PM Daily Market Commentary - 9/30/2013

By davefairtex on Mon, Sep 30, 2013 - 11:43pm

Gold closed down -8.60 to 1328.10 on moderate volume, with silver down -0.10 to 21.69 on relatively light volume.  The gold/silver ratio dropped -0.11 to 61.22.  At the open in asia gold opened at a new high of 1353, but it then it sold off until right before the NY open where it hit a low of 1322.  Its a perfect example of the market getting the shorts to cover with the new high, and then stopping out the new longs with the dive to 1322.  In spite of its unfortunate close today, gold is showing a clear pattern of higher highs and higher lows, which is bullish.  Is this government-shutdown-related?  Taper related?  I have no idea.  It could be.

The dollar was down -0.03 [-0.03%] today to 80.32, basically flat, although it made a new cycle low at 80.11 at 0900 EST.  I'm guessing that No Taper, government shutdown, and debt limit issues are all combining to weaken the buck; the brief rally following the big Fed No Taper dollar drop is now gone.

Mining shares were down modestly; GDX was off -0.60%, but GDXJ was down -2.14%.  Volume was moderate for GDX, and quite light for GDXJ.  Miners rallied in the morning, but then lost a good chunk of their gains as the day wore on.  The chart for GDX continues to look ill, with GDX closing at 25.02 right at support.

I like using ratio charts, because they help me to see trend changes and patterns sometimes before the trend becomes apparent in gold.  The dropping ratio of GDX:$GOLD shows that miners have been underperforming gold for the past six weeks - price of miners has been dropping faster than the price of gold itself.  The interesting bit is the timing.  GDX topped on Aug 26, gold itself topped Aug 28th, but GDX:$GOLD topped Aug 18th.  The miners (relative to gold) started weakening perhaps 7 trading days prior to the top.  In retrospect, this was a clue that the uptrend was weakening.

What does this mean for miners going forward?  An increase in this ratio might be useful in forecasting the next uptrend.  Currently its not looking all that great, but we are slowly nearing support for the ratio.  This ratio is quite close to all time lows set back in late June of this year.  This is basically saying that miners are as cheap as they've been since the timeseries began.  Some of this low valuation is due to extremely unfavorable trader sentiment, and some due to accumulated fundamental issues (bad management, increasing country risk, declining ore grades, overpaying for acquisitions, etc).

Ever since the peak in 2011, it has been far better to own the metal than the gold mining shares, and while gold peaked in August 2011, GDX:$GOLD peaked in April 2011.  Will this continue?  Presumably if gold rallies, the miners will have a supercharged rally, outperforming the metal on the way up.  So goes the theory.  So far, we have no signs of such a rally other than the all-too-brief move in the ratio during July and August.



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martin armstrong on today's gold move

So gold cracking 1300 was a reasonably big deal.  I went off to see what Armstrong had to say about it.

I'm not on board with Martin's prediction (perhaps I've been seduced by that hugely bullish futures positioning by the Producer category) but I do agree with his thesis that 2 trillion in money printing has not led to hyperinflation - or anything more than modest, tepid inflation, and the hyperinflation thesis was oversold by the goldbugs and it just hasn't come to pass.

Anyhow, I'm including this as a contrary opinion to the usual set of voices we hear.  For those disturbed and upset by his $1000 gold prediction (or those inclined to throw rocks at me on general principles), remember too he's predicting a massive move higher in gold later on, since he views gold primarily a hedge against loss of confidence in government - but that confidence has not been shaken just yet.  All is still well.  He sees that as a cycle that has yet to arrive.

Dan Norcini has also talked about the market needing some sort of catalyst that will drag Managed Money off the sidelines and into the various gold instruments.

The more I watch this world, the more strongly I believe in Armstrong's whole cycle approach to things.  The phrase "its not yet time" comes to mind.

Gold has tumbled sharply and the bearish decline still appears to be moving in full pace. The nonsense put out about gold as a hedge against inflation and the coming hyperinflation trapped a lot of people in the yellow metal. However, I have been warning that we face deflation not inflation and with the $2 trillion-plus Fed balance sheet expansion, gold failed to breakout to the upside demonstrating that the fundamentals talked about just are not real.

