The Job Numbers Were Bad - But Apparently Not Bad Enough

On Friday Non-Farm Payrolls for June showed an increase of 80k versus a (revised upwards) expectation of 100k. Not surprisingly the stock market sold off on the news, but eventually closed less than 1% down on the day. The US economy is growing very slowly but it is nevertheless growing. Which in some sense is a bad thing, as it means that Big Ben will probably not have an opportunity to come to the rescue with another round of Quantitative Easing.

Commodities Super-Cycle Revisited

Back in January we wrote a post highlighting that money has now started exiting commodity funds for the first time in the past ten years. (See Commodities Super Cycle Reversing Course.) This event has proven quite significant, as can be seen by observing the price action of most non-agricultural commodities this year. Gold and Oil are down significantly year-to-date, despite continued calls for a rebound by commodity bulls.

It is quite clear that something fundamental has changed. For example Oil is still very much correlated with equities, but despite Friday's massive bout of short-covering, it tends to go down

The Gold Bubble has Burst

By now it is clear to everyone that there is nothing fundamentally "safe" in Gold or any other precious or industrial metals. As a non-productive asset its value is only based on expectations of future demand. There is nothing inherently wrong with that, if the demand was real - say for jewelery or industrial uses. However when an investment's value is only derived from expectation of even more investments chasing the same asset, it becomes pure speculation. Or to go to an extreme, even a Ponzi scheme.

FOMC Statement Punishes Gold, Boosts Stocks

The guardedly upbeat comments in the March FOMC report yesterday pushed equity markets to new multi-year highs. At the same time Gold bugs were disappointed by the lack of any mention of QE3. The statement starts with the following comments about the general economy:

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further

As discussed in a previous post, recently Gold has been trading as the anti-dollar, mostly swayed by the

Gold Fails to Recover from Bernanke Shock

In the end of January, the price of Gold received a large boost when the Fed extended its prediction of zero short term rates until the end of 2014 (a year longer than previously announced). The market started pricing in another round of quantitative easing but those hopes were dashed with Bernanke's testimony before Congress last week. After a fast 5% drop, inevitably bids came in, but the bounce was short-lived. Given the strength of the US economy (relative to other developed countries) it looks like the need for Gold as a hedge against monetary collapse is becoming less pronounced. It is

Commodities Super Cycle Reversing Course

According to this Reuters article,

Last year had the lowest commodity inflows of the past nine years, with fresh investments dropping almost 78 percent compared with 2010, Barclays Capital said on Thursday.

Investors in precious metals and energy had a very volatile experience in 2011 and many are wondering if it really is the sure bet that they expected. For example Gold has had a big rollercoaster of a ride and Silver has been even more volatile (see a previous WhatIf post Gold Appears to have Lost its Shine for more details on the metals).

With Beijing trying to rebalance China's economy away from investment and towards consumption, the huge bursts of residential construction and capital investment may be behind us. As we have seen before, construction is unlikely to be picking up anytime soon and if China is headed for a slowdown, demand for most industrial commodities will drop considerably. Barclay's prediction of volumes and prices picking up notwithstanding, it appears that the market has reached a turning point in its 10-year cycle.

Gold Approaching Sell Target of 1650

In a WhatIf post from a week ago we were expecting a bounce in the Gold market with a sell target of around 1650. Spot bullion is now trading at 1635 with daily RSI in the 50's. We are approaching the target and Gold is no longer oversold so it would be appropriate to consider the timing of an entry. Recently the metal has been trading with a positive correlation to equities, and yesterday the S&P500 printed a new multi-month high, so we should wait for a change of sentiment in the equity market before establishing a short in Gold.

