Gold

[rffrydr]

Gold measured in houses:

[rffrydr]

Inflation hedge?

http://www.ft.com/cms/s/0/7775ec54-51fb-11dd-a97c-000077b07658.html
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

BCA getting more bullish on gold:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080812.GIF

[Odysseus]

Hi Henry,

I love the comment from Jimmy Grant about Gold. He called it 'the value investors guilty pleasure.' That boy can turn a phrase.

Personally I don't trade stocks, commodities or bonds. I trade only prices and it is good to know that the price of the barbaric relic may be getting close to an inflection point once again.

My preferred toy is PMPIX. FD- no position yet.

Gold was the last to roll-over. My beloved stuff stocks are getting close to fire sale prices. I own the stuff I hate (long market ETF's) but get all tingly when metals, ag and energy go into free fall. I feel like my wife at a Nordstrums 50% off shoe sale. Actually she shops at Steinmart. Big Dif.

The defination of a Spenglarian Pirate. 'One who intervenes amongst the enterveeners and gambles with money as a ware.' I guess I be one.

I hate gold. It pays no interest. Gold is not a colour but a luster. I may soon lust after that luster.

Sorry, wrong thread but my bride (of 37 yrs) is downstairs watching the Peking Olympics. What a hoot! An international panem et circeces. Amateur? athletes at their best. Paid from whatever government larder or sponsered by overpriced jock strap sellers. The last truely amateur athlete was Al Oeter, one of my boyhood heros.

No offense to China, but a REAL country would shun that staged media
event like the plague. Maybe they can recycle the metal stadium. To pay that price for some measure of legitamacy to me is demeaning.

Thanks for the update from BCA. I have always paid attention to their work. Often wrong but objective and thourogh. (SP)
The PM's are wares to we Western financiers. Other civilazitions cherish them for an historical, cultural bias. So, they have our dollar/digits and may buy what they wish.

Regards,
Bad speller person
_________________
Psychic with Alzheimers. I can predict what I will forget.

[HenryTo]

Hi Odysseus,

Thanks for your message. I will write more about gold tonight. Commodities in general are funny animals and gold elicits an emotional response that cannot be any more different. Gold has been in a six-year bull/momentum run - but as AQR has pointed out, momentum has worked wonderfully well in the commodities arena for the last decade, while value (buying losers over the last five years) has been a losing strategy (although it worked from 1990 to 1999).

The run in gold is no doubt extended but the momentum is still in place. In fact, assuming that crude oil or industrials commodities break their uptrend over the last six years, then gold may be the remaining major "commodity" left that is still in an uptrend. This means investment dollars will shift into the long side of gold (FWIW, hedge funds are now net short crude oil). That being said, the elephant is the ECB and they're still quite hawkish, and I don't see them adopting an easing bias until the Euro Zone starts to flirt with recessionary numbers and until crude oil declines back to $100 a barrel or below. No doubt the ECB is keeping an eye on the price of gold as well.

Best regards,

Henry

[Odysseus]

Hi Henry,

Thanks oodles for the gold update. Very timely too.

I'm probably the most incompetent technicals person in the room but over the years I've had the profitable pleasure of cultivating the acquaintance of some cracker jack Chicago traders. They don't think like us 'normal' folks.

Just a few observations. Look at the chart of the CRB and notice the inflection point in August a year ago. The panic by the FED gave good cause to expect significant rate cuts ahead with the comcomitant expectation of increasing inflation. Whoosh, off to the races for the next 11 months or so.

The current consensus among those I trust is that except for periodic oversold short covering rallies, commodities, perhaps with the exception of gold and some grains and meats, will remain in cyclical downturns until the perceived resumption of growth in the OECD countries.

A few potential price levels that only the brave would hazzard would be crude at $85 and gold lower. An inflection point cycle low could come before the end of the year and coinside with the beginning of the race to the bottom, ECB rate cuts and competitive devaluations.

The Chicago types are not so much black box fiddlers but use arcane stuff like Keltner channels which went out with high buttoned shoes. Anyway I've always thought of technical analysis as a windsock. These guys have good windsocks.

Just a few thoughts that I pass along from the pits. For me, I'm holding tight to my shield and bucklers.

Thanks again. Except for commodities, this is the most fauvistic market I can ever remember.

Regards
_________________
Psychic with Alzheimers. I can predict what I will forget.

[HenryTo]

Hi Odysseus,

Thanks for the update "from the pits." Highly appreciated!

