how this has been accomplished is explainable but not here as it would take a lot of space.
My guess is we see a falling dollar at the same time we see deflation and that is just not explained in the text books. Of course it is fully dependent on how the dollars and dollar assets are disposed of as the U.S. loses it's grip on the matter of the U.S. dollar remaining the world's reserve currency.
That said, I am a gold bull and think it is the best play over the course of the next few years. Don't know when it starts to climb as that seems clearly under the control of those manipulating the markets but I do think it will climb to new all time highs in the next few years.
So to summarize, my calls on gold I was bearish gold in late 2012 primarily on the basis that QE was simply not creating inflation other than in stocks. My view was that a lot of inflation was priced into gold starting with the Fed's QE program and it became readily apparent in 2012 that QE wasn't inflationary and therefore much of that premium that was priced in would disappear.
Whether you agree with my reasons or not, you can't disagree with the call on price as it has been pretty spot on. So to the point - why is it that I now see gold as a good play going forward and in fact think that now is the time to take positions in gold?
Why gold and why now?
The reason for why now has to do in part with the price action in the USD/YEN last week that suggests someone - and I think I know who - is very concerned with the possibility of a collapsing dollar. The chart below shows the movement of GLD and the USD/YEN pair and sets up the discussion going forward:
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The chart below shows a pretty high degree of inverse correlation between the USD/YEN and gold over the last 90 days. The longer term chart above is not so tightly linked but it too shows a reasonably high inverse correlation:
The fact is a strong US dollar has worked to dampen gold price and the need to keep a lid on gold price is obvious, as I will discuss in a moment, but first a look at what happened last week to the USD/YEN:
Anyone looking at that chart with reasonable objectivity would conclude that the market is being back stopped and driven higher at the slightest indication of weakness. The most glaring indication of that occurred on Friday with the release of a pretty dismal jobs report that caused the dollar to fall sharply against the yen before the dollar was pushed much higher and based on what exactly - nothing other than a lot of money being spent to back stop the free fall.
Here is what happened to GLD though. The chart below is the 5 minute intra day chart and shows that GLD diverged from the USD/YEN in that we see GLD moving higher even as the USD/YEN also moved higher:
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If the demand for gold is so high that the efforts to suppress it by keeping support under the dollar are no longer working then it stands to reason that those who have a vested interest in suppressing gold are beginning to lose the battle. So who would have an interest in suppressing gold prices?
Well, we do know this much - the German's attempt to repatriate their gold isn't working out so well. Consider this explanation from ZH:
On December 24, we posted an update on Germany's gold repatriation process: a year after the Bundesbank announced its stunning decision, driven by Zero Hedge revelations, to repatriate 674 tons of gold from the New York Fed and the French Central Bank, it had managed to transfer a paltry 37 tons. This amount represents just 5% of the stated target, and was well below the 84 tons that the Bundesbank would need to transport each year to collect the 674 tons ratably over the 8 year interval between 2013 and 2020. The release of these numbers promptly angered Germans, and led to the rise of numerous allegations that the reason why the transfer is taking so long is that the gold simply is not in the possession of the offshore custodians, having been leased, or worse, sold without any formal or informal announcement. However, what will certainly not help mute "conspiracy theorists" is today's update from today's edition of Die Welt, in which we learn that only a tiny 5 tons of gold were sent from the NY Fed. The rest came from Paris.
J.P. Morgan is the primary holder of physical gold and silver for the U.S. Comex, and up until recently, they stored metals eligible for contract and delivery at their headquarters across from the N.Y. Federal Reserve. However, in October of last year the financial center sold its underground vault and commercial property to a Chinese company, and has been divesting itself as the primary gold and silver depository for the futures market.
One thing that is disconcerting to many shorts in the gold market entering into 2014 are the massive increases in delivery demands of physical metals through the futures market, especially when their bets against gold were based on a system where very few investors actually took delivery, and instead rolled over their contracts to the following month. And as billionaire silver broker Eric Sprott said recently in an interview, the Comex is so depleted of gold in relation to their outstanding contracts that the market could see a default or fail to deliver event as soon as February.
Keep in mind most of this is not exactly breaking news. And it is pretty hard to argue that it has made a lot of difference in price even though it was well covered for those who pay attention. What I find interesting though - and in particular based on last weeks movement in the USD/YEN which was clearly counter intuitive and indicative of a concerted effort by someone to prop the dollar - was that gold has moved higher in spite of efforts to prevent it from doing so and the recent link between gold and the dollar/yen seems to have been decoupled for now.