Our Daily Bearish Reversal lies at 1283. We still see gold declining and it should perhaps just crack below the $1,000 level to wipe out most of the Gold promoters who have sold their bill of goods to a lot of unsuspecting people. Once that is accomplished, the tree should be shaken significantly and the majority will most likely then be looking for $650.

Nothing has changed on the long-term perspective. We will be issuing another report with the important turning points laid out. We see choppy markets until about next March. This suggests that many will continue to spout out the same nonsense of hyperinflation that will cause serious losses for many and that will then turn them off with respect to the precious metals. Once that has been accomplished, gold will rally like the Dow is doing now with the majority constantly expecting a failure. They will then sell every rally and miss the boat altogether. This is why it is so important to understand the global economy and to avoid the myopic nonsense of looking at just a single market with a single cause and effect scenario.

We are all HUMAN. Nobody is perfect. The best adviser is to learn how to listen to what the market is trying to tell you. The problem we face is bias and prejudice. Never marry an idea that forecloses any analysis of the other side – WHAT IF YOU ARE WRONG?

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Losing Credibility

When Armstrong says "The nonsense put out about gold as a hedge against inflation and the coming hyperinflation trapped a lot of people in the yellow metal.", he loses much credibility with me.

This statement is nonsense, not using gold as a hedge against inflation.

There are at least two things Armstrong gets wrong.

I agree we "face deflation".  Yes, the developed world is trying to deflate, naturally.  That is the natural direction of the markets.  It is a consequence of aging demographics and subsequent reduced consumption (hat tip to Mr. Demographics, Harry Dent), and as Chris constantly discusses, the decreased availability of cheap energy is causing the natural deflation, and other forces not the least of which is too much debt relative to our ability to service debt.

The problem is, our dear leaders are doing everything in their power to not allow deflation.   Whether they are indeed smart enough to understand the deeper problem of the end of the debt supercycle and are playing some global chess game with a deeper agenda, or they are more like rats pulling levers to "make the money machine work again" (I tend to favor explanations that are simpler and assume human frailties and incompetence), the behavior is the same: print, print, print.  Make the money machine work again.  This is what we are objectively seeing, despite the fact that 1) it is objectively not working, 2)  a rational and fundamental analysis explains how and why it will not work.

So which way is the right way to bet?   That the Federal Reserve and the U.S. Government, and any other developed nation's central bank and leadership will suddenly see the objective facts, choose the hard but correct path, stop printing and allow deflation to happen naturally as it is trying to do, until markets are restored to a healthy state, albeit with much "wealth" destruction (paper wealth actually, true hard copy wealth like food and tools can only be destroyed by fire, theft etc), and admittedly significant disruption and misery,   If you like this choice, then yes, discard all your devaluing precious metals. 

Or that the Fed and U.S. Government will continue money printing which is irrational, contends with the objective world, but allows the psychological boost and the charade to continue for yet a little while?  Also, does anyone think that there is a limit to the amount of money they will print?   There is no limit.  They will not stop until markets and mass revolt forces them to stop.   If you think there will be a great intellectual awakening in government and central banks, sorry friends, it will not go down that way.   And the more chips on the table, due to human pride and stubbornness, the less likely it will go down that way.  We had our lessons during the tech bubbles, the Great Depression and we did not learn the lessons that the market was trying to teach.

That's the second thing that Martin gets wrong.  He seems to ignore that in the real world, there are stochastic, unpredictable events that spoil beautiful plans.  I won't invoke black swans.  I don't need to.  Whether natural events or unpredictable human acts, these things can not be predicted by models and equations.  What we can analytically say is that we are moving toward either more resilience or less resilience.  Either a stronger balance sheet or a weaker balance sheet.  The facts show that we are increasing weakness and decreasing resilience every day. 

That doesn't mean that I or Chris or Martin Armstrong can craft an equation or cycle theory that accounts for the billions of inputs into this system and the trillions of resultant effects, but I believe in the existence of natural law.  The natural law that states that eventually, if you create more and more weakness and fragility, something will "break".  Applying increasing tension on a string, piling weight on a board, revving an engine past redline, driving while drunk.  The more fragile the system, the smaller the force needed to break it, and the more likelihood that one out of the millions of insults that occur each day will rise to that threshold of "breaking" the system.

