Wednesday, January 8, 2014
Proof that Gold was Slammed
Don't you love these catchy titles? I apologize to the reader but I just could not resist having a bit of fun. When it comes to gold, it is never boring.
Look - no matter what one thinks of what happened to gold the other day, my view is really simple - Gold needs an inflationary environment in which to thrive. Generally speaking, it also requires an environment in which REAL INTEREST RATES are negative. An inflationary environment in which REAL interest rates are positive ( nominal interest rate yields EXCEED the official rate of inflation as measured by the CPI) is detrimental to the gold price.
Back in the early 1980's, Fed chairman Paul Volcker broke the back of the gold rally by raising short term rates to extremely high levels - higher than the rate of inflation - thus giving buyers of Treasury enormous, risk free profits by moving out of gold and into Treasuries. In the process he slowed down the economy and brought on a recession but he broke the back of the inflation genie that was rampant in the US at the time.
Generally speaking - gold tends to have problems in such an environment because it throws off no yield. Investors who buy it want to see it outperform essentially risk free returns in Treasuries. The only way most investors are going to make a return on gold is through capital gains. In other words, its price needs to rise at a faster pace that the rate of inflation or at the very least, at a faster pace than the rate at which Treasury yields are going up.
I said all this to just make a point - there is no need - AT THIS TIME - for the Fed to fight any sort of rise in the price of gold because the market is convinced that the QE programs have not led to rampant price inflation as many anticipated they would.
Take a look at the following commodity index, the GSCI, and tell me, honestly and without any bias whatsoever, in which direction is the WHOLESALE PRICE of commodities generally headed? Is it up or is it down? The answer is obvious is it not.
Commodity prices have been GRINDING LOWER for over TWO YEARS NOW after spiking to a peak in early 2011. What has the price of gold been doing over that same period? Yep - it has been moving lower as well has it not?
What is so hard to understand about this? There is not the least scintilla of evidence that there is any upward price pressure in things tangible as a whole. So why do some keep insisting that gold should be thousands of dollars higher in price????
Some may want to look at the US Dollar but what has it been doing?
Again, since the early part of 2011, ( GEE WHAT A COINCIDENCE - note the GSCI chart above ) it has been strengthening, first SHARPLY and then, since early 2012, within a more gradual upward sloping price channel. Either way, it is no longer moving sharply lower as it had been during the bullish phase in the gold price. As a matter of fact, the rising Dollar has been an effective lid on rising commodity prices in general.
Now, and lastly, take a look at the weekly chart of the S&P 500 index.
Note that since its bottom in October of 2011, to its current price near 1840, it has returned a stunning 64% return.
Now consider all three of these charts together - given that commodity prices are weak and moving lower, given that the Dollar is strong and moving higher, and given that equities are returning such strong gains, why on earth would any investor rush into gold as protection against runaway inflation and lose missing out on such stellar returns in the US stock markets?
Given all these things, yet, we are to believe according to some, that gold is ready to lift off into the stratosphere any day now and that only manipulation of its price is preventing this from occurring.
Those who cite this manipulation are also ready to whip out the latest GOFO rates, backwardation, etc, to bolster their case that it is only through the clandestine activities of the big bullion banks, working at the behest of the Fed and the US government, that gold is kept from roaring upwards.
Dear reader, just look at the above series of charts and remind yourself, that when the commodity complex shows signs of shifting from a downtrend to an uptrend, when the Dollar shows signs of moving from a gradual uptrend to a downtrend, and when the US stock market shows signs of finally giving up the ghost and moving lower, then gold will have its day.
This is not meant to disparage any of those who keep advocating this manipulation stuff as I count some of them as my friends. It is however meant to discredit their notion that gold is under constant manipulation AT THIS TIME. It is not in my opinion as there is NO REASON FOR GOLD TO RISE sharply right now.
Those who are buying the metal are those who have nagging concerns about the overall well-being of the so-called "global economy". There remain trouble spots in the Euro zone, that is for certain. Also, the gargantuan debt of the US government with its massive amount of unfunded liabilities is not going away. However, and this is key, these are value-based buyers with a LONGER TERM horizon than the majority of hedge funds/investment funds/money managers who are paid to PERFORM in the here and now.
When that money flow from those sources re-enters the gold market, then the metal will rise and will continue to rise as long as that money flow persists. Until then, the feds do not need to waste their time with gold for Western investors are simply not interested in it. Asia is - but Asia, for all its size, is still not Western investment money flows.