That suggests to me that someone is losing the battle and someone is winning the battle and the chart above of the USD/YEN clearly suggests a battle is on between the bulls and the bears. So who has an interest in a strong dollar? Certainly the Fed if their vaults are empty and perhaps JPM even though it appears they may have mitigated much of the damage by amassing large positions on the long side of gold in recent months.
Here is what Ted Butler of Butler Research had to say on the matter of JPM in a recent article:
From the very beginning of the year to the last two days of 2013, JPMorgan has dominated and controlled the price of silver and gold. Here are the documented facts. At the start of 2013, with gold at $1650 and silver at $30, JPMorgan held short market corners in COMEX gold and silver futures. JPM was short 75,000 gold contracts (7.5 million oz) and 35,000 silver contracts (175 million oz). JPMorgan's short market corners at the start of 2013 amounted to a 21% net share of the entire COMEX gold futures market (minus spreads) and an astounding (but typical) 35% of the entire COMEX silver market. No single entity had ever held such outsized and anti-competitive shares of any important regulated futures market. It is unreasonable not to associate such extreme market corners with what followed in price.
And how is JPM positioned yesterday per Butler:
The facts show that JPMorgan not only took profits on their short market corners in gold and silver (to the tune of $3 billion+), JPM bought so aggressively on the price plunge thru June, that this bank almost eliminated their short market corner in COMEX silver and actually reversed their short market corner in COMEX gold to a long market corner. The facts indicate that JPMorgan was the single most aggressive trader on the extreme price plunge and not a lucky bystander.
It is well-established that a market corner is against commodity law. In fact, this is the most important aspect to commodity law, because market corners are unquestioned proof of manipulation. CFTC data indicate (as I've been reporting all year) that JPMorgan held short market corners in COMEX gold and silver at the start of the year and that this crooked bank holds a long market corner currently in COMEX gold. There can be no question that JPMorgan held and holds market corners in COMEX gold and silver based upon market share.
The only question is how the heck did these crooks pull it off? Specifically, how was JPMorgan able to buy so much COMEX gold and silver as prices plunged? Normally, one would think the net purchase of 150,000 COMEX gold contracts (15 million oz) and 23,000 COMEX silver contracts (115 million oz) by the U.S.'s largest bank would cause prices to soar. That would usually be the case, except for one other fact - JPMorgan and other collusive traders have come to control the price mechanism on the COMEX, thru high frequency trading (HFT), spoofing and other illegal computer trading means. The evidence of this is in the otherwise inexplicable daily price volatility on the COMEX and the fact that JPMorgan and other collusive commercials are always on the buy side on big down days with no exceptions.
For what it's worth, I spoke with Ted by phone for about an hour last week and found him to be very credible in terms of his in depth analysis of what goes on in the metals markets. Our conversation was arranged for the most part as a result of our shared views regarding JPM - albeit from entirely different perspectives.
Ted's conclusions as far as market action going forward are set forth below:
It appears that JPMorgan hasn't let gold and silver rip to the upside because the bank is still acquiring important quantities of metal in physical form. It does appear that JPMorgan has hit the limit of COMEX gold futures ownership, as the bank's long market corner is pretty easy to track and, apparently, hard for anyone to deny. Likewise, JPM's short position in COMEX silver has been hard to reduce significantly for six months or longer.
But the documented data clearly indicate that JPMorgan has been acquiring important amounts of gold and silver thru COMEX deliveries and, most likely, in actual metal from GLD and SLV. Unlike futures contracts which are reported weekly in COT reports, there is no reporting requirement by JPMorgan for physical gold and silver held. Considering that the statistics from the COMEX have shed much light on JPMorgan taking delivery of gold and silver in extraordinary amounts and the knowledge that JPM doesn't welcome close scrutiny of its trading, I'm inclined to believe we are closer to the end of JPM taking such visible deliveries, rather than this being the start of growing delivery-taking by them. In addition, after the unprecedented bleed of more than 40% of the metal in GLD, further massive liquidations look improbable from that source.
Therefore, I can see what JPMorgan has accomplished in 2013 and why they haven't pulled the trigger yet to the upside, as they continue to acquire physical gold and silver. But the easy flow of physical gold and silver accumulation by JPMorgan now appears largely over. That's not to say JPMorgan is done with its dirty tricks to the downside, but it's important to put things in perspective, which is the main purpose of year end reviews.