We are putting more and more weight on a glass floor that I am standing on with everyone else, partying on, dancing on, living our lives on.  A few of us see the danger of adding more and more partiers on that glass floor.  I come her as one place to try to find tools to help listen for the sound of cracking before the floor gives way in a catastrophic event.  I can't tell you exactly to the minute when the floor will give way, but I hope I can listen for cracking and discern when to get off the floor quickly.

Thanks for the analysis Martin, but I will keep my nonsensical precious metals as one of many hedges against inflation, aka electronic dollar destruction.  FWIW, tools, food, clothing, anything tangible are also good hedges against inflation, but I'm sure Armstrong has an argument why I should not own those either.   Follow this line of thinking at your own peril.

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Jim H
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The FED/banker cabal has had 60 years of practice

of successfully eliminating any and all deflation, as is so evident from this chart by Doug Short;

And no doubt the extraordinary efforts it takes nowadays to keep this up is further stressing the glass under our dance floor (h/t Hrunner).

Now, to address another point.. I do think it was a fourth grader who pointed out to me that something had changed in this chart starting around 2011...and this is where I got the idea, from said fourth grader, that the Gold price suppression, that had previously been in a mode of controlling the advance, had now gone into high gear.  Noting the caveat that correlation does not prove causation.. it is interesting to note the story this chart tells;  that it was not necessarily extremist hyperinflationistas driving the initial decade-long leg of the Gold bull market... but rather just astute market watchers who saw an unsustainable debt bubble in the making.  Will a new US debt limit increase be the final catalyst for the next leg higher in PM's?  The broken correlation would definitely argue in the affirmative.        


link to chart from Tom Fitzpatrick of Citi ;



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armstrong: gold and hyperinflation


Armstrong isn't anti-gold (or anti-tools) but his viewpoint is distinctly non-mainstream; non-mainstream goldbug, and non-mainstream mainstream.  The net result is, nobody likes him!

Armstrong Says: Gold Isn't an Inflation Hedge [at least not all the time]

The evidence?  During the 1980s and 1990s, we had steady inflation, and yet gold did not keep pace.  In fact, it dropped over the time period.   Gold was a terrible inflation hedge for those who bought in 1980 and held for 20 years.  $650 to $300, while inflation during that same period was 216% (78 to 169).  That's Armstrong's evidence for gold not acting as an inflation hedge, which he has presented elsewhere but not in the post I referenced.  A 20-year time period is a very long time for an inflation hedge to work this badly, especially considering people like to point at only the last 12 years as proof positive of gold's inflation-hedging powers.

That's because the charts for the last 12 years work out very neatly.  The charts for the last 30?  Not so neatly.  This tells me the truth of the matter is complex, and that Armstrong most likely has a point.

Of course in the 70s gold went nuts - inflation was perhaps 130% in the decade while gold did an incredible 2280% rise, and in the 2000-2010 period, gold moved up 400% while inflation was only 30%.  So where does the truth lie?  I don't know, but Armstrong has 20 years of gold being a terrible inflation hedge to back up his statement.

Perhaps inflation isn't the thing gold works against, even though it looks like it.  Armstrong thinks its a hedge against loss of confidence in government.  I'm not sure he's right, but if we think back to the 70s, certainly there was zero confidence in the ability of the government to get stuff right - inflation was a part, but also there was the energy crisis and the Vietnam war aftermath, and some pretty crazy interest rates. 

I don't have the answer and I haven't found one that satisfies me, but the simple one that says "gold is an inflation hedge" doesn't seem to provide the complete explanation, given the experience during the 20 years from 1980-2000.

I will agree that in the popular mind, gold is currently seen as an inflation hedge - somehow they've been able to ignore that two-decade period when it wasn't.

Hyperinflation Didn't Happen

Now then, about hyperinflation.  The people Armstrong calls "gold promoters" who predicted that hyperinflation would inevitably result from the Fed's printing operations have been discredited in the eyes of the mainstream.  Printing has gone on for 5 years, and not only is hyperinflation not happening, but inflation is largely not happening.  Gold exists in an overall marketplace - it doesn't just trade by itself.  What inflation we had peaked in 2011, and it has declined since then.  You can see this in the charts of the CCI - overall commodity prices have done nothing but tumble since the peaks were made.