Technical Bounce in Gold To Present a Selling Opportunity

The metal has bounced from a low of 1522 reached in thin trading in the last few days of Dec. The precipitous drop from a Sep high of 1920 had taken it into oversold territory amid anecdotal evidence of large funds reducing positions into year-end. There will undoubtedly be fast money playing the bounce, but should it trade into the 1650 level this would present a good selling opportunity. The fundamentals for Gold continue to be quite negative, with the world's biggest consumer, India logging a 50%+ drop in imports in the third quarter of last year (see Reuters article). The US dollar was the first major currency to suffer from the effects of quantitative easing but will arguably also be the first to recover. Since Gold has been heavily used as a bet on the de-dollarization of the world economy, one of its main investment functions is also waning.

Even Soros is Bearish on Gold

Without making this too much of a victory lap, I was delighted to read Soros Sees Gold on Brink of Bear Market on bloomberg. While he has been wrong in the past, the words of one of the most famous contemporary investors can not be ignored. At the same time, most analysts are still bullish, which is good, as usually everyone being on the same side should be a cause for worry.

Is China Calling the End of the Gold Bubble?

PBOC has announced that all Gold exchanges except for the 2 main ones in Shanghai are to discontinue operations (see the English language US edition of China Daily). It thus forcibly consolidates the market within a few large players, that are easier to monitor and control by the authorities. So far nothing new. The Chinese government has always operated this way in regards to any politically sensitive areas of the economy such as banking, insurance and most recently rare earths exports.

The timing, however, is quite interesting. Gold has been going up and investor interest in it has been building for the past 10+ years. However the regulation tightening only comes now that the market has experienced a few major hiccups (see previous WhatIf posts on Gold below, also FT article on recent sharp decreases in Gold ETF holdings). Beijing probably fears a public backlash should Gold continue to collapse, causing large losses to naive individual investors. The memory of the vocal protests before the building of the Stock Exchange after the Shanghai Composite dropped from its lofty heights in the end of 2007 must still be fresh in their minds.

Bearish Contrarian Signal on Gold - Popular Press Still Very Bullish

Once again the popular opinion is probably guilty of error by extrapolation. Everyone is asking not if but when Gold will reach $2000 / ounce. This is always a very worrying contrarian sign as it means nobody is even considering the opposite possibility.  "New year offers gold another shot at $2,000" on MarketWatch.com offers no specific reasons why this should happen at all, but rather explanations why it hasn't yet (the assumption being that at some point it somehow _has_ to). Even though Gold is currently tracking the equity markets, the piece claims that a European collapse should trigger a massive spike and not a selloff in the precious metal. It makes you wonder, especially given the -10.5% loss that John Paulson's Gold fund has racked up this year according to Bloomberg despite the 13% rally in bullion year-to-date. It may be that the gold miner stocks that he owns are pricing in the uncertain future demand better than the spot market.

Gold Appears to have Lost its Shine

For the past 10 years Gold prices have only gone up. Many have been quick to call it a bubble, only to be proven wrong time and again, but it looks like they will finally get some redemption. For many years only professional investors cared about the price of Gold. That slowly changed and in the beginning of 2011 the mainstream news was extolling its value as a hedge against inflation, deflation, credit risk, dollar debasement and just about anything else. As Gold prices had already gone up "too much" the popular interest drove a mini-bubble in Silver, with "poor man's Gold" almost doubling between the end of Jan and end of Apr 2011.

Then the 1st Silver Shock occurred on May 2nd, driven by the CME significantly hiking margin requirements. It dropped about 33% in a few hectic sessions, but the impact on Gold was limited (-6%). Gold closed on May 9th at 1470 and in fact kept rallying to an all-time high of 1920. This level was reached in late August (and tested again in early Sep) in the aftermath of the global sell-off triggered by the S&P downgrade of the US credit rating. So far so good, but the next time around it was different.

Silver never recovered to the April high and when the 2nd Silver Shock hit on Sept 22nd, it dropped as much as 35% in 3 days. This took Gold down from 1780 to 1530 (intraday low) for a drop of 15% and while it slowly recovered to the 1800 level Gold had lost its aura of a super-hedge and became an asset like any other. Since then it has been moving in lock-step with the S&P 500. With current price at 1570 I would not go near it unless it drops to the 1000~1200 range.