Timing the play
Although my call on gold has been a pretty good one over the last 18 months or so, my 2013 call on stock prices was a dismally bad call and I have found no shortage of readers who are quick to point that fact out. That said, I have made some other pretty good calls as well. For instance, I made a pretty good call on the dollar back on October 1st of 2012 as set forth in a piece entitled Making A Case For Buying The U.S. Dollar Now:
My views on the U.S. dollar changed in the first half of 2013 when China began to enter into bilateral trade agreements that effectively bypassed the U.S. dollar as a reserve currency and additionally began to sell U.S. Treasuries. Here is what I said on August 12, 2013 on the issue of the U.S. dollar:
Additionally, although not entirely rational in my opinion - the bond sell-off can at least be explained from a fundamental view. First of course is the taper talk. Second is the move to by-pass the U.S. dollar as a reserve currency with a number of bi-lateral trade agreements amongst the BRICS countries. This has prompted selling of reserve assets by foreign countries and put downward pressure on bonds.
I think the moves made by China are significant and in particular the move by the Chinese to sell U.S. Treasuries last year was a shot over the bow to establish that they are not just giving lip service to the matter of abandoning the U.S. dollar as a reserve asset and moving to the IMF's Special Drawing Rights.
I have written extensively on the subject of the U.S. dollar's ultimate demise as a reserve currency and think it is inevitable. For instance the matter was discussed in an article entitled Trying To Connect The Dots On The Feds Exit Strategy Timing and again in an article entitled Oxfam Report Suggests The NWO Is Almost Upon Us.
I won't delve further into the matter here other than to say that the impact of moving to the SDR as the new reserve currency and abandoning the dollar will have a decidedly negative impact on the U.S. dollar as demand for the dollar and dollar denominated assets fall precipitously. The truth is a sovereign currency as a reserve currency is problematic and tends to be deflationary as Robert Triffin properly explained the matter in what has come to be known as the Triffin dilemma - a subject I delved into in an article entitled How Much Longer Can The Fed Maintain A Corner On The Bond Market back in January of 2013.
Even Jim Cramer weighed in on the demise of the dollar back in October - Jim Cramer: Abandon the Dollar Now, U.S. Is 'Laughingstock'. I am not a big fan of Cramer as a rule although it may have as much to do with his style as the content of his message. In any event this is what he had to say back in October:
"I believe this is the de-Americanization that a lot of the Gulf States and Chinese are saying behind the scene," he said, adding that the dollar index reflected just that on Thursday.
"This is a good opportunity - between now and the next wrangle - where you can find a safe haven. Whether it be gold, whether it be the euro or whether it be, frankly, the Chinese currency," Cramer argued.
"The Chinese do not squawk. The Chinese do not complain," Cramer proclaimed in defense of his suggestion.
He pointed to gold's performance. Prices soared over $30 an ounce during the trade on Thursday. "Obviously" someone was putting money into the metal instead of the dollar, Cramer noted.
The world believes the U.S. has basically "lost control," he said.
"The only thing we have going for us is that we have a very liquid market," Cramer said of the United States. But he pointed to a common criticism of that single bright spot - the liquidity is likely because "the Federal Reserve is in there buying every bond they can right now."
"In a nutshell, we are back to business as normal where the U.S. government spends way too much money; which we have to borrow on the global market. We have no realistic way to pay it back and even with a 'shrinking' rate of deficits, the situation is not sustainable," Jeffrey Wright, managing director at H.C. Wainwright LLC, told MarketWatch.
He was a little early on the gold call but his comments regarding the dollar are the point and the point is the U.S. dollar's days as a reserve currency are numbered and that point seems to finally be making its way into mainstream media conversation of late. And it isn't something the U.S. is going to stop. Consider what Jim Sinclair had to say about the dollar and of course gold:
Renowned gold expert Jim Sinclair says financial calamity is just around the corner for America. Sinclair contends, "We are facing the annihilation of currency. We are facing the shift of America as the leading and most influential nation of the world to some form of banana republic. . . . If it wasn't for food stamps, we would be facing long lines of people waiting for free food." For gold, everything hinges on the U.S. dollar, and Sinclair says, "I think the dollar gets hammered. I believe we are headed for hyperinflation." One of the many black swans, according to Sinclair, is the possible abandonment of the U.S. dollar by Saudi Arabia. If Saudi Arabia stopped selling oil only in U.S. dollars, what would that do to the buying power of the buck? Sinclair says gasoline would be "$10 a gallon very soon, without a doubt."
