Full Court Press

Not a day passes without the financial media denouncing gold as an investment option and hailing the bureaucrats heading the world's monopolist monetary central planning agencies as superheroes. It began prior to gold's recent breakdown, with widely cited bearish reports on gold published by Credit Suisse and Goldman Sachs, among others. Never mind that most of their arguments were easily unmasked as spurious. It should be no wonder though: gold's rise was the most conspicuous evidence of faith in central banking being slowly but surely undermined. The banking cartel relies on the fiat money system remaining intact; the legal privilege of fractional reserve banking provides it with what is an essentially fraudulent profit center unparalleled by any other in the world (fraudulent in terms of traditional legal principles, but not in terms of the current law of course). Not surprisingly, ever since the completely unrestrained fiat money system became operational in the early 1970s, the financial sector's share of corporate profits has inexorably risen and finally eclipsed all other sectors of the economy.

 


 

financial share of profits

The share of financial profits of total corporate profits – a direct result of the fractional reserve banking privilege and the central bank monopoly on money (via Ed Yardeni) – click to enlarge.

 


 

In other words, the banks have to protect a major franchise. It is a good bet that if gold had continued to rise in the face of money printing being accelerated all over the world, the inevitable loss of faith in central banks would have happened sooner rather than later. That it will eventually happen is unavoidable – the modern monetary system was fated to self-destruct the moment it was conceived. This is so because central planning and price controls cannot work in the long run, even though central banks are socialistic institutions adrift in a capitalist sea, so to speak. They can to some extent observe prices in the market, but the problem is that the market price most relevant to them – namely the ratio of future against present goods as expressed in interest rates on the credit markets – is not independent of their actions. There is therefore nothing that can tell them whether their administered interest rates are too high or too low. It is a system that is condemned to fail at some point (unfortunately with grave consequences for the economy at large).

The fact that a great many people ostensibly believe in its viability is not proof that it is viable; most of those who are most vocal about retaining the central bank money monopoly are directly profiting from its existence after all. That the commercial banks only want to protect a source of large profits and an invaluable backstop in case their speculations go wrong is clear, but the same is true of most academics in the economics profession. The great bulk of them derives its income from the State, and the central bank is at the forefront of supporting the livelihood of its apologists.

Among commercial banks, Credit Suisse has been a leader in the recent rhetorical onslaught against gold, and has just published a follow-up, duly repeated by Bloomberg under the non-too-subtle title: 'Gold Seen Crushed'.

 

“Gold, down 17 percent since January, is poised to lose 20 percent in a year as inflation fails to accelerate and with the worst risks to the global economy waning, Credit Suisse Group AG said.

Gold will trade at $1,100 an ounce in a year and below $1,000 in five years, according to Ric Deverell, head of commodities research at the bank. Lower prices are unlikely to lure more central-bank buying, said Deverell, who worked at the Reserve Bank of Australia for 10 years before joining Credit Suisse in 2010.

“Gold is going to get crushed,” Deverell told reporters in London today. “The need to buy gold for wealth preservation fell down and the probability of inflation on a one- to three-year horizon is significantly diminished.”

Investors are losing faith in the world’s traditional store of value even as central banks continue to print money on an unprecedented scale. Bullion slumped into the bear market last month after a 12-year bull market that saw prices rise as much as sevenfold. Gold is a “wounded bull,” Credit Suisse said in a Jan. 3 report.

 

(emphasis added)

Color us unsurprised that the main author of the report is an ex-central banker. As regards inflation, below is a chart we have recently shown, US money TMS-2. The good people at Credit Suisse neglect to mention in their report that official 'CPI inflation' has rarely risen beyond the central bank's 'target' of 2% during the entire gold bull market to date. It was completely irrelevant to the gold market thus far, so why should the outlook for the government's 'inflation' data suddenly become relevant now? Monetary inflation has been higher over the past five, 10 and 15 years than at any time since the end of WW2 in a comparable period – and it continues to accelerate.

It is therefore erroneous to claim that 'the probability of inflation on a one to three year horizon is diminished' – the exact opposite is the case. As noted above, Credit Suisse's argumentation has been spurious in its first bearish gold report already and it continues to be so. It seems more likely that a concerted public relations campaign against gold is underway, while parallel to that, a pro-central banking campaign is in full swing. We're not really big fans of conspiracy theories, but in this case, everything points to this being the case; it is just as transparent as the pro-war campaign prior to the Iraq war was.

