"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, August 8, 2014

Ukraine Events Supporting Gold, but for How Long?

We are back to the same old "Tale of Two Cities" when it comes to gold. It is garnering support from fears of escalations in Ukraine but seeing selling pressure from concerns about higher interest rates coming to the US.

In looking at the falling yield on the Ten Year, it is hard to envision rising interest rates but both bonds and notes are responding to safe haven flows due to those above mentioned geopolitical concerns at the moment, and that is temporarily masking the slow, but certain shift in sentiment concerning interest rates.

Talk continues that the Fed will be out of the QE business before the end of the year but will hold pat on hiking rates until Q2 of next year. Such talk in recent weeks has put a bid into the Dollar and led to selling in the Euro but money flows coming off of Ukraine are clouding issues for Forex traders at the moment.

The reason I chose the above headline is because deep at heart I am essentially a fundamentalist when it comes to trading. I do not like trading any market that I do not have a solid grasp on the fundamentals. I then rely on technical analysis for entry and for exiting. Over the years I have learned to know the "why" behind moves before I commit to it. If I do not, I simply don't trade it. Others may have a different philosophy but this works for me and thus I stick with it.

Case in point - I have made the claim that I am concerned about the fortunes of the gold market should events in Ukraine recede from the forefront of traders' minds. With a stronger US Dollar, with talk of rising interest rates here in the US, and with commodity indices that are all down on the year, several of the fundamental pillars for a SUSTAINED rise in the price of gold are notably absent.

Yes, gold has been strong of late but as I have written many times here, I learned never to chase gold prices higher on the heels of a geopolitical event. I have been burned too often in the past and have learned my lesson. Since no one knows how an event like that will resolve itself, no one really knows with any degree of certainty when the gold price will have factored in the worst. Once that occurs, (Provided that the event does not worsen or escalate), gold usually surrenders most of its gains. Those who come late to the party are then inevitably left holding the bag.

What does this have to do with fundamentals? Answer - take a look at the chart of GLD, that big gold ETF. Studying this chart in relation to the price of gold has been invaluable to me as an asset to gauge one of the fundamentals that I like to track, namely Western-based investment demand. Look, it is a given that Asian demand for the physical metal has been solid for many years now. I will not waste time arguing whether or not Chinese demand is waning. I happen to believe that it is but others argue that the true level of demand has been masked because of changes in the entry point for gold coming into the country. Fine. Each has their own view on that. It is however irrelevant as far as I am concerned because the factor that led to a SUSTAINED rise in the price of gold prior to the end of the bull market was enormous Western-based investment demand.

One can look at the chart of gold holdings in GLD and compare that to the price of gold and easily see that when money flows from the West were pouring into this investment vehicle, gold was soaring. As money left it, the price of gold began moving lower. What could be more simple than that?

Demand and supply; demand and supply. When all is said and done, the essence of price discovery can be distilled to those two simple factors.

So why am I concerned about gold at this point when so many are bulled up about it as they talk war and collapse, etc. Look at the chart:

Does this look like Western-based investors are tripping over themselves to buy GLD? Would you like to know what the most current reported holdings of the ETF are? Answer - 797.65 tons. Not only has that number been falling as the metal works higher at the Comex on war fears, but it is also now DOWN on the year! At the end of 2013, ( or the start of 2014 if you prefer), reported holdings stood at 798.22 tons. GLD is now down a bit more than a half a ton on the year.

In trying to be as objective as I possibly can, how can anyone look at this number and not be concerned? Where is the haste to acquire the metal or metal products in the West? If it is there, I certainly do not see it.

Yes, I understand that there are other sources of demand for the metal; gold bars, gold coins, etc. that do not show up in this sort of chart. However, I do not think it can be successfully argued that demand among Western-based money managers for gold was not a huge source of demand during the bull phase of the metal's run. This group, or more accurately, the demand from this group, is simply not there at this time.

As a trader or an investor, one wants to have powerful "friends" with them when trading positions in the market. What I mean by this is that one wants to be on the side that hedge funds and other large players are on because those are the ones with the huge capital at their disposal. You can talk all you want about "contrarian" trades but I have learned through painful experience that I would much rather have the hedge funds on my side than be against them. The sheer firepower at their disposal can make even large, well capitalized commercial interests pale at times.

The surest and quickest way I know of to turn a large commodity trading account into a small commodity trading account is to be on the wrong side of a hedge fund buying or selling binge. Do it at your own risk.

That brings me back full circle to the question I posed in the headline. If one is looking for significantly higher gold prices then one should want to see a steady, sustained rise in reported holdings in GLD. If not, then all I can say is that you had better be very quick and nimble when it comes to gold. It can reverse on a dime. If one is long based on the expectation that events will further deteriorate in Ukraine, then that is understandable. Just be careful and don't get complacent is all I want to say. If something occurs over there to significantly lower tensions, gold will surrender a goodly portion of its recent gains because traders will then shift their focus to the negative factors for gold.

As a last comment to the rabid gold bugs - Yes, I know you will hate reading this and I know you will want to vent your spleen at someone who is giving an honest opinion. Spare us your venom. You can rant and rave and spew out all the trite arguments that you have mustered over the years but that will not change the reported holdings in the GLD, nor the fall in commodity indices nor the stability in the US Dollar. If those things change, I will happily note it. If they do not, then I suggest you are losing reason for gold to move to the kinds of levels that some in your camp are throwing around.

Markets move when they are good and ready to move - screaming, throwing temper tantrums, slandering others with different opinions than yours will not do a single thing to disturb the gold market. It will do what it wants to do when it wants to do it. Learn that and accept it - you might be a happier person. As it now stands, one thing I have learned - the rabid gold bugs are your best friends as long as you sing from the same choir book. Change your tune, respond to changes in the price charts and to investor sentiment and money flows, and they are some of the vilest, most bitter and malicious people you will ever run across. Touch their yellow metal god and they will curse you and spew out hatred which is astonishing for its ferociousness.

By the way, cattle are down the limit a second day in the row... as long as I have been at this it still never ceases to amaze me at how quickly sentiment and prices can change!