"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, September 23, 2011

Gold Chart comments

Gold was taken down very hard this week for several reasons.

First, look at both charts below of the S&P and the CCI. Notice that both are now solidly in the red for this year. What this tells us is that the vast majority of hedge funds have lost money for the year unless they have been very nimble and were able to beat the rest of their world to the sell button.

Also consider that many of their positions are heavily leveraged. Margin calls are now coming in. What do they do? They can obviously sell out of their positions and take the losses or they can try to pony up additional cash and hold the positions a bit longer in the hope that the markets will rally up and let them sell out at a better level or even initiate some new longs.

That helps to explain why gold was hit so hard this week and why many are now questioning its safe haven status as a result.

First, examine the long term charts of the S&P 500 and the CCI. Notice that both charts are underwater for the year.

What positions could a hedge fund actually sell that are PROFITABLE if they need to raise cash? Answer - They have none -  the only market that is still showing a profit for this year (other than the treasuries trade) is GOLD. It started the year at $1422 on the Comex and closed today at $1640. That is a gain of 15% on the year even after the whipping put on it this week. A short note here - silver is back to where it began this year so there are no profits left in it after this week.

Now consider that hedge funds are getting a boat load of redemption requests from disgruntled clients and from those who are simply scared stiff and have had enough of the insane volatility. They want their money back even if it means sticking it under a mattress. That requires these funds to sell the assets that they have to raise the necessary cash.

In other words, gold, is the only profitable investment these funds have that is both liquid and available for them to meet margin calls and meet redemption requests. This is why it is being sold. The selling has nothing to do with it not being a safe haven but rather functioning as an extremely liquid investment that has shown them a solid profit. Winners are getting sold to meet losing trades and redemptions. Nothing more; nothing less.

Once this money flows issue is resolved sufficiently, the factors that have led gold to rise will reassert themselves.

I am a bit amused by those who keep crying up the 2008 debacle as if gold is doomed once again. I can still hear their voices from back then and as I kept some of their emails to amuse myself in the future. The same things are being said now as were being said then.

Yes, a 30% decline in the gold price then was not fun living through as gold was sold off fiercely as carry trades were unwound and a mad scramble for cash commenced for the same reasons I just listed above. However, looking back in hindsight and at the price chart, that steep move lower amounted to a tempest in a tea pot on the longer term chart. Gold went on to more than double in price from that reaction low.

Not that I would be particularly happy about it should it occur, gold could drop as low as $1500 and still not dent the long term uptrend in the metal. If you look at this chart carefully, note that the red uptrend line was actually violated in 2008 leading to cries that the end of the bull market was upon us. However, that foray lower corresponded with the advent of QE1 and the rest is now history.

I expect that before we see the global stock markets utterly implode, we are going to see more concerted Central Bank action, on a global level, to provide more liquidity to these markets in an attempt to prevent any sovereign debt meltdowns or credit lockups. I am not saying it will be effective, I am only stating that anyone who thinks these monetary authorities will sit idly by and do nothing while the global stock markets fall apart, taking the commodity markets with them, is a stranger to the nature of these people.

I will betcha dollars to donuts that the FOMC is still seething over the response of the markets to its latest "Operation Twist". There is no doubt in my mind that they are already planning their next move.


  1. Wouldn't USD/USTs have shot up with the decline in gold? Or anything at all?

  2. Hey Dan,

    I'm curious about a couple of points made in this article.

    1. The idea that so many hedge funds have gold is interesting to me given the premise that it's under owned. If it was that under owned how could there be that many hedge funds having it to sell?

    2. It seems treasuries are much more prevalent in the typical portfolio and they are at all time highs indicating gold isn't the only asset showing a profit, so why were they selling gold and not treasuries?

    Basically my point is whenever liquidity is needed to cover losses it's gold that suffers. This flies in the face of a safe haven vehicle. Treasuries are still viewed as the safe haven and gold is still viewed as a risk asset. I don't agree with this philosophy personally, but this is what the market is saying. This means any pressure that the market faces, will be at the expense of gold (like 2008). Given that the miners are leveraged to this idea, the last thing one would want to own is miners. The market has proven this as well over the past couple days. Only when gold reaches safe haven status, will the miners be worth owning in the face of a weak market.

  3. All very good points. A large thing to watch is going to become very important. Third Quarter Earning season beggining in October. How can anyone deny the stock prices of Miners when their free cash flow positions have skyrocketed, earnings have increased dramatically, and alot are now increasing dividends. What alternative investments could compete with these types of assets? Watch out, here comes a run on the miners but this time straight up. I would think the run will begin soon. I am invested and just lost 10% in two days. I do however have lots of cash and will put it to work in the miners by end of this week or early next. Due to IRA status I have to wait awhile because of required 30 day rotation or I would be incrementally investing NOW. Prices of these stocks are still way undervalued.

  4. As my dad keeps asking me, who in their right mind buys 10 yr or 30 yr treasuries at 1.75- 2.25% yields. Who would tie up their money in positions like that? Might as well bury it.

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