Look - no matter what one thinks of what happened to gold the other day, my view is really simple - Gold needs an inflationary environment in which to thrive. Generally speaking, it also requires an environment in which REAL INTEREST RATES are negative. An inflationary environment in which REAL interest rates are positive ( nominal interest rate yields EXCEED the official rate of inflation as measured by the CPI) is detrimental to the gold price.
Back in the early 1980's, Fed chairman Paul Volcker broke the back of the gold rally by raising short term rates to extremely high levels - higher than the rate of inflation - thus giving buyers of Treasury enormous, risk free profits by moving out of gold and into Treasuries. In the process he slowed down the economy and brought on a recession but he broke the back of the inflation genie that was rampant in the US at the time.
Generally speaking - gold tends to have problems in such an environment because it throws off no yield. Investors who buy it want to see it outperform essentially risk free returns in Treasuries. The only way most investors are going to make a return on gold is through capital gains. In other words, its price needs to rise at a faster pace that the rate of inflation or at the very least, at a faster pace than the rate at which Treasury yields are going up.
I said all this to just make a point - there is no need - AT THIS TIME - for the Fed to fight any sort of rise in the price of gold because the market is convinced that the QE programs have not led to rampant price inflation as many anticipated they would.
Take a look at the following commodity index, the GSCI, and tell me, honestly and without any bias whatsoever, in which direction is the WHOLESALE PRICE of commodities generally headed? Is it up or is it down? The answer is obvious is it not.
Commodity prices have been GRINDING LOWER for over TWO YEARS NOW after spiking to a peak in early 2011. What has the price of gold been doing over that same period? Yep - it has been moving lower as well has it not?
What is so hard to understand about this? There is not the least scintilla of evidence that there is any upward price pressure in things tangible as a whole. So why do some keep insisting that gold should be thousands of dollars higher in price????
Some may want to look at the US Dollar but what has it been doing?
Again, since the early part of 2011, ( GEE WHAT A COINCIDENCE - note the GSCI chart above ) it has been strengthening, first SHARPLY and then, since early 2012, within a more gradual upward sloping price channel. Either way, it is no longer moving sharply lower as it had been during the bullish phase in the gold price. As a matter of fact, the rising Dollar has been an effective lid on rising commodity prices in general.
Now, and lastly, take a look at the weekly chart of the S&P 500 index.
Note that since its bottom in October of 2011, to its current price near 1840, it has returned a stunning 64% return.
Now consider all three of these charts together - given that commodity prices are weak and moving lower, given that the Dollar is strong and moving higher, and given that equities are returning such strong gains, why on earth would any investor rush into gold as protection against runaway inflation and lose missing out on such stellar returns in the US stock markets?
Given all these things, yet, we are to believe according to some, that gold is ready to lift off into the stratosphere any day now and that only manipulation of its price is preventing this from occurring.
Those who cite this manipulation are also ready to whip out the latest GOFO rates, backwardation, etc, to bolster their case that it is only through the clandestine activities of the big bullion banks, working at the behest of the Fed and the US government, that gold is kept from roaring upwards.
Dear reader, just look at the above series of charts and remind yourself, that when the commodity complex shows signs of shifting from a downtrend to an uptrend, when the Dollar shows signs of moving from a gradual uptrend to a downtrend, and when the US stock market shows signs of finally giving up the ghost and moving lower, then gold will have its day.
This is not meant to disparage any of those who keep advocating this manipulation stuff as I count some of them as my friends. It is however meant to discredit their notion that gold is under constant manipulation AT THIS TIME. It is not in my opinion as there is NO REASON FOR GOLD TO RISE sharply right now.
Those who are buying the metal are those who have nagging concerns about the overall well-being of the so-called "global economy". There remain trouble spots in the Euro zone, that is for certain. Also, the gargantuan debt of the US government with its massive amount of unfunded liabilities is not going away. However, and this is key, these are value-based buyers with a LONGER TERM horizon than the majority of hedge funds/investment funds/money managers who are paid to PERFORM in the here and now.
When that money flow from those sources re-enters the gold market, then the metal will rise and will continue to rise as long as that money flow persists. Until then, the feds do not need to waste their time with gold for Western investors are simply not interested in it. Asia is - but Asia, for all its size, is still not Western investment money flows.
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