A New Math? Depends on Your Teacher
The US dollar traded at a one-year low against the euro overnight and helped push bullion values to $1025 per ounce amid the continuing fund feeding frenzy that was unleashed more than two weeks ago. The greenback also came very close to the 76 mark on the trade-weighted index during the hours preceding the NY market's opening. Crude oil gave back only half a dollar of the gains it recorded yesterday, and was last seen at $72.01 per barrel.
Speculation that inventories might show a rise did not pan out yesterday, and black gold surged 3% as a result of the numbers actually showing the biggest decline in stockpiles since January. Still, analysts believe that the commodity is facing problems maintaining above the $70 waterline, and that, should support fail, it would be headed back to the under $60 per barrel value zone. In other market news, Switzerland is seen as keeping interest rates near the big fat zero mark, as it battles what it calls the 'spectre of deflation.'
Near-record gold prices further dented Indian demand overnight, as dealers reported little willingness to augment their inventories, even as festival season nears. Today marks the end of the 'inauspicious' period for gold purchases for locals, who are now coming back from it only to walk past shops displaying some of the very highest prices ever seen on a tag.
New York bullion dealings opened with a $3.10 loss in gold, which was quoted at $1014.20 per ounce as against 76.29 for the dollar index and a 1.472 quote for the greenback-euro rate. Silver started the session with but 2 penny drop, quoted a $17.38 an ounce. Platinum gave back a more substantial $10 per ounce, opening at $1335.00, while palladium remained flat at $297.00 per troy ounce. Rhodium was also unchanged, at $1500 per ounce.
To say that profit-taking or a correction of some kind is overdue might sound reasonable at the current juncture. However, that same juncture was alluded to, circa a week ago, by wiser sources than us -say, GFMS or UBS. Go tell the funds say traders we polled. These days, a 'correction' amounts to a brief downtick confined to small parts of the trading hour, not day. Thus, the emerging daily mantra for the past week has not been when gold might dip to under four-digits, but when the March 08 high might be matched. If that is the objective.
There is some degree of variance as regards at least one aspect of gold's fundamentals-scrap flows-at this time. One camp sees an abatement of the veritable flood that was seen in such supply during Q1. As you recall, the first trimester of 2009 witnessed an influx of circa 500 tonnes of the yellow metal into refiners' furnaces. In other words, about as much as the gold market normally absorbs during a twelve month period. The motivation? $1K gold.
Another camp however, sees a renewed surge in secondary supply as we speak, due -once again- to the price tag attached to bullion. Bloomberg's Millie Munshi fills us in on the details - they sound like a replay of Q1 to us. At any rate, someone, somewhere finds four-digit gold an attractive sell when circumstances of the financial variety dictate:
"While Standard Bank Ltd. predicts prices will rise 7.8 percent by the end of the year to $1,100 and Barrick Gold Corp., the world’s biggest producer, is spending $5.6 billion to bet the rally will continue, consumers are speculating that price gains are limited after a nine-year rally. Scrap sales, including used jewelry, will rise 22 percent in 2009, said Philip Klapwijk, the chairman of industry researcher GFMS Ltd.
Individuals are selling as the deepest recession in more than 60 years sends the U.S. unemployment rate to the highest level since 1983. The slumping economy has erased $13.9 trillion in household wealth, according to the Federal Reserve. Investor demand for a refuge from tumbling prices of financial assets sent gold up 31 percent in the past year.
Scrap supplies will jump to a record 1,485 tons this year, Klapwijk said in a Sept. 14 interview. The gains may “play a role in capping” the bullion rally, said Klapwijk, who joined two other managers to acquire a unit of Consolidated Gold Fields in 1998 to create GFMS. Scrap gold represents about 25 percent of global supply, according to the World Gold Council in London. The interest in bullion has kept the influx of scrap from depressing the market, said Aronson, a co-founder of closely held Cash4Gold in Pompano Beach, Florida.
Gold futures have surged 15 percent this year, touching an 18-month high of $1,023.30 yesterday on the Comex, and are heading for a ninth annual gain. Scrap supplies rose 39 percent to 880 tons in the first half of the year, according to London- based GFMS. “With the amount of gold that people on the investment side want right now, there’s never a situation where you’re oversupplied,” said Aronson, who is 36.
Analysts expect gold to keep rallying. Gold for immediate delivery in London will average $959 an ounce in the fourth quarter, up from $928 since Dec. 31, and will reach $988 in the second quarter of 2010, based on the median of estimates collected by Bloomberg from 18 analysts."
A quick recap of the GFMS -flavored and fundamentals-oriented math: YTD mine supply = up 7% + projected 2009 scrap supply = up 22%. Before any accounting for slumping global fabrication demand = projected to be down 15% in 2009 (after a 24.5% drop in H1). As the say, do the math. In plain English, in order for prices to remain anywhere near the four digit zone, two-thirds or more of all current mine output would need to find a home in investors' hands. A tall order, to say the least, as we look ahead at 2010. Or, even the fourth quarter.
