Watch out Gold was down $56 today! Of course there was talk of bubbles bursting, the trade is crowded, etc., which is all true, kind of. Gold definitely got ahead of itself, I do not deny that in the least, but it is not a bubble. I have been saying it will correct for some time now and have been wrong. Frankly, I hope it goes lower, a lot lower.
Why, would I want one of my larger holdings to go lower? Simple, I hate the negative talk on CNBC all the time and the constant pump and dump they do. Every time it breaks out I have to hear about how it is a bubble or it is a nominal high, not an inflation adjusted high, and that gold bugs are “creepy.” It is rather annoying because to me gold is at an all-time high since I did not buy it in 1980 and I own it a heck of a lot lower than where it trades now. Whether or not I am creepy is a question I will not answer since I am biased on the answer, but my wife says I am not.
Gold is not a bubble, in my opinion, based on supply and demand, but even more importantly if we look at the monetary base it looks way undervalued. However, it got way ahead of itself over the past couple of weeks, there is no question about that given its parabolic rise. Like all assets that go straight up it must consolidate or correct to shake out the speculators. Given the leverage it takes to play with the yellow metal in the futures market I am hoping a few days of heavy losses will kill many of the speculators, but only time will tell.
When the speculators are gone there will only be the serious buyers left, which is good news. Since the serious buyers right now are China, Russia, India, Iraq, other central banks and, I guess, me there are only long-term holders in the market moving forward. Given that Helicopter Ben will only increase the monetary base and the US will have some $4-5T in debt to issue next year I do not see the Fed’s balance sheet shrinking anytime soon. I also do not see the Fed raising interest rates as debt service currently consumes 3% of GDP right now and a 1% increase would be, well, not good. Within 10 years if interest rates get back to normal than our debt service costs will be so large that it will consumer our entire national budget.
Therefore, the Fed has one choice, other than, stop laughing now, forcing Congress to cut spending, fire government workers and balance the budget, devalue the currency. That is very bullish for gold and the primary reason I am buying the metal. Other precious metals will also do very well for the above stated reasons, but they also have other supply, demand and scarcity reasons for owning them. That is why I am diversified between all metals, not just gold, as each metal has a specific role depending on what the economy is doing or how the geopolitical arena plays out.
In the meantime, this bug is rooting for gold to come down so he does not have to hear about it on CNBC. Hopefully, without all the YV attention, interest in the yellow metal will fade and the real investors can regain control. Unfortunately, that will probably not happen. As we saw with oil, once speculators run with a commodity it is tough to get them out until it totally crashes and burns which is what I do not want to see happen.
That was the question posed to one Dennis Gartman this morning on CNBC, as we already know CNBC hates gold and anyone who invests in gold, Mr. Gartman said gold was indeed a bubble. One has to keep grounded when Mr. Gartman speaks about gold since he has been dead wrong about it at almost every turn. In fact, sometime this summer when gold was trading at $900-920 an ounce Mr. Gartman actually went short gold and stated he would cover his short at $840 or somewhere in that area. Gold went to $1,000 surely burning his short position.
However, when Mr. Gartman said he liked gold at $1,000 I contemplated selling my position only to buy it back lower, but I figured he would be out well before my time horizon so I held my position. What I find interesting is the fact that CNBC, Mr. Gartman and so many others are so quick to point out that gold is a bubble, but stocks are fairly valued. The only reason stocks are up, as Meredith Whitney pointed out today, is because of a “wall of liquidity” which is the exact same reason gold is up to begin with. Gold is the investment one buys when the dollar depreciates or one fears inflation, technically they are both the same thing, and given the dollars slide is it really a surprise that gold is going through the roof?
Even though I find the bubble argument to be ridiculous over the long-term I am willing to concede this, it has definitely gotten ahead of itself and I do expect a pullback. I believe the floor is somewhere around $1,040/oz which is where India bought its 200 metric tons of the yellow metal. I will be more than happy to buy more at lower levels, but I am not going to chase gold at these levels even though I believe it is a good long-term investment. Depending who you listen to gold either has a target of $1,200 up to $5,000 an ounce, but I have no opinion on a final value except I believe it goes higher. Clearly the market believes it will go higher as well, or does it?
As most of you know there are 2 markets for gold the paper market, GLD, and the physical market, COMEX for physical delivery or coins. Both of these markets have extremely high demand right now because of the debasement of the US dollar, which is undeniable. The question that I have is pretty simple, is the GLD powering gold higher? This wraps into the Vampire Squids game of high frequency trading.
Computers and algorithms simple track buy and sell signals from technical analysis or short-term trends. When the GLD broke above $100 it was a technical breakout so did these HFT machines then begin to get more active in this security? I do not have a for sure answer for that, but I am willing to speculate that it did. Since the GLD has to buy gold based on the shares bought, regardless if it is a person or a machine, when it broke out did these machines keep buying and drive up the price. Again, I would have to say that is not out of the realm of possibility and may explain how the price of gold continues to climb.