I am not sure how sophisticated some of the quant funds (such as AQR) are in their commodity strategies. I do know that momentum (usually 12-month momentum) makes up a significant chunk of their "factors" - especially when it comes to commodities since that's the only thing that has worked over the last decade or so. Within all their strategies, the combination of value (P/B in the case of equities) and momentum makes up perhaps 75% of their "black box." Cliff Asness once joked that it took him a year to come up with this 75%, while it took him and his entire staff of PhDs more than 15 years to come up with the other 25% that they're using now.

Gold just convincingly broke below its 325-day moving average in overnight trading. Should gold close below $805 an ounce tomorrow, then things will look pretty dicey for gold for the rest of the year. Should gold close below $750 an ounce, then most likely the upward momentum is gone and we're back to a bear market in gold. This will of course allow monetary policy easing around the world, which I believe will be bullish for global equities first and commodities second. The first batch of the new wave of petroleum engineers is graduating next May - and marginal cost of production of oil could very well start coming down as labor supply increases and wages start coming down.

Of course, I reserve the right to change my mind next week as new information comes in.

Best,

Henry

[Odysseus]

One last comment on gold and I promise I will cook and eat this dead horse.

Seeing the alcapulco flop in overnight gold pretty much convinces me that the cyclical low is yet to come. I understand the 12 month or your 325 day moving average arguement is usually true. That said, if we are setting up in commodities like stocks in 1987, then it may look like a bear market but is only a respite in the cycle. An outside probability but possible.

I would love to see gold back to $750 (tomorrow?) or even $600. Forty percent off sales in high class stuff is rare.

The petroleum engineering graduates thesis reducing production costs is interesting for another topic. Given lead times in rigs and the increased cost of steel and pipe, labour cost is a pigmy. Maybe an influx of former mortgage originators into the roughneck pool might be of some benefit.

It is widely held that gold prices are inversely correlated to the value of the dollar. What if next time, this isn't true? In the case of the dollar, a flight to quantity. With gold, a flight to quality.

This is a growing topic in 'the pits.'

Let me know if you have any insights into the tin hat gold bug crowd. Once these gents get flushed, we may be close to a cycle low.

Regards
_________________
Psychic with Alzheimers. I can predict what I will forget.

[BlueDaze]

[dknoester]

http://watch.bnn.ca/trading-day/august-2008/trading-day-august-19-2008/#clip84424

DK
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Be careful while stuffing your pockets not to lose your pants!!

[rffrydr]

Still a few ounces of funding to be put to use before the quarter:

http://www.busrep.co.za/index.php?fSectionId=&fArticleId=4569223
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

US Mint has to interrupt sales of gold. A run on the American Eagle, that's some bullish sentiment:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCxIWL5S4le4&refer=home
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Dr. Doom has been forced into an interesting contortion on his continued buying of gold in the face of his (and mine) prediction of plummeting asian surpluses and sharp appreciation in the dollar. It's now a "forced savings" only for those with strong equity-based cashflows. Keep buying down to $600. I wonder how his retail followers feel about this?

http://ftalphaville.ft.com/blog/2008/08/20/15214/dr-doom-let-us-just-assume-the-financial-system-blows-up/
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Simons on Gold:


Gold Has Lost Its Luster

By Howard Simons
RealMoney.com Contributor
8/19/2008 6:41 AM EDT
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An email from a RealMoney reader a few weeks ago asked in part, "Anyway, are you for or against gold? It is not clear." I responded, "One cannot be "for" or "against" gold. Sometimes I'm bullish, sometimes I'm bearish. That's why it's 'not clear.'"

Because gold seems to be a religion as much as a market, this answer might infuriate some. After all, imagine the stunned silence in any religious gathering if you were to say, "Well, let me run the numbers before I decide whether I really believe this week. I did a month ago, so you never know. I still could be with you, brother."

But gold is a market and nothing more. And if I may allow myself one dig before proceeding, it is not a smarter market than any other, despite its proponents' claims in that direction. For if it were, the very smart traders who comprise that market would have acquired all of the world's wealth by now and enslaved the rest of us chumps. As Willie Nelson sang in another context:

All the Federales say,
They could've had him any day.
They only let him slip away,
Out of kindness, I suppose...

Gold's Warnings

First, you are invited to refer back to a column from early July on how gold had lost its constancy with respect to inflation and currency risks. This was a hint that gold was in trouble; when a market's behavior vis-à-vis its known fundamentals changes, its price is about to disconnect and move sharply. Sometimes, as in the case of the many bubbles we have seen in our collective lifetimes, the price can disconnect by going to unsustainable valuations.

Other times, it can disconnect and signal us the fundamentals are about to change. This was the case with gold. It was signaling that the problems of runaway inflation and dollar weakness were about to change. It also signaled something far more sinister, and that relates to the role of the federal government -- our own federales -- in the economy.

