Tuesday, April 5, 2011

Throwing the kitchen sink at gold (from IKN100)

The intro to last weekend's edition of the weekly took a slightly different tack and went off on the price of gold. By the looks of the action in gold today, it's working out quite well as a think-piece. Here it is:

Throwing the kitchen sink at gold
This publication doesn’t really exist to make comments on the macro scene for gold made in countless other places and spaces. So to prove that’s a lie, here’s a thought or two on gold that formed as I was taking the bus down to see the doctor last Friday morning and crystallized into written words on Saturday evening.

On Friday morning your author was only one of the 18 people packed into a small bus* going too fast on balding tires over bumpy roads and tight corners, so it’s fair to say it was another typical bus ride in urban South America and the physical sensation tied into the thoughts of how despite having all sorts of flak thrown at it so far this year gold was still showing stout resilience at over $1400/oz (most of the time at least). This simple chart of GLD YTD  gives the basic idea.

The latest go at gold came on Friday on the back of a U.S. Employment report that headlined 8.8% unemployment, down from 8.9%. For sure this is good news (less unemployment is better than more unemployment) but the immediate rush to conclusions saw one percent knocked off Au in seconds and the spike going over 1.5% before the rebound set in.

We’re getting used to this kind of pseudogoldbearish action. I mean, does anyone remember Plosser of the Fed and his “high hurdle” for QE3 that hit gold at the time? That was back in the ancient history of....ten days ago, did the same kind of thing to gold for basically the same amount of time. Then, as now, the yellow metal picked itself up, dusted itself off and set about returning to previous price levels (and yes, guilty as charged of a nasty case of anthropomorphism, but as my Eng Lit prof would say, if it’s good enough for Walt Disney, Tolkien and the authors of The Bible it’s good enough for me). But back to last Friday’s action and this little snippet from the invaluable Calculated Risk (1) on Saturday neatly sums up the reality behind that US jobless number:

“The March employment report was another small step in the right direction, but the overall employment situation remains grim: There are 7.25 million fewer payroll jobs now than before the recession started in 2007 with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.”

(Aside: Calculated Risk has been mentioned in these pages on several occasions and it gets another no-holds-barred reco today; for a guy like me who needs to keep a tab on what’s going on in the US without wanting or needing to go into the minutae, it’s the perfect one-stop statscruncher read, taking up a minimum of my screentime and handing over good analysis without much in the way of op-ed spin. It really is must-read material for anyone involved with the markets, cannot be reco’d highly enough and one of the few high-traffic blogs where I’m happy to drop a coin in its tip jar on a regular basis).

So sell gold on that kind of scenario if you must, but in my personal opinion we’re still a long, long way from any macro that is truly gold bearish. As for the threat of no QE3 this year once QE2 comes to its programmed end, all I can say to Bernanke & Co is “Go ahead punk, make my day” because I still have cash in the accounts waiting for knockdown bargains. Seriously, who is out there begging to buy up the bonds that The Federal Reserve is currently buying?
This chart of the ten year note interest rate speaks its own volumes. We know what happened in late 2008. Then our eyes are turned to 2010 when the deflationary scare started all over again, the Fed implemented mo’QE in August and then, as the desired effect didn’t happen, upped the ante in November 2010 and started buying back treasury securities (a cute way of saying ‘printing money’) at an increased clip. Only then did the market react. And these people are trying to tell me that they’re just going to turn off the spigot and stop the buybacks once the QE2 program is done without any sort of deflationary pressure building that will scare the pants off of them as a result? Again, the simple question:  Who is out there ready to take the Fed’s place and buy those bonds? They think we’re that stupid?

And this is the real story with gold and its current action. People aren’t buying into the jawboning and headline flash numbers for more than the minimum amount of time these days, because anyone who can see further than tabloid/yellow press headlines knows that (to steal one of ├╝bersmart Gary Tanashian’s favoured phrases) “It’s inflation all the way”. So thanks all the same to you readers who have recently (and kindly with all best intentions) sent in links to this-or-that market commentator or who is calling his-or-her market top in silver, or gold, or junior miners, or copper explorers or whatever, be their calls of the short-term-it-needs-a-break-and-can-drop-10%-here-before-moving-back-up-again type or the final-top-now-we-all-gonna-die-ice-age-Armageddon-oh-no variety. There’s a whole industry out there that feels the need to feed the beast and keep up the non-stop chatter on gold and silver, so it’s pretty natural that these chatterers need to chatter about something...so why not call a top in silver? After all, the parasitic end of financial commentary world is full of charlatans good at remembering successful predictions at a later date but tending to suffer acute amnesia about bad calls made.

I digress. Yes, thanks to those sending in links to market soothsayers about the imminent demise of gold, but I have to say I take little notice. For one thing, short-term calls aren’t my strong point, I don’t tend to enter that arena much and I don’t care much about the noise generated by writers on the subject, no matter how widely read they might be. But more importantly, even if there is some sort of short-term downwards movement there’s no reason to panic out and sell positions at the moment, not with the state of macro play being obviously bullish for gold over the time periods that really matter. As I wrote to a regular mailer and longtime subscriber on Saturday, “Be long gold, it's so obvious it hurts my brain”.

*For the record, we do not own a car and have no plans to change that