So we've had a hyperinflation disappointment.  5 years of printing - no hyperinflation, and actually tame inflation.  Think that might have had an effect on the willingness of the mainstream hedge fund operators to buy and hold GLD and COMEX futures?  It seems reasonable to me.

A competing explanation is that "the Fed wasn't really trying to suppress gold until 2011" after which they really got their butts in gear and threw the kitchen sink at it and finally the gold price tumbled.

I cite Occam's Razor: the simplest explanation is most likely correct.  To my mind, there's no need to add in a Fed Ex Machina factor to explain the drop in gold.  Look at that commodity price chart.  Disappointment in mainstream money manager expectations for (hyper)inflation due to printing would do that quite nicely.  And not only no hyperinflation, but actual commodity price deflation!  What need is there for gold when commodity prices are deflating!

[It is possible the Fed (or some other actor) has been trying to intervene all along.  Its just that the intervention simply didn't work until the market itself was ready to turn - until the mainstream became disappointed in their hyperinflation expectations.  Then the interventions magically started working, pushing the market in the direction it already wanted to go.]

Going Forward

As to what will really happen going forward, and will the Fed "allow" deflation (we are giving them a lot of power here), that's certainly the open question.  Their existing printing mechanism hasn't caused inflation because most of it camps out as Excess Reserves, and even the mainstream press has figured this out by now.  All printing has done is create a bond market bubble, suppress rates for a time, and create a whole lot of risk for them in extricating themselves from their positions.

So my question (and your question too) is, what on earth will the Fed do for the next crisis, which is as sure to happen as the sun is to rise tomorrow.  If they are unwilling to stop money printing today, what can they do to rescue the system when things turn sour in the not-so-distant future?

I don't have the answer.  Either they'll think up something truly extraordinary, or the wave of deflation that hits will be overwhelming.  "A bit more of the same" (i.e. 120 billion/month in bond-buying) most of which will go to camp out in Excess Reserves won't do a damn bit of good.

That "extraordinary action" whatever it is, assuming they come up with something, will most likely be the catalyst for the next moon shot in gold.

As for the reason I posted the Armstrong blog post, it is because I think Armstrong has some interesting observations - that gold isn't just a straight out inflation hedge, and that money printing didn't lead to hyperinflation because the forces of deflation are quite strong, regardless of the expectations of the "gold promoters", and that led to the gold downturn.


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fed/banker cabal


The FED/banker cabal has had 60 years of practice of successfully eliminating any and all deflation, as is so evident from this chart by Doug Short...
I think you're conflating the banker cabal and its practice with the debt supercycle.  Private borrowers egged on by the Fed created all that inflation.  TCMDO/GDP chart shows that nicely.  Now that they're maxed out and/or unwilling to borrow, that Fed/Banker cabal has been unable to reignite inflation.  Did they for some strange reason lose the magic touch, or after the debt supercycle peaked, are they simply pushing on a rope?
One explanation: during the 20s, "the Fed fostered inflation" and during the 30s "the Fed couldn't stop deflation" and since then "the Fed has eliminated deflation."  In this world, the Fed is alternately clever, not-clever, and clever once again.
Another explanation: things go in cycles, and all the Fed can really do is amplify or restrain them through rates.  If borrowers were willing to take on more debt now, we'd get another leg up in the cycle, sure as the sun rises.  They aren't, so we don't.  The Fed can offer the debtor money, but can't make him borrow.
Its not that I doubt this cabal or its goals of control and making money, its that I think cycles are a lot more powerful than any cabal.  As we are seeing unfold right now.  Fed prints 85 billion a month, and really, very modest inflation.
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gold price/US federal debt - correlated or not?

It all depends on the time period you look at.  Last 12 years - they've both gone up.  How about the last 30?  The last 40?

I just happened to have a chart...

From 1970-1980 they both certainly go up, but gold goes up much much faster than the debt.

From 1980-2000, there is a negative correlation.  In fact, one might make a case (if one decided to look only at that time period) that as the debt rises, gold actually drops!

From 2000-2012, there is a good correlation.  Debt goes up, and so does gold.

