jueves, 9 de octubre de 2014

jueves, octubre 09, 2014


Is It Time For The Gold Bulls To Panic? It All Comes Down To The True State Of The U.S. Economy

Oct. 7, 2014 4:40 AM ET

by: Hebba Investments      
            
 
Summary
  • The key to the gold trade lies in the true nature of the US economic recovery.                
  • The most recent jobs report was not as strong as it may seem and looking beneath the numbers reveals a lot of problems in the economy.
  • Falling commodity prices also reveal a lot of economic weakness as we would expect them to rise in a strong economy and not fall.
  • Falling commodity prices, a rising US Dollar, and increased debt loads put pressure on debtors and suggest the potential for a debt crisis into a Fed taper.
  • Gold is what investors would want to own if we start to see debtors default on obligations.
Everyone has a plan until they are punched in the face

The quote from Mike Tyson is probably very relevant for those invested in gold, as gold investors are certainly feeling like they have been punched in the face and their whole plan has unraveled.

With another down week for gold (the 7th in a row based on the Tuesday COT London fixes), many gold investors are ready to throw in the towel and dump their gold and mining stock investments. The plan hasn't worked and maybe its time to call it quits on gold and jump on the next Ali Baba (NYSE:BABA).

Is the gold bull dead?

We think the answer is actually fairly simple and it all depends on one thing - the US economy.

The Strong US Economy

Many of the reasons why pundits are calling for gold to go down lie directly or indirectly with the conclusion that the US economy is improving. This was clearly evidenced on Friday, October 3rd, when a "strong" jobs report sent the stock market up over 200 points while gold dropped close to 2%. Logically this makes sense as a strong economy means that investment opportunities are abundant and the opportunity cost to holding gold is high.

The first thing that we will say is that even though the jobs report was interpreted as "strong" by the media and markets (or at least the algorithms that make up markets nowadays), there is much more behind this number that is not as strong as it seems. We'll let David Stockman summarize it:
My favorite number is right at the top of the BLS table and it's 155.9 million. That is the civilian labor force number for September and it compares to 154.9 million reported for October 2008 way back when the financial crisis was just erupting. The reason that rather tepid gain of 1 million labor force participants over the course of six years is important is that during the same period the working age civilian population (over 16 years) rose from 234.6 million to 248.4 million--or by 14 million in round terms.
So over the last six years we've seen the employed portion of the labor force increase by 1 million people, while the actual amount of people that are "employable" grew by 14 million - not quite the rosy picture that all the jobs hype portrays.

In fact if we were truly seeing a strong economy and growth we would expect to see rising commodity prices - after all energy and commodities should be being used more by both industry and consumers. But that's actually the opposite of what has been going on in the markets. Commodity prices such as oil, corn, soybeans, wheat, platinum, iron, copper, or name your commodity are all down significantly. That doesn't add up at all as all of those things (especially energy) should be used more in a recovering economy - these are all things that suggest that we're seeing a recession.

Even the rising stock market isn't all that it seems. Stock market volumes (including Friday) are still extremely low and the breadth of stock market gains (the number of all-time highs versus lows and rising stocks versus falling stocks) is actually very, very limited. This suggests that market participants are piling into a few gainers (or indexes), which does not suggest that the economy is recovering as we should see many different industries and companies firing on all cylinders.

Finally, in a recovering economy we shouldn't see bond yields fall to new all-time lows as the stock market rises.


As is evident on the graph above, investors have been piling into treasuries even as the stock market has risen (Friday was another day of rising markets and falling yields) - not very logical when treasury yields for 30 year bonds are at 3% and approaching generational lows. This is despite a Federal Reserve taper that should end sometime in the next few months. Does this suggest a recovering economy with plenty of opportunities for investment?

If we're not seeing an improving economy, then why are markets so strong?


What we think is happening is that we're seeing markets driven by algorithms as money flees to the US. Investors should take a look at the US Dollar index (represented by ^DXY):



Since July it has been rising at almost a parabolic level from close to 80 to almost 87 in a 3 month timeframe - that is a huge move for the most widely held currency in the world.

That suggests that a lot of money is extremely scared and is selling out of other assets into dollars. We know that Russian outflows have been severe, but we're seeing the same thing in Asia, South America, the Middle-East, and even Europe - which is strange because if the world economy were improving we should see money flow into international markets not out of them.