 


 

US-TMS-2-LT
Monetary inflation in the US since the year 2000. Money TMS-2 has more than tripled – click to enlarge.

 


 

Success! Gold Now Seen as 'Worst Performing Asset' by Investors

The gold market is of course complying so far, as the clients of the banks issuing bearish reports are bailing from their gold positions. Skeptical voices like Elliott Capital Management's Paul Singer have been drowned out by the incessant barrage of propaganda. Gold continues to decline in the near term and its chart has begun to look rather ominous.

 


 

Gold-one week

Gold over the past week (most active futures contract) – down every day of the week – click to enlarge.

 


 

As Credit Suisse incidentally also reported, its campaign has been crowned with success: not only has the gold price declined sharply, gold has now become the 'most hated asset class' with the 'worst outlook among commodities' according to a recent CS survey among institutional investors:

 

“Gold has the worst 12-month outlook among commodities and will trade below $1,400 an ounce in a year, according to an investor poll by Credit Suisse Group AG.

Sixty percent of respondents named bullion as having the worst outlook, 18 percent picked copper and 16 percent selected corn, the bank said in an e-mailed report today. Fifty-one percent predicted gold will fall under $1,400 in 12 months, it said. The bank polled 185 investors including hedge funds, pension funds and family offices on May 15 in London.

“Bearishness for gold was a very clear consensus,” said Kamal Naqvi, the head of commodities sales for Europe, Middle East and Africa at Credit Suisse. “It’s not about just not buying gold, it’s about shorting it,” or wagering on a drop.

Gold slumped into a bear market last month as investors lost faith in the metal as a store of value. Bullion is down 17 percent this year, compared with the 2.9 percent drop for the Standard & Poor’s GSCI gauge of raw materials.

Fifty-three percent of investors expect commodity prices to stay near current levels, Credit Suisse said. Most were underweight raw materials or had zero exposure, while they expected to be overweight or neutral in 12 months, the bank said. Investors named relative value trades, fundamentally based directional trades and volatility as the best ways to extract value from commodities.”

 

(emphasis added)

The general bearishness on commodities jibes with what we have seen in the recent Merrill Lynch fund manager survey. The bearishness on gold is in keeping with what we have seen in the Barron's 'Big Money' survey and other polls. Apparently though the people who write the gold reports at Credit Suisse are oblivious to the contrarian implications of their own survey.

As we have recently pointed out, just before Japan's stock market embarked on a 75% rally in the space of a few months, fund managers absolutely hated Japan (they love it now!). As we wrote in our October 30 review of the Barron's Big Money poll:

 

“However, what we really love is that they hate Japanese stocks even more! As it were, we are busy writing an article on Japan that will be entitled 'Reconsidering Japan' and should be published sometime this week. There are quite a few reasons to believe that Japanese stocks will finally do the unexpected and come back to life.”

 

At the time, a full 76% of the 'big money' fund managers surveyed declared themselves bearish on Japan. Currently, 69% of the managers surveyed in the most recent Barron's poll are bearish on gold. One must of course admit that from a technical perspective gold currently looks weak. That is undeniably the case and there could therefore be more near to medium term downside. However, the most important fundamental data as well as the sentiment backdrop clearly remain bullish. In fact, the skepticism of investors regarding commodities in general and gold in particular in the face of the biggest money printing orgy of the modern age is what we would call an 'extreme long term bullish dichotomy'. It seems highly likely to us that a year from now or maybe even earlier,  the conversation will have profoundly changed.

 

 

Charts by: Ed Yardeni, BarCharts, St. Louis Fed


 

 
 

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9 Responses to “It’s Official: Gold is Now the Most Hated Asset Class”

  • jimmyjames:

    At what price do you drop your fire insurance and set up your own fund? The same may hold true for gold, especially when other asset values are going skyward.

