Analysts Continue to Worry About Gold – Why?

As we remarked in a recent update, it is absolutely astonishing how much ink is being spilled on gold by mainstream analysts and the mainstream financial press since it has entered a downtrend. You'd think gold's 2013 downturn was the best thing since the invention of sliced bread, and there's almost nothing else worth talking about. Is it because they finally got something right about gold after being wrong for basically 12 years running? Yesterday we were once again greeted with a headline dedicated to gold at Marketwatch: “How low will gold go in 2014? Consensus forecast says down 14.5%”. The article fails to mention that 'consensus' opinions about markets almost always turn out to be wrong, but that is not what makes it so fascinating to us. Rather, we wonder why this is being repeated every day; after all, it's not as if we hadn't received the message over and over again by now. 

The always pragmatic Jeff Gundlach has recently advised investorsnot to sell their gold” and has been “scratching his head over the giddiness with which many analysts greet declines in gold. It’s just another asset, after all.”

We can possibly clear that question up for him. We believe that many analysts rightly suspect that if gold were to begin to rise again, then all the assets on which they are currently bullish and have recommended to their clients are likely to decline. However, the main problem is precisely that gold is not “just another asset”. Rather, as Bill Buckler, the editor of the 'Privateer' used to say, it is “the political metal”. Even Alan Greenspan understood that, in another life, long ago. In his famous essay on gold and economic freedom published in 1966, he stated that gold stands as a “protector of  property rights”:

 

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.”

 

(emphasis added)

Banks are members of a cartel that is in an intimate fascist embrace with the State. Officially, central banking has been introduced in order to be able to employ a 'scientific monetary policy' designed to 'avert depressions and the business cycle'.  This is without a doubt one of the most ridiculous excuses ever made up by rent-seeking parasites. Just consider that not long after it became operational, the Fed presided over one of the worst economic collapses in history, or consider that since its founding a century ago, the money of the United States has lost some 97% of its purchasing power, whereas its purchasing power remained largely unchanged over the preceding century. Is there any organization that has failed more spectacularly and completely to attain its official aims?

Of course the official explanation for establishing the banking cartel has nothing to do with the true reason, which is more in keeping with Alan Greenspan's interpretation. Essentially the central bank-led banking cartel is the result of an agreement between bankers and the State the aim of which was and remains to create revenue streams for both of them that are obtained by political rather than economic means. Thus the door was opened for applying the 'inflation tax', and in addition, a bailout mechanism was created which allows banks to inflate money and credit willy nilly without having fear bank runs when they have overextended themselves (which happens with unwavering regularity). That's it, in a nutshell. We should also point out that the idea that there can be a 'scientific monetary policy' is utter hokum. There may indeed be numerous economists who believe in this 'scientism' as Hayek referred to it, but that cannot alter the fact that central economic planning is unworkable and will always produce sub-optimal results, regardless of the intentions and abilities of the planners. The market cannot be successfully substituted by planning. 

Anyway, the etatiste mainstream's hatred of gold is therefore easily explained. Greenspan did it in the 1960s, and many others did it well before him. As Mises remarked regarding gold in the 'Theory of Money and Credit' in 1912:

 

“The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary units purchasing power independent of the policies of governments and political parties.”

[…]

The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard.”

[…]

The classical or orthodox gold standard alone is a truly effective check on the power of the government to inflate the currency. Without such a check all other constitutional safeguards can be rendered vain.”

 

(emphasis added)

There is really not much more to say. The arguments forwarded by supporters of the fiat money system are nothing but elaborate sophistry.

 

Gold Stocks Still Acting Well

Meanwhile, after breaking out over a minor resistance level on Monday, the gold sector has continued to act fairly well. There has certainly been no spectacular advance yet, but the breakout was defended, in spite of gold itself weakening somewhat in the meantime:

 


 

HUI-dailyThe HUI has managed to establish a toehold above the initial line of resistance (blue dotted line) – if it manages to overcome the red secondary resistance line as well, it will greatly increase the probability of a bigger rally – click to enlarge.

 


 

Gold itself is struggling with its declining 50 day moving average, and will soon face stiff lateral resistance if it continues to rise. Trading volume is weak, which is likely reflecting a great deal of uncertainty. However, there still is an MACD buy signal operative, so the recent rally deserves the benefit of the doubt:

 


 

Gold, daily annotNear term support and resistance in gold. The 50 day moving average still provides resistance as well – click to enlarge.

 


 

The next chart shows the gold price in terms of the South African Rand. It has just reached a lateral resistance level and to us it looks quite likely that it will break through, as this is the third time it is tackling this resistance, and there are bullish divergences between price and momentum indicators in evidence:

 


 

Gold in RandGold in Rand terms. A breakout seems likely – click to enlarge.

