By Jack Sparrow
Some quick thoughts on gold as we finish up a light holiday week of trading…
We have repeatedly emphasized, in past months, that gold looks terrible. We grew constructive again - briefly, when gold responded well to the previous jobs report, as documented in the following posts:
- Gold Looks Terrible Part II: Clarifying Thoughts (March 22nd)
- At What Point Should Gold Believers Lose Faith? (May 28th)
- Jobs Report is an Inflection Point Game Changer for Gold (June 3rd)
While gold and gold stocks were looking attractive circa early June - after the June jobs report surge - we never found a workable entry point to establish long positions. The metal was simply not "acting right." So we stayed on the sidelines.
And now, with another jobs report on the books, gold looks terrible again. The "inflection point" was totally blown. The performance of gold, silver, and precious metals stocks has been awful relative to the macro backdrop.
Consider Thursday's big news of "global coordinated easing," and gold's utter non-reaction:
Global central banks went on the offensive against the faltering world economy [on Thursday], cutting interest rates and increasing bond buying as a round of international stimulus gathers pace.
In a 45-minute span, the European Central Bank and People's Bank of China cut their benchmark borrowing costs, while the Bank of England raised the size of its asset-purchase program. Two weeks ago, the Federal Reserve expanded a program lengthening the maturity of bonds it holds and Chairman Ben S. Bernanke indicated more measures will be taken if needed.
"The actions had the look and feel of a coordinated global easing campaign," said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. "The central banks are trying to arrest the synchronized slowdown in global economic growth that has taken shape."
As they say, "it ain't the news - it's the reaction to the news."
For gold, Thursday's "whiff of desperation" from three central banks - with QE3 waiting in the wings - should have been like waving a bloody pork chop in front of a pit bull. Instead, gold actually declined, more cowed by a fresh burst of dollar strength (via tanking euro) than inspired by manifestation of the "pushing on a string" scenario.
As practitioners of the Mercenary Creed, we heed price action without deferring to it. And gold's price action, quite frankly, has sucked. The mega-surge on the last jobs report saw an ugly reversal 48 hours later, and following that, gold has traded sideways to down since.
What's more, the weekly SPDR Gold Trust (GLD) chart looks frightening (for bulls):
Gold stocks, meanwhile, are behaving as one might expect, like a leveraged play on gold. The prospect of further weakness in the yellow metal is keeping gold stock valuations depressed. Many gold bugs, er, bulls are being pushed to wits' end. To quote Blazing Saddles, they are asking: What in the Wide, Wide World a' Sports is a Goin' On Here?
Not finding an answer, some content themselves with assurances that the market is being manipulated, that there are nefarious forces at work keeping the gold price depressed. But this isn't necessarily the case.
There are simpler explanations for why gold is behaving so poorly.
Here are a few quick refreshers:
- The market does not believe in the inflation / reflation case. The bedrock argument for gold is runaway inflation, in the form of monetary velocity gone wild, with nervous central banks refusing to tighten prematurely for fear of the 1937 scenario (killing a nascent recovery). There is no evidence this is happening. If anything evidence for the opposite is mounting. For ex. see "Americans squeezed by higher rents, tight credit".
- The market does not believe in the deflationary "nuclear stimulus" case. Gold is portrayed as an asset that does well at "fire and ice" extremes. The fire is inflation; the ice is deflation. Gold can theoretically do well in "ice" conditions - deflation conditions - if emergency stimulative policies amount to rapid currency debasement, causing gold to look attractive as the one "alternative currency" not subject to the ravages of the printing press. Market is not buying this either.
- The market is putting us somewhere between "Ugly Goldilocks" and "Politically Constrained." In April we discussed "The Return of Ugly Goldilocks," the idea that things still look bad, but not so bad as to induce a true "fire" or "ice" scenario, and in the middle, gold gets no traction. As far as "politically constrained" goes, the idea here is that the major central banks (Europe, US, China etc) do not have carte blanche to go "nuclear", and in fact, may be forced to continue doing too little in the face of synchronized global slowdown.
The euro, too, works against gold
Euro weakness is also having a negative impact on gold, via follow-on dollar strength.
There are still legitimate questions as to whether the euro will survive. And even if the euro DOES survive, there are legitimate questions as to whether it will ever regain sufficient credibility to be considered a genuine "world reserve currency" alternative.
China's currency, meanwhile, is just not ready for primetime. Too many unknowns and too much macroeconomic risk, not to mention corruption and looting on a mass scale. (Oh, and the yen? Yeah, right… fughedaboudit…)
All of this creates risk of a prolonged U.S. dollar short squeeze, as a result of synchronized global slowdown, with a lack of attractive alternatives (and US Treasuries still acting as one of the "cleanest dirty shirts," to use a Bill Gross phrase).
As much as debt doomers hate the reality of things, dollar-denominated assets are still seen as a financial safe haven in this uncertain world. Politically constrained central banks may not be able to stand against the deflationary pressures of further global credit contraction, which would have the effect of pushing the $USD up and risk assets down (including gold).
Did we mention that Chinese exporters are now hoarding dollars? The world just ain't as simple as many assume.
The Mass Capitulation Thesis
Another precious metals "problem," which we have touched on repeatedly, is the mass capitulation threat. That threat comes in two forms:
- Retail fatigue. GLD is one of the most successful ETF launches ever. SLV (SLV) has been a great success also, allowing the "little guy" to make precious metals bets from his stock trading account. But if precious metals endure a certain amount of decline - if the pain goes beyond an unknown tipping point threshold - a mass capitulation on the retail side could be the painful result.
- John Paulson. Paulson, the 9-ton elephant in the gold and gold stocks room, has gone from hero to zero with his increasingly frustrated clients. Worse still, a large chunk of Paulson's deca-billions under management came in after the big subprime score, and have thus gotten all downside, having missed the lion's share of upside. At some point, these clients are going to say "No mas." In fact they are saying it already…
A mass capitulation in gold, while certainly not guaranteed - nothing is - would also fit certain historical norms.
Check out the following 1970s gold bull market chart (hat tip Zeal LLC):
Were we to consider recent action as a "three stages" analogue, today might be analogous to the 1974-1975 period, in which gold prices endured an extended 50 percent decline (!)before regaining their footing and finally going "parabolic."
Such action would dovetail with a very plausible macro scenario:
Synchronized global slowdown continues… central banks continue to pull the lawn mower ripcord with little happening… "fire and ice" get exchanged for ennui, frustration and boredom… gold sinks lower and lower, finally blowing out the retail masses in disappointment and disgust… and then, around the time precious metals are yesterday's news / written off as terminally comatose, reflationary lag finally kicks in, bringing about the super-bull all the long-term investors anticipated years too early.
Could happen. All the more reason to be a vigilant and flexible trader, ready to move at moment's notice, versus a rigid and overly thesis-committed investor, caught out by headfakes on a grand macro scale.
But, to paraphrase the old Dennis Miller: "That's just our opinion. We could be wrong…"
funny old world innit?