This week's rise in US retail sales brought many smiles to traders' faces and it was hailed as the ultimate proof of the fact that you cannot keep the addicted US spenders on the wagon for very long. There was, of course, more to that statistic's release - we saw it in the effects on various markets we track. The data engendered all kinds of renewed talk -of the alphabet soup variety- about the emerging shape of the US recovery. V? A? U? L? W? N? Consensus is a futile search.
But, "not so fast," says...the consumer himself/herself. According to the latest Bloomberg survey, "Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months. Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year."
Speaking of polls, it has been revealed that the 'average' American gives his new President a 61% approval rating, but when it comes to the 'average' investor, that mark slips to but 49% according to another Bloomberg-based survey. The investor camp is almost 50/50 on the issue of whether Mr. Obama is a better economic leader than his predecessor was. Certainly, not as much of a rift as that seen on other hotly contested issues.
Meanwhile, plus ca change...guess what s back in fashion as we close out Fashion Week in New York? You'd never guess, if all the noise about not going back to our 'old ways' held any water. The Huffington Post finds that "Credit-default swaps -- the financial instrument that helped bring down AIG and played a key role in causing the biggest financial crisis since the 1930s -- are, a year after the fall of Lehman Brothers, back en vogue on Wall Street, Bloomberg reports. Instead of being viewed as tools of financial disaster, CDSs are said to be contributing to the credit market's renewed confidence." A different kind of addiction, but one that persist.
Finally today, a bit of portfolio advice. No, not from us. We will only go as far as to tell you to ensure that gold is present in your asset basket at a level that lets you sleep at night, and that price performance ought to be the last objective, since we do not really view gold as a 'trade.' As the debate over inflation versus deflation rages on, Minyanville's Josh Lipton offers up some tips for those of you who still see leaking balloon. And, yes, fear not, it still includes the presence of gold.
"When it comes to portfolio construction, perhaps the most important and basic question investors must answer is this: Are we confronting an environment of rising or falling prices in the future? It’s the inflation boogeyman that's stalked the narrow canyons of Wall Street recently but, on Monday, San Francisco Fed President Janet Yellen shut that monster back in its closet with a smart speech that supported a much more cautious view of the US economy.
Yellen, who some argue is one of the more astute forecasters at the Federal Reserve, said that the summer probably marked the end of the US recession, and that the economy is back on track to expand in the second half of the year. However, she also argued that the recovery will prove tepid, “vulnerable to shocks” with an unemployment rate that will remain “elevated for a few more years. Yellen, a voting member of the Fed’s Federal Open Market Committee, also sided with those who worry about a downward spiral in prices rather than inflation.
“My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy,” she said. If Yellen is right, and deflation remains the principal risk we now face, then how best to construct a portfolio?
In general, according to strategists and investment advisers, it’s going to mean staying more bullish on bonds than stocks, including long-term Treasurys and munis. Investors would also want to pack their portfolios with yellow metal, advisers add, and maintain a healthy slug of cash. Dedicated deflationists come armed with scary data: Rents are declining for the first time in 17 years. Consumer credit is contracting at a rate not seen in 65 years. Wages and salaries are shrinking at an unprecedented annual rate of nearly 5%.
In brief, writes David Rosenberg, Gluskin Sheff’s chief economist and strategist, “We have a deflation on our hands of epic proportions.” The key to the inflation process, says Rosenberg, is not what the Fed is doing to the money supply but the extent to which the “liquidity” is being circulated in the real economy, if at all.
The fact is that velocity is still contracting. “You can bake a cake as a central banker, but that doesn’t mean anybody is going to eat it,” Rosenberg writes in a recent research note. As for investment implications, Rosenberg is telling his clients to focus on income and capital preservation. He’s more bullish on bonds than stocks, noting that investment-grade credit is discounting 2% real growth versus 4% for US equities.
Mike Shedlock, a registered investment adviser for SitkaPacific Capital Management, is also a member of the deflation camp, believing that a decline in prices looks a lot more likely, he thinks, than runaway inflation. A deflation-fighting portfolio, Shedlock says, would have long-term Treasury bonds. The thinking there is that, should we suffer a deflationary environment, there will be a flight to safety by investors. Also, the fixed-income stream would be worth more relative to falling prices, Shedlock notes.
Dedicated deflationists can also prep their portfolios by buying gold. Investors often think of the yellow metal as a smart hedge against inflation, and there's evidence to suggest it works well in that role. But gold does well in deflationary environments too, says Shedlock. “Gold has proven to be a very good hedge in times of credit stress,” he says.
Finally, if you agree with the deflationists, then you’d also want to maintain a healthy slug of cash. “A high cash position would make sense,” says Shedlock. “Now, you’re not earning anything on that cash. You’re earning zero, as a matter of fact. But zero is better than negative returns. How many people would love to have 2008 over again? And just sit in cash earning nothing?”
It’s important for investors to recognize that financial advisers don’t necessarily agree with the strategy of purely playing the deflationary trade. Even if investors believe that we’re due for deflationary times, these advisers say, it’s important to remain more balanced in the portfolio.
“Putting all your eggs in either inflation or deflation is the wrong way to go,” says Cohen. “Look at all the people that have been terrified on inflation. But, last time I looked, TIPS (government-backed bonds that keep pace with inflation) were just so-so.”
Kitco Bullion Dealers Montreal
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