So, do we have a smoking gun?  Or is the truth likely more complicated than one chart showing only the last 12 years of debt and gold?  You tell me.

I think this chart shows the price of gold has very little to do with debt or debt limits over the shorter term.  Both of them have generally gone up over the long haul, but they can diverge wildly either high or low for decades at a time.  They did so during that 1980-2000 period and who knows, they may do so again.

So: debt and gold, inflation and gold - correlated sometimes for decades, and then uncorrelated sometimes for decades.  Conclusion: it would be unwise to use either metric blindly, assuming the correlation goes on forever.

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Currency Collapse, not Inflation, is the Issue


First, before I forget, I wanted to say thank you again for your insightful and clearly data-driven PM Commentary.  It is one of my must reads.  We may disagree on the meaning, mechanism and direction of things, but your writing is very clear (the highest compliment) and thoughtful.

That said (there's always a but), I think Armstrong's and your analysis is focusing on general trends and statistical averages, all of which are correctly derived and presented, but miss the most important points.

Inflation versus Price

First, you know I generally don't care for "inflation" or even "CPI"  or any of these "averaging" statistics.  I don't entirely reject them, I just don't find them nearly as useful as the "price" of the entity of interest.  Carl Menger and the "subjective theory of value" is still a landmark work in human history, IMHO, because it explained price better than any previous (and mostly subsequent) economic theory.  Menger recognized the interplay between subjective and objective forces that give us the current price, and we would do well to remember that price is at any given instant an integration of those forces.

I believe inflation is an unavoidable consequence of a fiat, fractional-reserve money system that simply must mathematically grow the money supply or die due to monetary destruction.   To be clear, a fiat monetary system is not the only option to have economic prosperity and even wealth creation, as Chris has pointed out in the review of American Growth over the centuries in Crash Course.   Also, Karl Denniger once stated that the Founding Fathers intended a "stable" money supply, and under no twisted logic or deception is "stably growing" equivalent to "stable", therefore I also reject the fiat-fractional system as constitutional.

What is Different 1970's verus 2010's?

The data you post is correct, but you aren't analyzing things in context.  The 1970's and 1980's were a time of robust economic growth, across the board, in house prices, household incomes, and of course Wall Street bonuses and Wall Street bank accounts.  Yes, there was inflation, but no one cared, because almost everyone's salaries were growing and almost everyone's home prices and bonuses were inflating.  The Fed was not printing money via QE to infinity.  Is there any surprise that gold was not loved (subjectively- please see Carl Menger)? 

Now, look at the following charts and see if anything has changed since the 1980's:

I think the charts speak for themselves.

Commodity prices are going down because of two reasons.  Again with deference to Menger, one is fundamental and one is subjective.  There is a fundamental decrease in economic activity due to problems in the three E's, i.e. there is physically less demand for goods and services (more on gold in a minute).  And subjectively, the large traders of managed money who actually set the 'market price' (it ain't the middle-class mom buying aluminum baseball bats at Dick's Sporting Goods) perceive that commodities "are trending down" and "are a bad investment", thus the price goes down.

Reality Catches Up Eventually

Since gold doesn't have a huge industrial demand, then the fundamental side of it's input is low, and the subjective input is high.  Gold is going down because the large market traders aren't subjectively interested in it.   I believe the center of mass of the market is moved by the manipulation of a few players at the margin (seriously Dave, repeated dumps of 3,000 contracts in the dead of night?), but you don't have to invoke manipulation to follow the logic.  However, if you look at the above charts, their subjective price assessment is disconnected from the reality of monetary fact.  But the large traders subjective valuation is just as real as the physical reality (again, h/t to Menger) and thus the price goes down.

A market that is driven so much by subjective inputs can turn very quickly.  Some goods are produced from plentiful inputs like bicycles or pet rocks.   Supply can respond relatively quickly to demand, with a lag period where price can temporarily climb high.  However, precious metals are called precious for a reason- they are rare, hard to find and expensive in term of labor and energy to produce.  Gold producers will not be able to crank up the gold machine by 10-fold to respond to price.   I realize there is a lot of gold reserve above ground, but I don't think it will come off the sidelines until prices are much, much higher, and alternative investments are much, much more attractive.  Multiple the preceding analysis by 10 for silver which has an extraordinary tight supply.

