There’s gold in that thar abyss

I haven’t yet commented upon the newest iteration of the gold crash. Down 5% or so now from its recent peak:


I was never convinced by the rally given the clear and present danger represented in the Fed and that’s what’s undone it. From the AFR:

Goldman Sachs Group and Societe General can thank Janet Yellen for helping to get their bearish forecasts for gold back on track.

After hedge funds piled into the precious metal this year with the most bullish bets in 16 months, defying the predictions of lower prices by Goldman and SocGen, gold tumbled last week by the most since November as Yellen, chair of the Federal Reserve, said economic stimulus could end this year, with interest rates starting to rise in early 2015.

…“The sentiment probably had gotten a little ahead of itself,” said Ted Harper, who helps manage more than $US9 billion ($9.9 billion) at Frost Investment Advisors in Houston. “Gold is going to be somewhat problematic from an investment standpoint over the next six to 12 months. We’re probably looking to a relatively higher and quicker increase on rates, which is a headwind for precious metals.”

“We continue to believe that the economic momentum in the US shows further improvement,” said Michael Haigh, the New York-based head of commodities research at SocGen who correctly predicted the 2013 bullion rout. “We reiterate our very bearish outlook for this year. Prices could drop below $US1,000. I would not rule that out.”

Neither would I, and I wouldn’t buy it then either. Remember, above all else, gold is a play on the dominant reserve currency and, by extension, its monetary and fiscal underpinnings.

When the next bust arrives, some time in the next two years is my guess, gold will get get crushed as the safe haven play returns to US dollars. That’s when it will be time to buy gold. Some are still holding for other reasons:

“We have gold as an inflation hedge,” said Adam Strauss, Chicago-based co-manager of the $US300 million Appleseed Fund at Pekin Singer Strauss Asset Management. “Some of the inflation forces have dissipated significantly over the last 12 months. That has not changed at all our long-term outlook.”

But my major reason for retaining an interest in gold is deflation. When the next bust happens, and QE returns in greater form (oh yeh!), gold will once again glitter.

Houses and Holes
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      • migtronixMEMBER

        No idea. I’m not across the ag space. I suspect it was the harsh mid west winter in the states though. I just watch the correlation my algo throws up.

        EDIT: Ukraine the bread basket of Europe probably something to do with it also

      • Speculators speculating.

        Unless there’s a full invasion of Ukraine it won’t last. And if there is war, it will be over quickly. Exports won’t be too affected.

        If it isn’t over quickly, wheat futures will be the last thing on your mind.

    • migtronixMEMBER

      Nice ! I’m starting to think should have sold my calls a week ago, but look at nikkei up 2% one day down 1.5% the next. Don’t trust any of it !

  1. Yellens interest rate talk really took a shine out of gold. Still, I see potential for some surprise to the upside – say retrace to 1270 then grind higher on worsening data and less QE/more systemic risk.

    QE is bad for gold, but higher rates are also bad for gold (end of financial repression/negative rates). This is a bit of a confusion in that the latest meeting was good for gold (expected 10b drop in QE) and bad for gold (unexpected bringing forward rate hike expectations). Gold market was poised for a post-fomc rally in that the metal sold off in the lead up to FOMC (sell rumour, buy the news), so the post-Yellen sell off was mostly priced in already and not too dramatic – rate talk was a rude little surprise though.

    I think Yellen is optimistic that she will get the chance to raise interest rates – when QE is over, stresses will begin to rise in markets and I doubt it will take 6 months to see that raising rates would be foolish.

    Still mildly bullish for me… Though of course the better play us US long bonds which are really liking the end of QE.

      • Both 10 and 30 year fell in response – heavier fall in yields at the long end as expected from less QE:

        Raising rates strengthens the case for long bonds, as doing so would hurt the recovery – especially in the absense of QE. If inflation was a concern, we might see long bonds and short rates rise together – but not in this disinflationary environment IMO.

        Raising rates weakens the case for gold a little, I have to admit, but it makes me more comfortable about UST’s.

      • I’m not sure I have ever said that US short duration bonds were a good bet.

        In fact, I’m sure I’ve never said that!

      • migtronixMEMBER

        @macro: I never said you did, but why is the cash rate going up at the same time gold is getting dumped? Makes no sense to me, if you have a working theory I’d love to hear it.

      • I suppose similar to what I said above:

        A cash rate rising from ZIRP is bad because, apart from either high inflation or deflation (instability), gold benefits from a negative real rate environment – as gold has no yield itself, it becomes more attractive when other safe investments are offering negative yields after inflation.

        Inflation is running at sub 2% and trending lower in the US – it wouldn’t take much normalisation of rates to end negative real rates on cash, and hence one of the supports under gold. This is what the market is saying, I suppose.

        Where I diverge from concluding this is bad for gold, is that I don’t think the Fed will end up raising rates soon, and if they do, they will discover it was a bad idea for the recovery and reverse course.

    • “QE is bad for gold, but higher rates are also bad for gold (end of financial repression/negative rates”

      —Macro Polo

      # QE is a money supply expanding and inflationary policy by design… Gold loves QE

      # Paul Volcker had to raise the 10-year bond rate to 16% in 1980-81 before people would sell their gold.

      • Yeah OK, but in the non Austrian world, QE hasn’t managed to keep inflation above 2%. This is because – to repeat something you’ve probably been told before – banks are not reserve constrained and do not lend reserves.

        Whether the Fed creates 1trillion of base money a year is insignificant compared to the private sectors money creation through bank lending.