That column was written just over a week before the de facto nationalization of Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take). As more and more of our financial system becomes beholden to the federal government as a source of funds, credit, shareholder protection and management entrenchment, it is going to have to play by the federales' rules.

One of those rules could be a repeat of the 1933-1974 experience banning U.S. citizens from holding gold in monetary form (the best predictor of something happening is whether it has happened previously). That would make gold's price move to whatever level someone decided. Would that level be higher or lower? Put me down for "lower."

Many Unhappy Returns

Now let's get to the meat of the matter -- whether gold is a good investment. As all investments must be judged in reference to the risk-free rate, let's compare the long-term total return of gold as measured by backward-adjusted futures to the total returns of both three-month Treasury bills and 10- to 15-year Treasury bonds as reported by Merrill Lynch. Backward-adjusted futures incorporate both the interest rate and physical costs of carry for a commodity.



Comparative Total Returns:
Bonds, Bills and Gold

http://images.thestreet.com/tsc/common/images/storyimages/081808_simons01.gif

Click here for larger image.
Source: Bloomberg; CRB-Infotech

The comparative performance going back to December 1977 is so lopsided we have to display it using two scales; gold is on the right. The last time the total return on gold exceeded that of three-month T-bills was April 1981, marked with a green line.

How can this be so? The answer is compound interest: While bonds and bills compound, gold faces discounting, or inverse compounding. The money tied up in gold futures includes an interest rate carry, and its cumulative effect over time is an enormous hurdle to overcome.


Comparative Returns Since Aug. 17, 2007

http://images.thestreet.com/tsc/common/images/storyimages/081808_simons02.gif

Click here for larger image.
Source: Bloomberg; CRB-Infotech

What if we shorten the timeframe up considerably, say to Aug. 17, 2007, the date the Federal Reserve cut rates before the opening? Let's widen the comparison out to include high-yield and investment-grade corporate bonds as well as three-month Treasury bills and an index of government bonds of all maturities. Once again, we have to use two scales, with the short-term total return on gold dwarfing that of the fixed-income instruments.

While gold's dive over the past month is the dominant feature on the chart above, please note how it was preceded by the dive in high-yield bonds' total return. Is there some sort of long-term relationship between high-yield bonds, which are a barometer of risk acceptance, and gold?


Gold Rose as Investors Fled Risk

http://images.thestreet.com/tsc/common/images/storyimages/081808_simons03.gif


We can take the data back to February 1990. Prior to Aug. 17, 2007, marked in blue, the general relationship was defined by the price of gold itself; the green trend curve declined as gold declined and rose as gold rose. After the credit crunch started to bite a year ago, marked in red, the relationship changed. Gold shot higher as high-yield bonds stalled. Gold's current retreat is still within that trading range for high-yield bonds.

This summarizes gold's dilemma: It had everything -- and I do mean everything -- going for it. You had higher inflation, dollar debasement, huge flows into commodity-related instruments and terrible returns elsewhere, and it finally collapsed under its own weight. If the credit crunch is going to be with us for a while -- and I am afraid it will be -- global economies will contract, wealth levels will recede and the fuel for a future gold rally will disappear.

That is not being "for" gold or "against" gold. That is saying it is a poor long-term investment in a risk-averse world.
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Today is the Tomorrow you worried about Yesterday!

[Odysseus]

That was probably the sorriest piece an analysis I've seen in a few years. I don't know the guy but he is a poster person for 'Let me massage the stastics and I'll prove the world is flat.'

Loved his 'the Government can confinscate your gold at lower prices.'

The government cares not a whit about gold or who owns it. An unproductive wheat farm, maybe but not gold. How absurd.

I liked his comparing gold to the treasury bubble. The dates of the excercise are instructive as well. Peak gold bubble of 1980 and trough bonds? How silly of me to think this was just a co-incidence.

Eras come and go. Compare the world price of gold (not the $35 and ounce fraud) to bonds from 1967 through 1980. Little different outcome eh? Hows bout 2000 to now?

I'm not a gold bug nut or champion and own less than an ounce that I wear on my finger but this loonie (no offence to my Canuck bros) needs a remedial course on sums and takeaways at Miss Norma's preschool.

Gold 1974 to date...25x

Oil 1969 to date...57x

Dow 1966 to date...11.3x

Ya, I know. No dividends but I can cheat also?

In the West, gold is a ware to all but the diehards. Other cultures identify with gold differently. Since those other cultures are accumulating our assignants at a rapid pace, they might prefer gold to Gucci leather as an investment.

Sorry for the semi-rant but I hate sloppy contrived analysis. It's what makes for pendantic dullards.
_________________
Psychic with Alzheimers. I can predict what I will forget.