A View from the Trenches, December 7th, 2009: "Gold is put to the test"
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It’s Monday morning and I expect that you will have already digested
Friday’s action, that you will have had enough time during this weekend
to think over what just happened two days ago.
The release of US labor market data gave a final touch to the
discussion over whether there is or not an ongoing recovery, with weak
consumption. The so-called and feared jobless recovery, where
consumption would remain weak as unemployment remained high, seems to
have faded in the mind of investors. With this, the expectation of “low
rates for longer than expected” seems to have muted into a “low rates
for a certain and limited period”. Gold sold and sold dramatically,
dropping from $1,226/oz intraday Thursday to $1,049 intraday Friday. Of
course, the S&P TSX Composite Index (Canada) took it on the chin.
Today, instead of giving answers, I want to suggest some observations that bring up what I think are relevant questions:
-Interestingly enough, the Euro lost against the Canadian dollar on
Friday. At the close of Thursday, a Euro bought 1.5910 CAD. At the
close of Friday, a Euro bought 1.571. However, European equity markets
had gained over 1%, while the S&P Toronto Stock Exchange Composite
Index had lost -1.08%. If we remember that on Thursday, the European
Central Bank had decided to leave interest rates unchanged… What do we
make of this?
-Gold held very well immediately after the announcement that Dubai
was considering restructuring the debt of Dubai World. Yet, some mildly
positive news out of the US labor market sent gold 5% down intraday on
Friday. At “A View from the Trenches”, I have held that gold’s price
has been a function of the degree of coordination in global monetary
policy. But, we can still ask ourselves if gold is actually a hedge
against inflation or against chaos…
The US yield curve steepened on Friday, signaling “wise” money is
getting ready for a change. If commodities sold off on Friday on fears
of an earlier than expected increase in interest rates, why would that
negatively have affected the Euro? Would Europeans not happily increase
rates too?
From a fundamental perspective, the disparity in the USD and Euro
outlook can only be justified if one assumes that productivity
increases will match interest rate increases better in the US than in
the Euro zone. Note that I did not say that productivity would change
faster or slower in the US vs. Euro area. I said that the changes in
productivity would match better the changes in interest rates in the
US, rather than in Europe. Now…how true is this statement? Is the US
increasing productivity or is the USD only lagging other currencies,
given that it had been massively oversold? There are problems in the
Euro zone, with countries like Greece, whose fiscal deficits are
unsustainable…But we could also talk about California. How can we
blindly adhere to a fundamental view these days? How can we ignore the
technical damage done to gold on Friday?
The end of the year approaches and I do not think we can see
catastrophic moves. I will wait and see. But come January, and you’d
better be ready to fly low, because it will be open season…
One last thought:
In 2009, Gold was NOT profitable when there was global coordination
to lower rates. Gold became profitable when the coordination broke,
with central banks keeping rates low, while others increased them. If
the Fed started to increase rates sooner than later, would that
increase be “coordinated” with other countries? I think the answer is
yes, but not because the Fed sought to coordinate, but because the rest of the world would play along. According to our Thesis No. 2, with this coordination, gold should underperform. Thesis No. 2 is being tested right now.
Martin Sibileau.
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