 


 

If a breakout occurs in Rand-denominated gold, the dollar gold price is likely to follow suit. Obviously, such a breakout would be very good news for gold miners based in South Africa, most of which are marginal producers and therefore highly leveraged to the Rand gold price (HMY, DRD, AU and SBGL). Their share prices are quite depressed and have traditionally tended to be strong early on in rallies. In later stages of gold rallies, the Rand often strengthens and they cease to benefit from higher gold prices. So they are usually in a 'sweet spot' early on.

 

Gold and the 'Taper'

It is widely assumed that the Fed's 'QE' tapering must be bad for gold. In fact, most of the bearish mainstream analysis rests on this assumption. Superficially, this seems to make sense, as 'tapering' will slow down money supply growth. However, one must ask then: why did gold not rally during the vast money supply expansion on occasion of 'QE Inf'? And why should it decline upon tapering, when it declined already beforehand?

In reality, the tapering exercise is likely to prove bullish for gold and bearish for those assets that have recently benefited the most from 'QE' (i.e., risk assets like stocks and high yield bonds). Gold is a good asset to own when a liquidity crisis threatens, as it will almost immediately begin to discount the future measures central banks are likely to take to stem the crisis. To our mind there can be little doubt that 'QE tapering' will indeed eventually provoke a liquidity crisis, complete with a major deflation scare evidenced by a sizable decline in risk asset prices. Not to get overly technical about it, the market for one thing believes that 'QE' is helping stocks (based on the strong correlation to date), and secondly, rising asset prices will reverse course once the source of monetary inflation that drives their price appreciation dries up. Given that inflationary lending by commercial banks is nigh non-existent at present, 'QE' is that source.

 

A Blast from the Past

Many readers probably have come across this tidbit already, but for those who haven't, here is an interesting excerpt from an article published by the New York Times:

 

 

Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight.  The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.

 The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold's allure.

 Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators' dreams into a nightmare.”

 

(emphasis added)

This reads exactly like what much of the mainstream press has written about gold over the past several weeks. A more perfect reflection of the current conventional wisdom is hardly imaginable as Peter Schiff has pointed out.

There is only one problem – this article wasn't written today, or at anytime in the past few weeks. Rather, it appeared in the August 29, 1976 edition of The New York Times. Gold had just gone through a vicious correction, losing almost 50% of its value in a span of a little over 18 months. Unbeknown to the authors of the article, it had actually bottomed exactly four trading days before the article was published, and embarking on a rally that would eventually see it rise by nearly  800% from said low over the next three years.

The reason for mentioning this is not to assert that exactly the same thing is going to happen again these days – we don't know the future after all. It is merely meant to demonstrate how utterly misguided the conventional wisdom often is, especially in connection with financial assets. Every word of this article reflects today's conventional wisdom as much as it reflected the general opinion in 1976. If the NYT wants to publish an article about gold today, it actually doesn't even need to write anything new: it could simply copy/paste this 1976 article. No-one would notice.

 

Conclusion:

There are a number of good reasons why so many love to hate gold. We rather suspect though that this tends to cloud their judgment. They certainly have no better handle on the future than we do, and their forecasts need to be taken with a big grain of salt. Once there is such a broad consensus about a trend, the trend is usually close to reversing.

 

 

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2 Responses to “The Mainstream Loves to Hate Gold”

  • Vess:

    Hey, I hate gold too. Hate to be invested in it, that is. Gold only preserves your capital – it doesn’t grow it. It’s not really an investment – it’s just money. It might be the safest form of money but keeping your money in the form of gold still means that you are just keeping your money; you aren’t investing your capital. Unfortunately, at the moment all possible investment opportunities seem incredibly risky and overvalued to me, which is why I am forced not to invest but to keep my money. I hate it, but I don’t have much of a choice.

    My own technical analysis suggests that the gold/dollar exchange rate has bottomed. (Strictly speaking, it bottomed in June the last year, but there was no way to determine it with sufficient confidence back then.) However, there is one thing that bothers me.

    The real interest rate is no longer negative. The yield of the 10-year Treasury is 2.827%, while the CPI is only 2.3458%. Yes, I know that the CPI is doctored to understate inflation and that it is a silly way of measuring inflation anyway – but that’s what everybody uses. If being invested in bonds provides a small but positive income after inflation why would one want to not be invested at all and keep their money (in gold or in any other form)? Historically, gold doesn’t fare well when the real interest rate is positive…

    • No6:

      I think we will have to wait until the Fed does a U turn and increases QE before Gold really takes off.
      Gold may fall a bit more yet but at least you can still get hold of physical. It won’t be long before that becomes very much more difficult.
      Once Gold does start to move I think a currency crisis will not be far away.

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