    *************

    mann… good post- from all the data I’ve looked at.. very few have fire insurance to put that money elsewhere-

    As Jim Dines has predicted since Nixon cut gold loose- “it will be the same fools that dumped gold ie: central banks/governments that will eventually be buying on the open market in a bidding frenzy- trying to shore up weakening/collapsing currencies-
    It will not matter which major currency it is that has to run to gold first- that one will be the final kiss of death to all of them-

    • JasonEmery:

      Jimmy said, “It will not matter which major currency it is that has to run to gold first…”

      Probably a food importing nation, but there are other possibilities. A rising DOW, when there is no real, inflation adjusted growth in the economy, can mean only one thing: hyperinflation is around the corner. Gasoline usage is falling sharply, yet the price is near the all time, sustained high. Does that sound like ‘deflation’ to you?

      • jimmyjames:

        Gasoline usage is falling sharply, yet the price is near the all time, sustained high. Does that sound like ‘deflation’ to you?

        ***********
        Actually it sounds to me like- high gasoline prices in a deflationary environment-

  • There are clearly various ways to price gold. Seems I recall that laborers worked for $1 a day around 1900. Gold was $20 an ounce, so it took 20 days to get an ounce of gold. Minimum wage in the US is $7.25 or roughly $14,500 per year. Take out the taxes and this probably equates to $1000 a month. There are a million other factors to price in, but productivity has increased in every area, most likely including gold mining. A band around $1000, a hundred or so in either direction, would probably establish a market price, long run for the metal.

    Then we have the unknowns. Does a major economy collapse? Japan or France seem to be standing in line. Is this deflationary or inflationary? What about war? Syria and central Asia appear to be major flash points. I’m not sure what to make of Korea, but I suspect this guy is merely playing checkers.

    As long as there is more debt than can be paid and there is a means of enforcement, hyperinflation is going to be difficult. Doug Noland puts out the various money growth figures every week and the growth rates. M-2 has been growing at around 6.5%. How much of this is Bennie bucks? How much growth does there have to be to merely keep the banking game going, as debts depend on money flowing to debtors to make good on them.

    At $1000 an ounce, the world’s supply of gold is worth between $5 trillion and $6 trillion. This is a sizable sum. The purpose of fiat money is to pay debts, not to act as a hard asset, so we have another Trojan horse in the mix. It is the need to pay debts that gives it value, as debt is the link between having control of property and not having control in many cases. Who needs the currency? The banks, for one, as they owe it all against a pile of debts they hold, that in sum are not payable. I suspect this is the real reason for all the central bank asset purchases, to provide money for the banks, not to lend, but to hold. It has already been loaned and the banks problem is covering the liabilities on its books.

    Now we have the new asset bubbles. Same as the old asset bubbles, except even more extreme. In this weeks Credit Bubble Bulletin, Doug Noland called this the biggest bubble in history, mainly because of the poor fundamentals it has been constructed. Like all manias, cash is needed to play and I would suspect liquid assets are for sale in order to gain possession of that money. You can only draw an income off gold by leasing it, and the lease rates have to be next to nothing due to competitive interest rates.

    People are buying stocks for the current income, not because it is worth a damn, but because it beats other investments viewed as safe. No one alive in most major countries has been through a stock market, business cycle adjustment, where the prices didn’t come back, so the SPX can be viewed by many as a risk free portfolio that promises future appreciation. The catch is the fuse goes on forever, as there is only one maturity for a stock, bankruptcy. Two, if you count merger or acquisition. It is hard to view the 10 year treasury as something that offers much appreciation, as the difference between now and absolute zero interest is less than 20%. The current stock price predictions are not any less fantastic than all the $5000 gold in a year that has been going on, and in the meantime, you can get a dividend that beats 10 year treasuries. There will be a rude awakening in this crowd.

    The gold/silver ratio is what has my eye. It is over 60. Has there ever been anything more bulled in advertisement on a rumor/factual basis than silver? Yet, it is losing traction. The talk is such that, if the talk was in fact, fact, a couple of major hedge funds could control the entire world’s supply. I have suspected the copper market, much larger than silver, has been cornered for years, maybe due to more liquidity in the contracts around the world. In any case, this ratio is screaming recession or credit crunch and bears watching.

    Maria, on CNBS, was chirping with some character about the private bank customers being something like 30% in cash. Well, someone is going to be in cash, because it can’t go anywhere, save for paying down bank credit. The implication is they will put every dime of this money in the stock market, like all the other nonsense we hear from the asset stripping crowd. This is the smart money and they already own most of the stocks, so maybe they are selling. Maybe they know there will be a massive credit crunch and everything will be on sale to acquire some of that cash they have. Gold did a pretty good tumble in 2008 and silver fell out of bed.