What Happens Next?

I think that is the key question we are all asking, and no one knows in detail.  Fundamentally, gold and silver should be multiples higher right now, based on a fundamental analysis of currency versus supply.   However, Menger's "subjective" inputs have driven it lower.  One could say the same thing for UST and really anything that is a USD-denominated instrument.  I don't know what happens next.  However, if you look at the graph of the German Mark, you can compare 'Early' versus 'Late' phases of currency destruction.

If you were a German citizen and looked at the data in the 1st half of 1920 (Early Circle), you would conclude that all is well, inflation is going down, not up.  However, the fundamental analysis of German economic output versus World War I debts would easily show that Germany could not pay its debt (in 1919 Marks).  The Late Circle tells the rest of the story we know well.  Please note how exponentially inflation moved in just one year.

The graph in your post is factually correct, but out of context to the larger forces of money supply, economic growth, and money velocity.  It also looks suspiciously like the inflation graph above in 1919 Germany.

I admit that I don't think things will unfold just like Germany, so Germany as a model has limited utility.  For one thing, Germany had paper currency which could not be easily sucked back out of the system or moved around at the speed of light.  Electronic currency is much more manipulable and movable.  There was no internet or sped-up world.  There was no highly interconnected central banking and private banking sector.  There also were no derivatives.  And no just in time food service and water and energy (h/t to Rawles).

I think there are a few broad categories of scenarios:

1.  Humans discover some miracle abundant energy source that is not a fossil fuel.  Gamechanger, like cheap Thorium nuclear energy.   Many problems solved- but not as easily the fresh water and potential global warming.

2.  We have a true leadership renaissance and start the conversations that Chris so often mentions and make very hard but correct choices that put us on a path toward sustainability.

3.  We keep printing money like crazy to make government and financial leaders happy and give the masses a warm and fuzzy feeling, while destroying our currency and our real economy that grows food, makes medicines, and moves supplies around the globe.  There are other variations like debt jubilees (which sound nice but are just as much a destruction of paper wealth/ currency default and disruption-causing as inflationary disasters, so I lump these together).

I simply think that based on human psychology and historical precedent, 3. is vastly more probable that 1. or 2.   But I would welcome a thoughtful reason why 1., 2. or some other scenario is more likely.  Thus I plan to stay the course of investing in tangibles versus USD-denominated instruments.

Keep the excellent posts flowing!



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You needs your sleep

Mr. Fairtex,

I feels so bad for you that you is up at 2:57 AM and 3:37 AM and 5:30 AM making these nice posts.  You needs to rest and saves your energy.  Way way too much energy spent on writing writing writing busy busy busy.  Hard work good but all work no sleep make Mr. Fairtex dull boy.  Sleep my friend sleep and rest sleep and be at peace.  It just not that important for you to sacrifice your health worrying about these things.  All that should come to pass will come to pass.  Like Mr. Armstrong say, gold is good.  Buy more.  It go up, way up, up to sky, up to heaven high high high.  Yesser yesser three bags full.

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i need my sleep!


You needs your sleep

You are indeed a compassionate person, Mr Roof.  I thank you for your concern.  However, you make one assumption: I'm in the same timezone as you.

I am not.  :-)

If this weren't such a fun hobby though, I certainly would find something else to do!


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armstrong: commodities, hyperinflation, and what moves gold


Thanks for your kind words about my daily commentary.  I try hard to distinguish between my more opinion-based macro stuff (the kind of things we're talking about now) from the daily things I see happening.  I do not want to lead anyone down any garden paths.  I want to be neither a promoter nor a denier, just a conveyer of facts and what I see.

Now then - I notice you've morphed the discussion from "what drives hedge fund managers to buy gold" into "why I think owning gold is a good idea."  Let me start by saying I agree with your rationale for owning gold, as I think do most people here at PP.  However, we don't drive price, at least we only drive it slightly.  We are small fry, and charts of Weimar Hyperinflation and MZM may mean things to us, but if they aren't useful in predicting gold price, they aren't exactly on point in the discussion I was trying to have.  I also got myself off the original point too, so I'm not pointing fingers!