Sinclair predicts retirement funds and bank deposits are going to be taken by the government. How much of your money could you lose? Sinclair says, "In Cyprus, it was a total of 83%. . . . Cypress is the blueprint, and it's what we are going to experience here in the United States." Jim Sinclair, who has just accepted the position as Chairman of the Advisory Board for the establishment of the Singapore Gold Exchange, says, "The exchange will trade physical gold only and not future gold. . . . You have to make delivery." Meaning, there will be no naked short selling or manipulation of this new market. Sinclair says, "This will emancipate gold from the paper price." How high will gold go? Sinclair predicts, by 2016, "Gold will be $3,200 to $3,500 an ounce." By 2020, Sinclair predicts, "Emancipated gold will be $50,000 per ounce."
I do respect Sinclair and understand his views. I am not so sure the situation is so dire that we see a Cyprus like confiscation of bank deposits in the U.S. though nor do I think we are close to being a "banana republic". As I said at the start of this article I am not a gold bug but I do think we have failed to provide good stewardship of the exorbitant privilege that goes with being the world's reserve currency. That said our banking system appears to be very solvent at this point as excess reserves are extremely high and the banking system in the aggregate has very large holdings of U.S. Treasuries - about as liquid a situation as one could ever hope for and not a situation that suggests a major liquidity crisis in the banking system.
Notwithstanding the fact that the banking system today seems quite solvent and very liquid I think the matter of the dollars status as a reserve currency was always a foregone conclusion as Robert Triffin explained back in the 60's. Keynes himself made the same point at Bretton Woods. The duality of providing economic growth domestically and acting as a provider of reserve assets to the world are simply not compatible.
For what it's worth the problem of providing reserve currencies and its deflationary effects are not just an issue for the United States. Both Japan and the Euro Zone experience the same problem and both of these currencies are used to a lesser degree than the dollar as reserve currencies.
The problem is reflected in the level of debt these economies have relative to GDP that necessarily expands money supply which should have an inflationary impact but that doesn't seem to be the case. The reason is akin to the Keynesian concept of a "liquidity trap" in that emerging market economies are forced to hold these currencies as insurance against the possibility of a policy change in the issuing economies that creates a liquidity issue.
The truth is the problem is not entirely the fault of the United States as the idea of a sovereign nation currency as a reserve currency is rift with problems from the start as Triffin correctly pointed out. My own view going forward is that we will see a flood of dollars move into the system as more and more countries elect to abandon the U.S. dollar as a reserve currency. The process of bypassing the U.S. dollar started last year in earnest with China's efforts to enter into bilateral trade agreements that bypass the U.S. dollar. To date the number of countries that have moved to bypass the U.S. dollar total 23 and by some accounts those countries represent as much as 60% of world GDP.
But again the matter is one of timing and in my own opinion now is the time. The reason I say that has to do with the sudden and significant upheaval in the area of currency trading or more to the point - currency manipulation. A few excerpts from an article posted by Bloomberg on February 5th entitled Currency Market Unsettled by Trader Exits on Lawsky Probe should make the point:
The foreign-exchange trading business was in upheaval across Wall Street as senior executives resigned and others were fired amid an expanding probe of possible currency manipulation.
Benjamin Lawsky, superintendent of New York's Department of Financial Services, asked more than a dozen firms including Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) for documents on their currency-trading practices, said a person with knowledge of the matter. Deutsche Bank, the top foreign-exchange trader, fired four dealers after an internal probe, people with knowledge of the move said. Goldman Sachs lost two partners while Citigroup said its foreign-exchange chief will leave in March.
Lawsky's investigation is at least the 12th opened by authorities in Europe, the U.S. and Asia since Bloomberg News reported that traders at the world's largest banks colluded to manipulate the benchmark WM/Reuters rates. Even staff who aren't being probed are reassessing career plans as the scandal forces firms to change fundamental practices as revenue falls.
The facts are currency traders are being put on leave, fired or leaving of their own volition and the numbers aren't insignificant. And they aren't all underlings either. Consider the following - again from the Bloomberg article:
Citigroup, the third-largest U.S. bank, said foreign-exchange head Anil Prasad will depart the bank to "pursue other interests," according to an internal memo. His exit isn't related to the industry probe, said a person with knowledge of the situation.
