Editor’s Note March 30, 2010: While it has been some time since we published our commentary below, now is a particularly relevant time to republish it in our view. The rates of deflation below are no longer valid as there has been a rebound in growth in most countries. Nevertheless, we continue to monitor GDP worldwide for any change in trend.
Gold has had every reason to make new highs this Spring.Unprecedented spending by Government and Central Banks, massive amounts of cash looking for investments that are working in this environment (Gold still up marginally on the year), and a banking system that has to be stress tested – the results of which should be scaring everyone in the know.But alas, Gold peaked last year, and since then, has been corrected downwards, despite claims by many that bullion coin and bar purchasing continues at an elevated pace, not a record pace mind you.Recall that in our previous surveys of dealers on availability, we found gold available, and where it was not available, delivery times ranged from a few weeks to months.But generally, the response from mints has been positive, and they are once again accelerating production to match demand.Our latest survey shows no material bullion shortages anywhere.Something has happened in the market now that no one wants to cover, and this is the real story – the one we will continue to write about in the days and weeks ahead.The story is, the world has fallen into a Deflationary growth recession, and some very familiar countries are currently experiencing a Depression.
Every major economy is either slowing, or in outright recession.We can now enhance this statement and say that the following countries[1] are experiencing Depressions as defined by an annual decrease of GDP > 10%[2]:
Japan: Annual decrease in GDP is 12.1% and falling
Singapore: Annual decrease of 16.4%, and free falling; just devalued its currency
South Korea: Annual decrease of 20.8% and in serious crisis
Thailand: Annual decrease of 22.2% and at war with its neighbor, and chaos in its streets
Brazil: Annual decrease of 13.6% and on the precipice of significant currency devaluation
Mexico: Annual decrease of 10.3% and experiencing a massive drug war
So which countries are next?Based on the latest first quarter figures it appears that Sweden (-9.3), Chile (-8.3%), Germany (-8.2%), Hong Kong (-7.8%), Italy (-7.5), and Denmark (-7.3) are the prime candidates.To put this in perspective, we called for a major blow up in Latin America, and right on cue, Brazil and Mexico are leading the way, with Mexico the first recipient of the new “new” loans with no strings offered by the IMF.But what is more dangerous is that a very unstable Chile is sneaking up, and if they default, the dominoes will quickly fall.Argentina? Is a distraction to the Main Event.Germany is the largest economy in Europe, so when she goes into Depression, and we think she will, you can expect that all of her trading partners will get slammed.And for those holding out hope that China will save us, one need only look to Hong Kong to see how quickly China’s tiny little economy can turn hope into despair.
Oh, you don’t have to be in a Depression to compete for the Who’s got it worse award, however.The following countries would have outright collapsed if the IMF had not bailed them out[3] as indicated:
Romania ~$17 billion representing 7% of GDP
Ukraine ~$16 billion (8% GDP)
Hungary ~$15 billion (11% GDP)
Iceland ~$3 billion (11% GDP)
Latvia ~$3 billion (6% GDP)
So quick, shall we all go out and buy gold?It’s a Depression!Let’s try to understand the value proposition of gold during a deflation.Everything in the world is getting cheaper, so gold should hold its value better – it’s a great store of value.Yet, gold has declined since its peak in 2008.Why would we trust a commodity that is declining during a deflation?One could argue that the world is a very unstable place, and people are demanding safety of their assets over investment return.In that case, why are short term government securities continue to rally if governments and central banks are spending massive amounts of capital with their stimulus programs, which should devalue paper currencies.The reason is people are paying off their debts, and you need cash currency to do this.But perhaps the more important reason is that short term government securities are safe AND rising in price, something gold has not done in the past year.Oh, and government securities pay interest too.Ok you say, but what if there’s a war in the Middle East.Well, does the price of oil indicate that there is going to be a war in the Middle East anytime soon?Are the prices of defense stocks spiking?Last I checked, the U.S. is pulling out of Iraq – which fortunately will save the American taxpayer a nice chunk of change.By all accounts, gold is not an excellent investment in a Depression, and that is why it has not reached new highs.And that is why we continue to expect it to fall over the coming months, perhaps spectacularly as the stock market continues to rebound.
We write this column for our readers who are interested in buying bullion.For those that have it, we commend you for protecting your investment portfolio with a diversified asset not correlated with the stock market.For those of our readers that are thinking about purchasing, we’d urge you to wait.And we have been urging you to wait for awhile.As we continue to cover the important story of the spreading growth of the global Depression, we will see first hand what happens to gold prices.Our prediction:Gold will fall at least 33% from current levels with much more downside potential.
Please accept our apologies for not publishing as often as before.We simply did not have anything more to say about the market.We know this is not good for the economics of our business – when we stop publishing, people stop reading.We promise we’ll have more to say this summer, and we thank you for your patience and continued loyalty and interest in our work.
[1] The Economist, “Output, prices and jobs” % change on year ago, April 11, 2009, p. 97.
[2] Nobel Prize-winning economist Robert Barro defines a depression as a 10-percent fall in per-capita gross domestic product and consumption
[3] The Economist, “Caps in hand” IMF programs, amount lent, $bn Source IMF, April 11, 2009, p. 70.