So back to Armstrong, who said (paraphrased): gold isn't an inflation hedge, and the price move in 2009-2011 was primarily about hyperinflation expectations, which didn't happen, and so gold sold off.

My original purpose for posting Armstrong's note was not to challenge the PP reason for owning gold but rather to explore & discuss his ideas on why the price of gold moved the way it did this year - directly contrary to our expectations, and I include myself in that group.  In 2009-2012 I fully expected money printing to lead directly to inflation, and thus to a gold moon shot.  When it didn't, I wanted to find out why.

After some analysis, I see that the gold marketplace is a complex beast.  All of the physical buyers - Indians, Chinese, southeast Asians, various Central Banks, and PP members buy gold slowly, and thus affect the price of gold slowly too.  Central bank buyers buy for geopolitical reasons as much as anything else, while people in their countries buy because of culture or a history of serious currency debasement and/or failure.

The futures markets and GLD buyers tend to move prices rapidly, as leveraged hot speculative money moves in or out of the various paper gold vehicles - which are still connected to the physical prices via various gold delivery mechanisms.  I have concluded that it is the hot speculative money that ends up driving prices in the near term timeframes.

Given all that, it is my belief that the hedge funds, who were big paper gold buyers on the way up in 2009-2011, bailed out due to declining concerns over hyperinflation.  First, here's a chart of the COT category managed money futures contract holdings vs the price of gold.  See how managed money jumped into gold in 2009-2010, and then started to bail out in 2011-1013.  Interest in gold peaked mid-2011.  Also notice how managed money interest affects the price of gold.  Managed Money longs are not the sole cause of the rise or fall, but they definitely have a big impact.  The tail end of this chart also suggests our recent gold rally was short covering, rather than hot money returning to gold.

Here's a chart of a "google trends" query looking at the search keyword "hyperinflation".  The concern about hyperinflation first made itself felt after money printing started in 2008/2009, but today its back down to a pre-crash level of concern.  I applied a 4-point moving average because otherwise the chart is horribly noisy.  Isn't it interesting how you can trace some of the peaks & valleys in gold to peaks & valleys in the queries about hyperinflation on google?

Now take a look at the commodity price index that the hedge fund operators were looking at, relative to the price of gold.  Its clear that from 2009-2011, commodities were racing higher post-crash, and that together with the hyperinflation concerns that appeared in 2009, the story made for a powerful incentive for these hot money operators to rush into gold.  And then - for whatever reason (Carl Menger, phase of the moon, whatever) - commodity prices peaked in early 2011.  And then started to decline.  And more money printing started in 2012 didn't cause the commodity prices to resume their climb.  So the hedge fund guys bailed out.  "Money printing wasn't leading to hyperinflation after all" was the conclusion they drew, based on the evidence they had.  And in fact, they had mostly bailed out prior to the April crash.  Perhaps some clever banker noticed this, and figured nobody would be there to "buy the dip" and so was born the April gold smash.

I'm not trying to argue that we sell our gold, or that we change anything.  Just that when analyzing the overall marketplace, we have to get outside ourselves and look through the eyes of the other participants, especially the hot money guys, and see what (might possibly) motivate them.  Its not a precise thing, its more like making a circumstantial case, and its all subject to argument, opinion, and interpretation.  I've convinced myself this year's move in gold - from 1800 at least - was about fading concerns about HI and hot money fleeing gold.  For gold to stage a dramatic big leg up as in 2009-2011, my opinion is we will need some new catalyst that will bring back the hot money guys.  Otherwise, it is the slow physical buyers who will eventually move the price higher over time - central banks, Indians, Chinese, etc. The key word there being "eventually."  I still think the futures positioning is quite bullish (the producers being almost net long, for instance), but we just haven't seen any reason for hot money to return.

As to whether or not the Fed will engage in absurd levels of printing when the next crisis arrives (they have not done so to date) I think "something inflationary" will definitely take place, but the question is, how long will we have to suffer through deflation in the meantime.  The length of that waiting period will depend on how the market responds to the Fed's initial printing reaction.  If the markets take the printing press away from the Fed initially, we could have deflation for longer than we might expect.  That's why I favor diversification, and being completely out of debt if at all possible in additon to owning gold.


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