If this is indeed the case then there is a bad ending to this tale because as soon as the machines are done with the GLD they will dump it or short it. This could cause the price to swing back below where it should be, wherever that might be. Obviously we will not know if this will happen or not until it is over with, but the one thing I am certain of is that as long as the government and the Fed continues down its destructive monetary path gold will continue to make new highs. However, if I am right about the HFT machines being involved then those highs may take longer to materialize, but they come.
The other thing I am sure about is that at the end of the day gold is not in a true bubble like most seem to think. It is a vote against fiat currencies and the monetary policy of the central banks. Let us not also forget that production of gold, and all the easy to mine gold for that matter, has already been mined and many central banks are buyers of the yellow metal. There is also the individual “gold bug,” like me, who buys the stuff which essentially means that demand will be much higher than supply for some time. According to my economics professor, when supply is below demand the price increases, not that many of the talking heads on the TV will ever realize that point, but it is a reality. The only long-term bubble in the gold market is from the ignorance of those who do not wish to understand the basics of supply, demand and their impact on the price of gold.
I am a gold bug, there is no question about that, and I am a long-term bear on the USD because I know that Washington will never reverse their ways of the last 30+ years of fiscal irresponsibility. However, I feel that gold has made a huge run in the recent months and the USD has made a big move to the downside as well. This will not continue as stocks are beginning to struggle and earnings are not as good as many have expected.
This means that the dollar will more than likely see some strength in the short run which will drive stocks and commodities lower. This will certainly drive gold below the $1,000 level which will bring about a much better buying opportunity for those looking to buy. Not to mention, other metals have largely been ignored in the recent run up in gold prices, i.e. silver, palladium and platinum are well below their 2008 highs.
Whether or not this equity rally was liquidity induced or not is really irrelevant as the one true correlation that we can draw is that the dollars losses were stocks and gold’s gains. This will stop as we see a reverse in this trend in the near-term. I see this happening based on the trading patterns over the last few days and the market rally losing its ability to sustain itself. It is really unreal that the market could simply continue to move higher without much skepticism from participants on this fantastic move, but it is what happened.
The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time while we shed jobs and credit continues to contract. Not to mention economic growth is anemic at best, subtract government activity and it is downright ugly, but buyers in the USD will come back as the bearish trend in the short-term is actually bullish. Also, its inability to maintain a new low makes me think a rally is in store in the next few days, which is bad for stocks and precious metals.
Because of this, I am not buying any metals right now with the exception of palladium, it is my favorite and, in my opinion, has the most to gain no matter what happens. My feelings on the USD in the short-term is also why I am short the market right now, a position I opened 10 days ago and added to on Monday, and will more than likely add to. No matter how I run the numbers I am coming up with a fair value of the S&P 500 of between 800-900, but that is my opinion and what makes a market. Eventually, valuations will have to matter in equities and a stronger dollar will force a revaluation quickly, on the flip side a major devaluation would do the same thing I might add.
On a long-term basis, until Washington changes its ways there is no way anyone can be bullish on the dollar. Therefore, I am a buyer of metals on a longer term basis, but I prefer to use my head and unless something happens over the next few days I see no reason to change my mind. An important note is I already have a healthy position in all metals and I am not a seller, I am just not committing new money at this time.
A new low was made on the DXY today, which should make you very concerned about the stability of our currency as we enter a new paradigm of inflation. While we do not have actual money velocity inflation we do have devaluation of our currency which is unsettling to say the least. What is perplexing is the fact that the dollar is way off today, stocks are up and gold is flat to down, what gives?
Here is an honest answer, I don’t know. I could give into the conspiracy theories which makes sense on such days when we have such a steep decline in the greenback and no movement in gold. On the other hand I could accept the esteemed economists view that gold moved too far too fast with no inflation, but why would that explanation of too far too fast work for gold, but not stocks? So, I give in to no one and accept the fact that someone is just shorting gold today and running into buyers causing a flat market.
However, deep down inside I have a sneaking suspicion that the conspiracy folks are probably right. The only reason I would ever concede this is because the inflation aspect of gold is one part of the argument to own it, the other part is currency devaluation. Plus, who doesn’t like a good conspiracy theory? Gold should be up $20 today, but I digress.
He actually said that gold is going up in all currencies not just in US dollars. He makes me want to smack my head against the wall and why someone would pay him $1,000 a year for “advice” I will never understand. However, look at gold in CAD or Euro’s or other currencies and you will see it is not going up, its pretty simple to see that actually. It is going up the Sterling, because they are going down the same path we are with quantitative easing and perhaps this is the only currency Ron is looking at, but in most other currencies gold is relatively flat.
I am certainly no rocket scientist, but man, this guy…
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