        If you are long gold because you think QE is inflationary, you will be disappointed. But, as I said, QE – especially open ended QE – has been just awful for gold, so be happy it is ending and instability might rise to help you profit. I’m not anti gold.

      • Increased money creation is the definition of inflation … doesn’t matter to me if it is produced by government or privately… Gold is money and fiat is IOU.

        “QE hasn’t managed to keep inflation above 2%”
        —Macro Polo

        That’s if you believe that is a true number.
        Truthful Jones would tell you that inflation in the stock market, bond market and the real estate market have not been included in the inflation number… and that’s just price inflation…

        The real inflation is in the huge amounts of money being created as debt by all banks … Commercial and Reserve.

    • “A cash rate rising from ZIRP is bad because, apart from either high inflation or deflation (instability), gold benefits from a negative real rate environment – as gold has no yield itself, it becomes more attractive when other safe investments are offering negative yields after inflation.”

      —Macro Polo

      The interest rate is a reflection of risk… there is no interest rate for gold because there is no risk.

      • Gold has no interest rate because it is not capable of creating a cash flow – it is an inanimate object.

        By your logic, fiat dollars in the US have no risk either, because the interest rate is effectively zero. Do you believe this is true?

        Look, not trying to have a go at you, but I feel like I can’t help but offend goldbugs/Austrians even when I’m trying to say gold will rise…

      • Gold doesn’t change at all because it is the real money.

        Sovereign currencies are just devaluing compared to gold because they are created or brought into existence as debt… It is fiat… Nothing backing it but the unlikely honesty of good government… If that can ever exist.

        It is a twisted path… this tortured course.

      • Macro Polo… you have the look of truth about you.

        The difference between you and I is that I’m 63 and have already had the shit kicked out of me and lost large amounts of money over the years.

        You still have faith in the system.

        Please try to be a little more cynical.

      • I’m a realist these days.

        I was cynical a few years ago, reading Zerohedge etc.

        As I learned a bit more, I figured out that the ZH type of perspective wasn’t just making me miserable with the world – a lot of it was wrong, or didn’t make sense with a little more perspective/understanding of how the monetary system operates.

        That’s where I’m coming from. I’m not naive, just realistic.

  2. “When the next bust happens, and QE returns in greater form (oh yeh!), gold will once again glitter.”

    — H&H

    Where are you going to be able to buy gold when that happens?

    The US doesn’t have enough gold to pay back Germany any more than 5 tonnes of its gold.
    While gold is being manipulated, China and the rest of Asia are buying as much as they can get their hands on…they’ll never sell their gold for hundreds of years.

    Jim Grant said it best: “a commitment to precious metals and related mining shares is an investment in the almost certain failure of the PhD-standard in central banking.”

    70% of my super is in precious metals.

    • migtronixMEMBER

      +many. The shares are difficult because the miners are hocked to the gills to the banker but unencumbered bars and coins? Worth their Molecular Weight in atoms 🙂

      • Yeah Mig, can’t see gold at $1,000… It costs KCN $2,000 to get it out of the ground at the Challenger mine.

      • Mig, when the 2008 crash came, I had large number of Dominion Gold (DOM, now part of KCN) shares.

        I watched them go down over 50% in the crash, but came back better than ever after 6 months or so.

        Lesson: buy precious metal shares after the sharemarket crashes because when it’s a real crash, everything is sold down.

      • migtronixMEMBER

        @atha: I hear that!! Probably by liquidating some bars 🙂

        Thanks for report from the front BTW doc, I didn’t start getting on PMs until AFTER 08 crash, so didn’t quite know how that played out…

      • IMO Gold shares followed the price of Gold which bottomed in late 2008. The stock market continued to crash into March 2009, but by then many Gold miners had already rebounded in the vicinity of 100% or more (from their lows) i.e. don’t count on the miners following the stock market unless the metal is also falling.

  3. Yeah BB, sold my large holding of DOM in late Dec 2010/early 2011 just before KCN took them over, to buy the metal.

    Today my metal is up an insignificant 1.23% and KCN is down a very significant 90%.

  4. “When the next bust arrives, some time in the next two years is my guess, gold will get get crushed as the safe haven play returns to US dollars.”

    Hmmmm. And what if the next bust is due to, or, triggers, a collapse in the USD?

    • Yeah Opinion8red, it is pretty obvious that the US has chosen the inflation route and are pressing for a lower USD.

      On this wonderful site on 16th February I wrote:
      “In the Plaza Accord Sept 1985, the US organised agreement to devalue their currency against the German and Japanese currencies as per Trade Weighted US Dollar Index:Major Currencies (DTWEXM), such that the US$ went from 148 to 87 from 1985 to 1988.
      China has been similarly affected with the US$ going from 112 in 2003 to 77 now.

      The best way for these Asian exporters to protect the value of their US Treasuries and Bonds is to now buy gold while the US is so desperate to manipulate its price as low as they possibly can.”

      That is happening… No great secret.

      More recently I’ve noted that in the last iteration of this in Australia between 1973 and 1983, if you check the RBA Inflation Calculator, our RBA organised an average 11.4% inflation per year for 10 years such that a $100 basket of goods in 1973 cost $294 in 1983.
      And in the same way a retiree with $294,000 in savings in 1973 had purchasing power of $100,000 by 1983.

      Unhappy X and Y generations should note what will happen to Baby Boomers:
      1) the bourse will crash as much as it did in 1932/33 … 89%
      2) property prices will crash… 40%, and then after this deflation
      3)10-15 years of inflation such that the purchasing power of their surviving savings will be crushed

      X and Y generations should not expect much of an inheritance.