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  • 'Gold's Decade-Long Bull Run Is Dead' 3 comments
    Apr 7, 2012 7:38 AM | about stocks: GLD, GDX, GDXJ, SLV

    ...says Gartman. From Forbes entry in the 'Running of the Goldbugs, 2012' sweepstakes:

    Bernanke delivered the fatal blow to gold's ten year bull market, according to Dennis Gartman. Gold has been in bear territory since the summer of 2011, when it topped out above $1,900 an ounce, with the latest post-FOMC sell-off inflicting irreparable technical damage, he says.

    Well close Dennis. But let's fine tune a little: Unbridled panic-fueled momentum drove gold unsustainably higher as it took a mini blow off and very predictable correction. Gold is not broken in its secular bull market (and not necessarily even the cyclical one out of 2008) by any rational technical parameters. Not as of this writing and thus, not as of your little Forbes piece with the alarmist headline. 'Irreparable technical damage' Dennis? Where?

    Technical damage could come about but here's the thing, it has not yet come about. Why the haste to make such a call good sir? And you Forbes; why pile on now when everyone from Buffett to Bernanke himself is mowing down the poor, under-armed gold bugs? If gold is so marginalized, why the big and seemingly coordinated negative ad campaign?

    The time to have negative feelings was late last summer. The time to think like a capitalist is now.

    UBS' Edel Tully adds that markets' no-QE-for-now realization will push gold even lower, probably down to $1,550 an ounce over the next month.

    Oh my... all the way down to 1550? While that's a little under my initial support parameter, it does not break the bull market. Next...

    Over the last couple of years, gold's precipitous, and continued, rise fueled causal theories, with some investors attributing it to U.S. dollar weakness, others to a safe haven trade in the face of widespread market turmoil, an inflation hedge, or whatever they could correlate a chart with. The yellow metal, though, appears as a Humean experiment in causality, marrying no single trend.

    What the #$%! are you talking about you egghead? Okay, so you razzle dazzled us with a reference to David Hume. Dial your head out of the clouds and down here to ground zero of the battle between honest systems and corrupt, media perverted ones. David Hume, are you kidding me?

    Gold has fallen nearly 9% since late February, trading at $1,628.5 an ounce on Thursday in New York. Gold went on a rollercoaster ride over the last 12 months, rising to an all-time high above $1,900 last spring, then tanking about 18% to December, then rising a further 15.5% to this February.

    Gold is up over 350% since I became involved in its market. Casino patrons can have thrills on the amusement park rides of 18% and 15.5%.

    According to Gartman, gold's latest price action confirms the trend line has clearly been broken, indicating we've been in a bear market for 12 months, since it peaked. In Thursday's Gartman Letter, "in retrospect it does appear that gold has not been in a bull market but has indeed been in a bear market" since August 2011, when it peaked above $1,900. "Since then," he added "each new interim low has been lower and each new interim high has followed. How, we ask, had we missed that fact!"

    I agree with you Dennis. But you need to define 'trend'. Is it a trend that ends the secular bull market or just a trend that defines a mini cyclical bear or as I would call it still, a downward consolidation of the unsustainable momo into the euro blow off? You know that in the hands of the mainstream financial media the definition is simply going to be "bear market" without any care about time frames and sub-definitions of bear or bull markets like cyclical, secular, etc.

    The catalyst for that realization has been the Fed, specifically the latest FOMC meeting and Wednesday's minutes from that meeting. In both, markets caught a glimpse of a more optimistic Fed that, while keeping the option on the table, has seen the necessity for a further round of quantitative easing reduced by the improved economic performance. UBS' Edel Tully adds:

    "The minutes painted a rather more optimistic view on growth, a more convincing take on the basis for the decline in the unemployment rate and most worryingly of all for gold, an acknowledgement by the Fed of the potential for a change in the end-2014 forward guidance."

    With the Bernanke Fed guiding markets over the last couple of years, it should come as no surprise that gold prices are very sensitive to monetary policy. Record low interest rates amid a weak global economy pushed nervous investors out of both risk assets and the safety of Treasuries. A weak U.S. dollar, along with massive liquidity injections via QE, helped investors look to gold for it has always been: a store of value.

    "Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity..."

    No QE3 and higher interest rates before late-2014 would cause further damage to gold, as it would signal an improving economic environment where capital should once again channel into productive, and thus riskier, assets. Fed unwinding will definitely deal a deadly blow to gold bulls, so the real question investors should be asking is: are we out of the woods yet?

    No QE3 and higher interest rates would cause further damage to gold if the charade on the yield curve can be maintained. Why are long term rates rising when Bernanke has expressly stated that the Fed intends to buy those bonds? For now, short term rates (don't look behind the ZIRP curtain where Fed Funds money is being given away free of interest) are rising faster than long term rates in all likelihood due to what the Fed has already stated it would do; manipulate the curve by driving up short term rates (selling short term Treasury bonds) relative to long term rates (buying long term bonds).

    If the gradual pace of economic improvement in the U.S. and the relative calm of European markets persists, then the global economy might be close to the edge of those woods. Bernanke has remained cautious, noting downside risks still abound, while ECB chief Mario Draghi was blunter on Wednesday saying risks are definitely skewed to the downside. Housing markets in the U.S. remain depressed and labor markets, while healthier, are still relatively weak.