Why does everyone love gold even though it has risen only about 10% since its peak in 1980, while the Dow is up about 10-fold since then?
Our Answer: Because no one cares about its long term performance. They only care about what they think gold will do in the short term.
APMEX has excellent (763) availability of U.S. 1 ounce Gold American Eagles, 162 1 ounce Krugerrands, and 10 oz bars at only $14.95/oz over spot. Ah, looks like hyperinflation is imminent, no?
The Chinese Ministry of Industry and Information Technology said in a statement that Chinese Gold Companies’ profits were down 15.75% year over year. No additional details were provided. Are the only people making money trading gold in China the illegal gold sellers? (see previous post)
The money is flowing out of the GLD on an up day today as the Wall Street Journal reported healthy selling in the GLD etf. Block trades purchased were $2.34 million and sold were $13.04 million. Total non-block trade money flow was negative $22.67 million.
Reuters is reporting that July saw outflows from all major Gold exchange traded funds. Holdings of the six gold-backed etf funds that Reuters watches fell 3% in July from the previous month.
While this did not make major headlines, it illustrates the weakness in the metals sector. Yes, the dollar did fall to ten month lows today, but gold only rose to a two month high.
Continued selling in the gold ETFs could swamp gold markets and lead to a dramatic sell-off because of the massive amount of sell pressure this would exert on the open gold exchanges as a percentage of average daily volume.
The China Daily is reporting that hundreds of illegal gold trading firms are taking funds from speculators with sizeable funds hoping to profit from the sudden rise in gold. According to the report, these illegal firms have little or no reserves, and are using deposited funds from speculators to cover potential losses. Further the illegal gold trading firms are using “high leverage.” The report concludes that “speculation has become rampant in the black market.” It seems that China is now experiencing the gold bubble that the U.S. experienced last summer.
Numerous China market analysts are warning of a bubble in China. Whether its stocks, real estate, or now gold, its clear that the Chinese stimulus plan has been successful in reflating its economy to dangerous speculative levels. With the risk of a China collapse increasing, understanding the impact a collapse would have on the gold market may be timely.
Google trends is reporting that the interest in the search “bullion coins” is at the lowest level since just before the October 2008 crash. We cannot overstate the message the lack of interest is presenting to the bullion coin collectibles market. In short, less interest multiplies through the coin dealer community, resulting in sudden drops in purchase volume. We notice the sudden increase in email solicitation by dealers trying to drum up repeat business. The chart itself may hold special meaning to Elliott Wavers, perhaps showing we are about to experience a sudden drop off in searches to multi-year lows in a final “Wave 5″ down. We watch and we wait.
Classic exhaustion. Futures are down, market is very overbought, and you’ve got the dollar hanging in there and Yen is rallying. Fed says financial system can withstand CIT bankruptcy on Friday, according to Bloomberg. And emerging markets are sucking wind – China, India, and other frontier speculations. Silver popped but doesn’t look like it can rally much further. Divergences in the VIX and summer volume that indicates everyone is on vacation except the trading programs.
I think thechartpatterntrader.blogspot.com has this short term market nailed. He’s expecting to go short, and we’re looking forward to seeing real fear before we get our final up move late summer. Its a bearish gartley patternwith maybe a dark cloud cover reversal pattern tomorrow and we never look back until 811 on July 28. If the S&P500 breaks above 943.84, the bearish call is wrong. Enjoy watching the dollar gap up as Europe catches a glimpse of its brown weeds and gold bugs bug out. Please read our disclaimer as nothing contained anywhere on this site constitutes any investing advice or recommendation. Any purchases or sales of securities are solely at the discretion of the reader.
Gold slid another 1 percent on Tuesday as traders unwind the reflation trade in favor of cold hard cash.
Strength in the U.S. dollar unit resulted from selling of commodities, correcting much of the gains over the last few weeks.
Spot gold was bid at $921.20 an ounce at 1507 GMT, against $932.30 an ounce late in New York on Friday.
U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange fell $9.70 from Thursday’s close to $921.30 an ounce.
As the retracement in gold approaches $900, we expect buyers to enter the market. But as previously stated, once gold breaks below $900, more selling should occur.
Silver, after crashing through $14, approached $13, where buying should come in forcing shorts to take profits on the massive sell-off. While the correction could last several weeks, once gold breaks below $900, silver should also see more selling.
India, the world’s biggest consumer of bullion, announced it doubled import taxes on gold and silver as the government sought to raise funds to spend on roads and supply food grain to the poor at below market rates. These duties come as the country bought 51.8 metric tons of gold in the January-to-May period, compared with 115 tons a year earlier according to the Bombay Bullion Association. New duties can only further weaken a market facing crashing demand this year.
We’ve been patiently waiting to see which way the market would break. Silver fell below the psychologically important $14 level today. Gold is off $8 to $925. The GLD is trading below its 200 moving average, and with a gap down this morning, should be bumping against the key $90 level. When gold falls below $900/oz, more furious selling should kick in.
