Is gold “fading from the investment picture” as the Wall Street Journal recently declared? Is it time to abandon the barbarous relic completely, leaving it for dead as Keynes himself fervently urged? Better yet, is it time to short gold as prices fall back into oblivion?
Not just yet. As with Mark Twain at one time, the reports of gold’s death are greatly exaggerated. But nor is the picture clearly bullish.
For those pondering the current state of gold (and by extension gold stocks), we would put them in Charlie Munger’s Too Hard Bucket. There is a time to bet big, a time to bet small, and a time to bet nothing at all – the third case now applying.
The WSJ’s Weak Vodka
Last week, in a piece titled Gold Fades From Investment Picture, the WSJ raspberried gold as follows:
The investor gold rush that propelled the precious metal to a dozen years of annual price gains is on the verge of ending with a whimper.
Russia’s central bank in September sold gold for the first time in a year, according to the latest data from the International Monetary Fund. Since the start of 2010, Russia has accounted for 30% of all gold purchases made by central banks that report to the IMF.
Like other emerging-market nations, Russia bought gold to diversify its foreign-exchange reserves. The retrenchment of Russia and others is the latest factor to weigh on gold prices, which are down 19% year to date. The last time gold prices posted an annual loss was 2000…
Hmm. There are plenty of reasons to be skeptical of gold’s prospects. But does activity out of Russia really count as one?
First consider the amount Russia actually sold — a mere 12,000 ounces. This was reported in the WSJ piece, but somewhat buried farther down, even though Russia was the opener. Hmm… funny when you think about it, as 12,000 ounces amounts to less than $16 million at gold’s spot price.
Sixteen million bucks may be a lot to you or me… but to Vladimir Putin, not so much. And when one considers that the GDP of Russia is approximately 2 trillion dollars, putting weight on such a sale looks downright silly. As one sarcastic commenter suggested, a Russian sale of 12,000 ounces is more likely to reflect the Kremlin running low on vodka and caviar than any meaningful policy shift. It’s petty cash, folks.
In kicking gold when it’s down, the Wall Street Journal, as the mainstream financial media so often does, is acting as a delayed reverb echo chamber, reinforcing views already held by money managers like this one:
“Gold really doesn’t have much to offer,” said Joseph Murphy, a senior analyst who helps manage about $2 billion at Hermes Commodities, a unit of Hermes Fund Managers Ltd. in London. Hermes has trimmed its gold holdings this year. “People are seeing better opportunities, whether that be in bonds or equities.”
What an insightful observation (not). One is reminded of post-game sports interviews: “We just went out there and played hard, and the other guys played hard too but it was our night tonight.” Gee thanks. We saw the game.
We Mercenaries are not gold bugs. In fact, for an extended period of time we were extremely harsh on gold — and correctly so — as this July 2012 article shows. With that said, we are not gold permabears either. As Jesse Livermore observed, there is only one side of a trade to be on…not the bull side or the bear side, but the correct side.
And yet, our contrarian alarm bells tend to ring, at least a little, when the smugness factor of one camp or the other reaches a certain level.
Muddled Price Action
What does the price action say? If the SPDR Gold Trust ETF, (GLD) weekly chart could speak, it would do so with a mouthful of marbles.
One could make a reasonable technical conjecture that gold has bottomed — for now — but getting anywhere more meaningful that, based on price patterns alone, would be a heroic stretch.
Certain areas of the market are more emotionally charged than others. Gold is one of those. Many “goldbugs” will show a tendency to make a bullish case for gold, regardless of what the chart is doing. Similarly, those who hate gold (Keynesian fanboys?) are wont to make a bear case with the same lack of logic
We don’t care if you have a permanent ideological fundamental bias — just stop trying to justify it with price action if you are willing to be technically bullish or bearish regardless of chart orientation! (You are probably a lousy trader or investor if you do that.)
To illustrate the tongue-in-cheek point, and further demonstrate “muddledness,” here is the same gold chart once again — but flipped upside down:
Muddled Seasonals
The seasonals are muddled too…
Seasonal indicators can be surprisingly profitable in their application to commodities and precious metals. November and December are typically two of the strongest months of the year for gold, in much part thanks to jewelry demand for the holiday season.
Over the past decade or so, India has increased its gold demand for Diwali (the Hindu Festival of Lights), making November gold’s best month. Reports that some Indians are willing to pay $200 per ounce over spot indicate the ‘Diwali effect’ could be at play again in 2013.
But even this once-dependable source of demand is now in question. Indian authorities, who have been striving to improve India’s current account balance, are placing import restrictions on gold, which helps explain the premiums Indians have been paying over spot. Via Reuters:
Last year over this festival period around 60 to 70 tonnes of gold was sold, roughly the amount imported in an average month, according to Bachhraj Bamalwa, a director at the All India Gems and Jewellery Trade Federation.
This year, supplies in the domestic market have virtually dried up because of restrictions on gold imports imposed by the government to reduce the trade deficit and support the currency. Import duty on the precious metal is at a record high of 10 percent.
Call it a wash. This is supposed to be a strong time of year for gold, but the strength is being notably impeded by government policy. No cause to get bullish with guns blazing here; But not much cause to be a roaring bear either.
Muddled Macro
And finally, even the macro for gold is about as muddled as it can get.
On the one hand, gold has been beaten like a red-headed stepchild in 2013. Gold bugs have been shivering in the cold, noses pressed up against the glass, while long-only equity bulls gorge on a delicious feast. But does this mean gold’s decade-plus-run is over, and it’s now time to pile on short and smash gold into the hole? Or does it suggest reversion to the mean is about to kick in, changing the picture as such that “the first shall be last and the last shall be first”?
Could be either one actually. The surprisingly low inflation that has befuddled the hawks (and yes we know about Shadowstats, no one with meaningful AUM or policy control cares about Shadowstats) could continue, leaving gold to drift and lurch and dribble lower, increasingly the skunk at the garden party.
Or, alternatively, monetary velocity could suddenly heat up along with business confidence, leading to increased corporate capex spending, a rebound in raw materials prices, and gold perking up on hints of new cost-push inflation. Or as yet another alternative to that, the global economy could slip back into recession in 2014, Janet Yellen could push the ‘nuclear’ button and do something nutty like start talking negative nominal interest rates, and gold would all of a sudden be the hottest thing going again.
And what about the dollar? Same thing: muddled. The euro’s strength has been uncanny but Germany is delusional if it thinks Greece, Spain et al can become good little Germanies. The euro is putting “deflationary death spiral” pressure on the periphery countries. That can’t last.
At the same time, myopic currency traders are bound to notice again, at some point, that the United States has the best economy and the US budget deficit is contracting, not expanding. Which all means the USD is bound to roar back.
But then again, you’ve got Janet “superdove” Yellen coming in. And Germany doesn’t really care what happens to Spain or Greece as long as all hell is kept from breaking loose. Muddled, muddled, muddled.
There are clear and smart arguments as to why gold could up a lot from here. There are also clear and smart arguments as to why gold could go down a lot more. Anyone pounding the table is either delusional or agenda laden in our opinion (unless they’ve got a major piece of information we are absolutely missing).
All in all, the best trade in gold right now is no trade at all. Gold stocks? Not much better a position. Silver? Meh. The “Too Hard Bucket” is a valuable concept. Save yourself some aggravation and put gold in it.