    I am not a perma bear. I was noting economic improvement in February and taking email derision for it to boot. I also noted that the economic growth was caused by inflation. What I did not do was plan for the devil that eventually came out in the details as Dear Leader Bernanke did what no respectable policy maker has done before and decided to just take over the operations of the US Treasury market, which means he had the nerve to single handedly attempt to massage the unmeetable obligations of the US Government in a way that paints a picture of economic growth WITHOUT inflation. So regular market players got Goldilocks and honest money advocates got ignominy.

    Among the best at illustrating the bear case is Peter Schiff of Euro Pacific Precious Metals. "Don't catch the recovery fever" he told investors in his daily newsletter, adding "the recovery is not only going to falter - it's going to evaporate like the mirage it is!"

    Schiff expects substantially higher interest rates, which went untested in the recent stress tests on banks, to blow the lid off major financial institutiosn. Large Wall Street names like JPMorgan Chase, Citi, and Bank of America have relied on cheap money from the Fed to keep operating. Rising inflation, as a consequence of money printing and bond buying by the Fed, will force Bernanke to raise rates. From Schiff's newsletter:

    In fact, higher interest rates are not only possible, but probable. The stress tests assume long-term Treasury note yields stay under 1.8%; but that figure is the current six-month low on the 10-year, which is already dragging along its historical floor. As I write, yields are already up to 2.2%. The post-war average is about 5.2% - high enough to crater today's banking system.

    The stage is set for gold to continue falling in the immediate-term. Higher interest rates and an improved economic environment suggest it's time to put capital back to work. The improving outlook does face substantial threats, though, particularly the European sovereign debt crisis (which promises to flare up again), which could stoke recessionary fears. Add Schiff's predicted inflation, and you could see the yellow metal rally rise through the ashes like the Fenix. At the end of the day, it all boils down to the true strength of the economic recovery. Stay tuned.

    Well, here we have Peter being Peter. Peter gets a little excited. It comes down to this... if Bernanke is able to continue screwing with the curve, rising rates are likely to hurt gold. If he fails and the market wins out and the yield curve begins to rise again, gold should benefit from rising rates. Short of these scenarios, maybe what is on tap is that the precious metals are forecasting a hard decline across the asset spectrum (with a hard decline in yields, AKA a deflation blip) before gold again leads the way out of it into the next inflationary up cycle. Patience and a noise filter are the best tools now.

    Manage risk and understand the game; Forbes, Gartman, Buffett, Roubini, Bernanke... the whole lot of them. This is what happens at the opposite pole to the damaging momentum and greed that drove gold too far last summer and it is all part of doing business in markets that operate as if in Wonderland as opposed to any sort of rational and healthy environment that policy makers and media would have us believe actually exists.

    Stocks: GLD, GDX, GDXJ, SLV
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  • jusdoit
    , contributor
    Comments (112) | Send Message
    Gary, calling folks "egghead" is not nice.


    Let them panic, I can work with a $1480 - 1550 number as long as we do it without the Titanium reinforcement. Buffett made very clear the 100 year difference between pile A, B, and C, so everyone has an equal opportunity to adjust their behavior and exposure.


    Remember, "It's not about Price, it's about Value"


    Thanks for the good read and rant.
    7 Apr 2012, 12:05 PM Reply Like
  • Gary Tanashian
    , contributor
    Comments (99) | Send Message
    Author’s reply » Yes, I suppose not. Good thing I pulled back from what I really wanted to say. Sometimes these informal blog posts ( get a little ranty for sure.


    As for price and value, it's why people need to know whether they are a player or value holder. Players get mowed down periodically and value holders yawn and look for opportunity.
    8 Apr 2012, 08:05 AM Reply Like
  • Roman Chuyan, CFA
    , contributor
    Comments (245) | Send Message


    "maybe what is on tap is that the precious metals are forecasting a hard decline across the asset spectrum"


    Values of most asset classes (metals, stocks, bonds) are likely inflated as a result of the Fed's stimuli (and other central banks' around the world), including infusions of cash (QE's) and very low interest rates. So, if rates were to rise, asset values would likely drop - which I think is what you are saying... so I agree. (though the net effect on gold price may be positive OR negative, see below).


    The question is - what would bring about the rise in interest rates? As you said, the Fed not only keeps short-term rates low (as it traditionally does to stimulate the economy in the absence of inflation), but also long-term Treasury rates, by buying those Treasury notes. So, rates would rise if/when the Fed want them to, if the U.S. economy starts growing faster - in this case I think the gold price may drop.


    The second scenario in which rates would rise is if the market "wins out", as you said, despite a weak economy - this could happen due to rising inflation, or due to credit concerns about the US government debt. The latter scenario, though still low probability, is more likely, in my view, than most observers think. Across the Atlantic, both Italian and Spanish 10-year rates are now pushing 6%, which is the level that brought down Ireland, Portugal and Greece. It were actually rising rates, driven by the market, that bankrupted the countries, because the amount that they have to pay in interest on their debt which is ~80% - 100% of GDP, balloons and becomes a large part of the budget outlays. So, Spain and Italy are now all but insolvent; dominoes continue to fall, progressively from the weaker to a bit stronger ones (remember the credit crisis?).


    Well, the US government debt is 100% of GDP, and its annual budget deficit is above 8% (which it has to borrow, thus raising the debt) - these are at the level of Portugal, and worse than Spain (which will only reach 80% this year). Of course, the US has a large and diversified economy which makes it not as vulnerable to sovereign default as, say, Spain, but... this possibility is quite real... and gold will likely benefit in such scenario.
    12 Apr 2012, 01:47 PM Reply Like
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