Steven Cho and Leland Lim, two partners in Goldman Sachs's currency-trading business, have also left, a person briefed on the matter said. Cho was global head of spot and forward trading of G-10 currencies in New York, while Lim was co-head of macro trading, which includes interest rates and currencies for Asia, excluding Japan, said the person. Cho and Lim were both named partners in 2010.
What it all means
As the USD/YEN chart at the beginning of this article reflects the manipulation is still not a thing of the past unless you really believe that Friday's 2nd really bad jobs report in a row - a report that produced an immediate knee jerk collapse in the USD/YEN - justified a ramp from 101.60 to 102.40 in a matter of minutes. More to the point though - gold didn't react to the ramp in stocks and the USD/YEN this time. Here is the 5 minute intraday chart showing that GLD closed at its high on Friday.
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And NUGT was even more impressive as the 5 day 5 minute chart reflects:
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What I see in the coming months is a significant sell off in the U.S. dollar precipitating a sharp move lower in equities and a rather dramatic short squeeze on gold that could drive gold sharply higher and very quickly. I have resisted joining the gold bug camp for a long time based on the thinking that gold would eventually have to move higher as we would ultimately have to inflate out of our debt problems but also thinking we wouldn't see significant inflation for a long time.
I still tend to think that is the case as far as inflation not being an issue in the near term but I also think we see a much weaker dollar as the process of dismantling the U.S. dollar as the world's reserve currency gains momentum. Some might find that puzzling but consider that those dollars being held as reserve currency will no longer be moving into U.S. Treasuries and the result should be a glut of dollars. That can occur even though cash will be hoarded producing a very low M2 velocity and a "liquidity trap".
There are those who argue that economists don't make good investors or traders and that may be true to some degree but not entirely. As readers know I have been bearish stocks since late in 2012 and the facts are the stock market has gone substantially higher even though I don't think that move was justified in spite of decent earnings.
The reason for my view has to do with the unsustainable path we are on relating to soaring debt levels. We've seen significant multiple expansion in recent months that suggest the exact opposite - in other words the increase in multiples suggests traders and investors expect the economy to catch up to the stock market. I don't see that as a realistic assessment going forward and in fact see a situation where top line sales and profit margins begin to reverse trend and in fact that has occurred to some degree already.
What's interesting here is that the macro economic analysis I have used to forecast stock price is essentially the same analysis I used to forecast the gold market. In the first case I was decidedly wrong and in the second case extremely accurate.
Ironically the same dynamic applied to both stocks and gold and the truth is most investors simply don't understand the deflationary pressures that have occurred and they have wrongly assumed that monetary and fiscal policy has been highly inflationary. If you don't understand the economic impact of the Triffin dilemma that puts a counter intuitive downward pressure on inflation then it is easy enough to assume these monetary and fiscal policies are inflationary.
A lot of gold investors have expressed real outrage at the sell off in gold in spite of what they see as excessive money printing. I would suggest that the sell off in gold made perfect sense and the significant increase in PE multiples in stocks did not make sense.
That said I think we have finally reached a seminal moment in both stocks and gold. One can't deny that manipulation of markets may continue for a time but it is my opinion that a combination of current efforts to curtail manipulation combined with the concerted efforts of the IMF, the UN, the BRICS and to some degree at least most of the other nations of the world to bypass the U.S. dollar going forward and implement a new system are going to result in a glut of dollars and that will produce downward pressure on the dollar.
In fact it can be argued that the Fed understands this dynamic very well and that at least part of the reason for stepping away from QE is motivated by the need to avoid this glut and the subsequent weakening of the dollar. After all if we are no longer going to be using the dollar as a reserve currency - or at the least, if the level of use is diminished - then the supply of dollars needs to be reduced to avoid the glut.
The truth is we are indeed close to a seminal moment in time and the dollars use as a reserve currency will decrease in coming months. There is really very little that can be done about that from a policy perspective. What really matters though in the short run is how investors perceive this dynamic or for that matter whether investors even see it happening in the first place.
One thing seems more certain though - accumulation of gold in both physical and paper form has been the reality even as gold prices have fallen precipitously. Those who have accumulated gold have done so for a reason - they see it as insurance against the collapse of currencies. For that reason alone it seems a logical time to establish long positions in gold and in both paper and physical form. If you do so you will at least be on the same side of the trade that the big players are on and that makes sense to me.
Additional disclosure: I am long puts on PCLN, FB, AMZN and NFLX