This from Roberto;
Roger I don't understand why you doubt the move in Gold. Also, who cares about the fundamental reasons? Look at the chart that is what we call a bull market, and charts don't lie. Gold $1000 you heard it from me. It will correct near term, but shorting gold is imho not a good idea. It is what it is, and the trend is your friend. Here is a better question; will oil hit $100 before gold hits $1000? Don't take this personal I still love your blog.
I hope I was clear, I'm not shorting gold. To repeat, I own it for everyone. Clients also benefit from Australia's correlation to gold as well. Bloomberg says that the Aussie dollar has a 0.94 correlation to gold.
Roberto's analysis and conclusion could be correct. I look at both sides of every theme I invest in and every theme I am thinking of investing in, its consistent with my notion of fiduciary obligation. This allows me to look any client in the eye and tell them I did my best, right or wrong.
Recently I wrote about getting lucky with two very quick trades for my personal account. I measured what I felt was the risk and the reward and had an idea of an exit strategy on the upside and the downside before I went in. That's just how I do things.
Back to gold, I have exposure and I have taken some inventory, I think, of the downside. Just seems prudent. But if $1000 turns out to be correct, I have to wonder what that does to domestic equities?
As far as taking it personally? Highschool sports to a fraternity to a trading floor to a fire department. I'd like to think my skin is a little thicker than "dude, I disagree with you about gold."
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8 comments:
Why the rush to gold? Read this.
The effecctive fed funds rate (currently 4%) minus the yoy% change in PPI (currently 5.26%) is a negative number (4 - 5.26 = -1.26%). As long as that is the case, inflation not only exists but is growing. And, when that equation works out to a negative number (as now) gold is what pays in spite of cheerleaders telling you that gold pays no dividends and owes no interest.
Though, it's probably too late to get into gold now. When that equation gives us a positive number again, and it will, it'll be too late and the average joe will be up to his ears in gold, after the fall.
I didn't make this up. Paul Kasriel, a very good economist from Northern Trust made this analogy. I ran the record through my own excel spreadsheets, and he's right. The last time this happened was the last time we saw the outrageous peaks in gold, 1980.
great stuff jack, thanks for the info.
chart is up on my site.
Hey Roger...
Been meaning to ask... How do you come up with the .93 correlation for gold/aussie. Seems a bit high.
I think what everyone needs to remember is to not obsess about gold the way that people did with tech stocks etc. in 1990's.
If you own gold shares and those stocks are up and taking up too large a share of your portfolio then set trailing stops and let whatever happens happen.
I think it wise to follow your discipline even if everyone thinks the only way is up.
well said
Mark Dodson, CFA at Hayes Advisors has posted several excellent points about gold.
The public has flooded into the StreetTracks ETF for a little better than a year now. It has been the fastest growing ETF in history. It gave the public the ability to purchase gold easily. And, 232 tones have been purchased. The fund increased in size by 10% last month! Each time a purchase is made the fund has to buy gold to back the shares.
There is a divergence that must eventually correct. Gold normally moves inversely to the price of the US dollar. It appears that some traders, who are short the dollar, are buying gold as a hedge. The average production cost of gold is only about $235 per ounce. Give the miners a little time and they will produce a lot of gold to be sold at $500 or better.
I have made the same point as Uncle Jack this way; scores of countries are now routinely increasing interest rates thus increasing the cost to carry gold. I do not use the PPI because it is extremely volatile, but using the core CPI, real interest rates are causing a real cost to hoard gold. Gold cannot go up year after year at a rate that matches compound real interest rates. Of course, if you can sell to a bigger fool, it does not matter, but once the cycle breaks, the price will fall dramatically.
Roger, in regard to correlations, there is normally a strong correlation between oil and gold. This too has diverged. The divergence sets up an arbitrage for the hedge funds, they can sell gold short, buy oil and know that the spread will eventually narrow. Believe it or not, strong gold is artificially inflating the price of oil. Heating oil, airplane fuel, and crude oil supplies are well above historical averages and yet the price went up last week (I know it was because of the unexpected cold weather in December). The good news is the invisible hand of Adam Smith will take charge to slow the consumption of oil all the more and eventually it will be oil that is dragging down the price of gold.
Another divergence is between gold stocks and gold. It appears that some players are shorting gold stocks and buying gold ETF’s. Once the turn comes, the gold stocks will fall a greater percentage than the ETF’s that track the actual metal price.
The European Central Bank sold tones of gold recently; it only takes one extra ounce to drive the price down hard. Manias can go a long way but I never want to depend on finding a fool at just the right time.
Good discussion and, who knows, the FOMC could offer a surprise this week. The response of gold to a hawkish interest rate statement could settle the issue.
Very useful discussion; it's all too easy to sell oneself on a story so it pays to listen to the other side. As an interesting side note (and no surprise really), it seems clear the tools one uses are going to affect interpretation considerably. For example I prefer a moving average of PPI and money supply as inflation metrics because the number of ways CPI is massaged seems less useful to me; e.g., I don't use core CPI at all other than to try and understand what those who do use it are thinking. Obviously that is going to affect what I consider real interest rates to be.
But I'm not aware of any metrics that say we are in a time of hyperinflation and, given the way countries like China and India export deflation, I'm not sure we could ever see a time like the 70's again unless trade protectionism comes back into vogue (in which case I think all bets are off). Gold primarily seems like part of the overall commodities picture to me (which I still view as positive) with the added kicker that it traditionally reflects uncertainty about money and, after years of easy money (excess liquidity), I believe such uncertainty is reasonable.
That aside, the better run base and precious metals companies, and energy companies too, are still generating lots of free cash and I'm making money on them; Obviously I'd rather keep doing that than be proven right concerning the secular trend one way or the other so I'll lighten up their current overweighting in my portfolio if and when events dictate.
But what I'm actually starting to dabble in now are long Treasury zeros -- any thoughts on whether the yield curve will invert if the FOMC is hawkish?
RW
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