Investors should also remember that in our globalized world we cannot have a US recovery without a global recovery - the economies of the world are too intertwined for that. Even if US consumers were different from everyone else around the world and were strongly recovering, their spending would work its way into emerging market economies through imports of goods (the US is the largest importer in the world) and we should expect to see their economies improving. Again, we're seeing none of this.

What this all seems to suggest is that money is fleeing home and international investors are sending money to the US and thus are strengthening the US Dollar while not helping the real economy.

So What Does this Have to do with Gold?

This is very important for gold investors because one of the biggest reasons we'd sell our gold and gold investments is that a strong economy would reduce the needs for financial crisis insurance - the primary reason we want to own gold at this time. If the economy is improving then it is much more profitable to put your money into real assets and businesses that generate returns, exactly the strategy in the 1980's and 1990's as the world went through the technological boom due to the spread of computers and the internet.

But if the economy is not improving and strong markets are a low-volume algorithm generated mirage, then the next crisis is already brewing. This is the case that we think we're seeing and we believe that it will be made even worse as the Fed is expected to end its quantitative easing program by the end of this month. That means that the free money that the Fed injects into the economy will no longer be available to mask its weakness, and the economic warts to be visible to all - falling commodity prices are telling the true state of the global economy.

That's where gold comes in because it provides investors with that economic catastrophe insurance - you may not know exactly how things will go bad, but if they are then you want to own some gold. This is especially the case when the primary thing that we're concerned about going wrong is related to debt - because gold is the ultimate alternative to debt.

In fact it's the soaring debt loads that we believe started the gold bull market in 2001, and we believe that's precisely what we're going to see in the future - which will be brought much sooner as the Fed tapers into what it perceives as economic strength, when in reality it is economic weakness.

Falling commodity prices are already putting significant pressure on producers that range from farmers to frackers (the US Energy department recently issued a warning about growing fracker debt loads), and couple that with the rising US Dollar that is putting major pressure on dollar debt loads of foreign companies and countries, and you have a recipe for default. If that wasn't enough, investors should pay close attention to a recent Geneva Report, which is aptly titled "Deleveraging? What Deleveraging?", which shows that global debt loads have INCREASED not decreased over the past few years - we're not deleveraging at all.

We don't know how it will all start, but all it takes is one debtor unable to pay and forced to default to start a cycle of worries - exactly what happened in 2008.

Conclusion for Gold Investors

So it all comes down to whether or not the US economy is improving and on the mend. If you believe it is then there is little reason to own gold as opposed to stocks. But if you believe that the US economy is not as strong as it seems, then we're in for some major problems as the Federal Reserve stops its quantitative easing.

As we explained above, we believe that the economy is not recovering and the best evidence for that are plummeting commodity prices across the board. This is all happening as debt burdens are growing - what happens when interest rates rise?

In fact, we don't need to see rising interest rates for a credit crisis, as debt burdens are already very large and growing - all it takes is one catalyst (lower commodities, energy, a war, etc) to lose confidence. As Kenneth Rogoff and Carmen Reinhart said in their excellent book about financial crisis, This Time is Different:
Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence - especially in cases which large short-term debts need to be rolled over continuously - is the key factor that gives rise to this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits.
Gold therefore provides "bang" insurance - it is what you want to own if confidence is lost.

That's why we believe that investors should continue to accumulate physical gold and the gold ETF's (GLD, PHYS, and CEF). Investors interested in leveraging this situation into higher potential profits may also consider buying gold miners such as Newmont (NYSE:NEM), Goldcorp (NYSE:GG), Randgold (NASDAQ:GOLD), the Market Vectors Gold Miners ETF (NYSEARCA:GDX), or any of the other gold miners. Though we always caution investors that gold miners are not necessarily an investment in gold - make sure you do your research before you invest in the miners.

We want to close with one important point about markets - they do what the least people are prepared for them to do and the same applies to the gold market. The same investors that saw $2000 or $2500 gold as a certainty are now either long out of gold, or are so pessimistic about gold's prospects they will sell as soon as it rises a little bit. Others are waiting for gold's descent to stop and things to become much better before they buy back in - and even then only in small tranches.

Then is there a more opportune time for gold to disappoint the most investors than if it rockets up higher in price now?

Most gold investors have gone by the wayside as the punches have accumulated, but for the few that can take the punches and still focus on their plans with patience then there may be a bright future - it certainly would not be crowded.

0 comments:

Publicar un comentario