    Buying fire insurance and never having a claim is preferable for most people to having the property burn and have no insurance. As a true gold bug, one has to keep the policy, regardless of what happens. Once the gold is liquidated, the principal is abandoned. That is, unless the holder is cashing his insurance policy in disaster. Then, he no longer has insurance, but he has his house. At what price do you drop your fire insurance and set up your own fund? The same may hold true for gold, especially when other asset values are going skyward.

    • georgew:

      “There are clearly various ways to price gold. Seems I recall that laborers worked for $1 a day around 1900. Gold was $20 an ounce, so it took 20 days to get an ounce of gold. Minimum wage in the US is $7.25 or roughly $14,500 per year. Take out the taxes and this probably equates to $1000 a month. There are a million other factors to price in, but productivity has increased in every area, most likely including gold mining. A band around $1000, a hundred or so in either direction, would probably establish a market price, long run for the metal.”

      This is flawed about about 2x, notwithstanding the accurate comment that there are many other variables. If a laborer worked for $1/ day then, how does that compare with the minimum wage today? The average laborer in the US works for far more than the minimum wage. Back of the napkin: At $12/ hour, we have 8*$12*20 days = $1920. Now you can start adding in all the kickers, like the worldwide rate of capital accumulation has outstripped the increase in the quantity of gold almost every year worldwide since then. It seems to me that before you even start adding in risk, the unhampered (I mean by legal tender laws) value of gold is several thousand dollars.

  • goldbug000:

    I also believe that the gold price is under attack by the US government, federal reserve, and other big financial institutions, in order to protect the US dollar and our fiat money system.

    If that’s the case, once their manipulation fails, and the price of gold starts to rise steeply, won’t they just step in and effectively nationalize it, as they did in ’33? They’re happy to let us take losses when the price drops, but are they really going to let us profit when it finally rises?

    Naturally, they’ll call us evil speculators who are driving down the US and its currency, as did Roosevelt in ’33 and Nixon in ’71 as they engineered previous defaults.

  • Andrew Judd:

    >>the legal privilege of fractional reserve banking provides it with what is an essentially fraudulent profit center unparalleled by any other in the world (fraudulent in terms of traditional legal principles, but not in terms of the current law of course)

    Fractional reserve banking does not require a legal privilege to exist. FRB can exist without government. FRB has been practiced more or less as it is today for thousands of years. You just need a book of accounts and people who chose to transact across your books, where you set an interest rate to ensure you keep sufficient savers. Whatever anybody thinks of the principle of FRB it is clear it does not require legal privilege to exist, but rather when it exists it is licenced by government.

    Similarly, we do not require a legal privilege to drive a car. We must however have a licence.

    Yes, the fact the government can/will act to support the FRB system does alter the mix, but it does not alter the fact that FRB can/will exist without government.

    For sure if government was abolished FRB would continue.

    • Crysangle:

      There are different ways at looking at what we call money .

      Unbacked fiat , the use of which enjoys various legal privileges even when it is not obliged on a population , is often grouped into the same boat as FRB which employs unbacked paper based on future earnings or on an estimation of a lesser reserve requirements of hard assets – and so demanding a similar ‘trust’ .

      I understand your point , but nowadays where the two (fiat and FRB) cross or join is in the ability of a central bank to monetize assets (for example of a bank being bailed or supported) by placing non performing (FRB credited) assets on its balance sheet, purchased by ‘printing’ . This is not FRB to my thinking , though the original loan to asset may have been . Result is the modern fractionally reserved bank is subordinate to the paper used to perform this arrangement , fiat , which does (its creators do – in the name of, or on behalf of , ‘the people’) enjoy legal privilege. Therefore that fractionally reserved bank enjoys legal privilege . It is similar maybe to the population being obliged to use unbacked debt as currency that can be issued at will by a bank , while that bank might purchase all assets it likes with its own production of that obligatory money and hold them indefinitely . ? .

      • georgew:

        Of course fraud, e.g., FRB, false advertising, etc., doesn’t require legal privilege to exist. I agree with the rest of the comment, just the superfluous beginning statement is out of place.

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