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Guest Post: Bucking The Trend
Submitted by Contrary Investor
It should
be absolutely plainly obvious to everyone at this point that the
direction of the dollar and many an alternative financial and
physical asset class have been very highly negatively
directionally correlated for some time now. This
has been especially true over the last year of economic and
financial market volatility and has been nothing but reinforced
lately with the dollar assuming the role of global carry trade
vehicle (notice how much foreign sovereign debt has been dollar
denominated lately?). It
should be no surprise as the
US
government has coincidentally been in the process of betting the
fiscal and monetary ranch with its historic and unprecedented
stimulus efforts. And
at least according to the CBO (Congressional Budget Office)
estimates for the forward US deficit released a number of weeks
back, this is not about to stop any time soon.
So the rise in many an asset class nominal price is as much
about adjusting to and reflecting the reality of a declining
dollar as it is about anticipating improving asset class specific
fundamentals.
From
a global perspective, in June we watched
China
sell the greatest dollar amount of Treasuries in one month on
record, albeit a somewhat less than stunning 3% of their total
holdings. So far, this
is a one off event. Also
on the global scene, the election in
Japan
last month may also mark a shift in policy regarding Japanese
holdings of US dollars; we’ll just have to see how it all works
out. In
Japan
, the landslide election of the DPJ (Democratic Party of Japan)
was more a refutation of the LDP (Liberal Democratic Party) than
an overwhelming affirmation of the DPJ, but the fact is that the
DPJ has made noises about wanting the
US
to repay its borrowings from
Japan
in Yen. The DPJ has
long criticized the LDP for its “closeness” to the
US
. Not exactly a dollar
positive comment or political backdrop, now is it?
And lastly as it pertains to the near relentless “adrift
on a sea of government-sponsored liquidity” US equity rally of
the moment, the very simple chart below simply confirms the
importance of this negative directional correlation to the dollar.
Although this relationship may be broken some time ahead
for all we know, it sure seems to imply
US
equities require a weakening dollar for further northward
movement.
It’s time
we get to the point of the discussion – gold.
We all know that the dollar peaked in early March of this
year and has been declining since.
Accompanying this decline has been the rise in equities,
commodities, etc. But
the one asset class that most folks certainly would have expected
to run counter to the very meaningful dollar decline since March,
gold, has effectively gone nowhere over this period.
The chart below is pretty darn clear on the subject.
And we’re pretty sure gold investors far and wide are
plainly aware of these circumstances.
This has
prompted a number of folks to begin to question whether this
divergence means gold may be topping?
Is the negative correlation linkage with the dollar being
severed? Is this more
than evident divergence a major warning sign for gold as an asset
class? As we see it,
there are two issues occurring here.
First, we need to realize that over the last year, gold as
an asset class has been part of the “safety trade”.
Believe it or not, very much the same role US Treasuries
played amidst the deleveraging and panic move to supposed safe
asset classes late last year and early this.
The chart below exemplifies this a bit.
We’re looking at the yield on the 30 year US Treasury
alongside gold itself.
Very
highly directionally correlated since the March-April period of
this year. So in one
sense gold has really acted like a champ in the broader context of
market movement given that safety trade assets such as Treasuries
have done very poorly this year as investors have quickly moved
back into risk assets as the key thematic macro trade.
Although it may sound crazy, gold essentially standing
still while the world rushes back to risk oriented assets and
shuns safety/panic trade investments has been a major win.
After all, if the global economy, credit markets and
financial markets are now in the midst of confirmed healing, why
hold the “insurance policy” that is gold?
With the pun clearly intended, gold has been one of the
few, if not the only, assets bucking the trend of the movement
away from the safety trade. We
believe this is a very important message.
And
this leads us to our final and hopefully meaningful observation of
the moment concerning what may or may not be to come over the next
six months or so in terms of gold.
As we see it, gold is running smack into two very important
historical trends dead ahead, one seasonal and one cyclical.
Although this is not new news to anyone, the historical
calendar period of seasonal strength for gold the metal is the
September through February six month period.
That begins now. Four
decades of average monthly historical price experience lie below.
This
is more than well known.
The
second and probably more important “cyclical” issue that gets
little to no headline attention involves investor perceptions and
behavior also in the period directly ahead.
As we have been harping on in many a recent discussion, one
would have to be living on a desert island not to know that the
US
will print a positive GDP number for 3Q.
We’ve been detailing all the specific reasons why (car
sales, car manufacturing, improving trade numbers, etc.), so we
will not drag you through them again.
That being said and directly to the point, history also
tells us that in terms of economic cycles, gold does not perform
so well in post recessionary environments.
Big surprise? Hardly.
Again, in economic recovery environments, safety trade
assets are shunned in favor of risk assets.
Isn’t that what 2009 has been all about?
Simply institutional investment management 101.
The following table details exactly what we are describing.
We’re marking the price performance of gold the metal in
the three, six, nine and twelve month periods following each
official
US
recession conclusion since 1975.
As
is clear, except for the post 2001 experience, gold has been lower
in every twelve-month period following recession conclusions.
As you’ll remember, post the 2001 recession, the economy
and financial markets remained very weak until early 2003, so we
can understand the strength in gold post 2001 recession end as a
continuation of the safety or insurance trade during the period of
continued economic and financial market weakness that followed.
But in the bulk of historical post recession cases, gold
moved markedly lower. We
fully realize that post the recessions of the early 1980’s, gold
was still descending from its prior cycle spike price peak, in
sympathy with a US economy moving from an inflationary to a
disinflationary macro environment.
But by the time the 1980 recession came to a finale, gold
had already fallen close to 30% from its prior peak.
The table delineates the fact that in the twelve months
post the 1980 recession, another 35% was lopped off the price of
the yellow dog, so we take the post recession experience of gold
in the early 1980’s as being a valid historical marker of
investor behavior regarding the metal in post recessionary
environments.
So
in the six months ahead, gold encounters calendar based seasonal
strength. Running
counter to favorable seasonal tendencies is theoretical price
pressure in a post recessionary economic environment.
Our thought here is that over the next six months-plus gold
may indeed be a key marker of the character of the supposed post
recession economic environment.
IF gold prices continue to remain firm, or perhaps even
indeed move higher, gold will be suggesting to us something is
very different relative to historical post recessionary cycle
experience. This will
be the first post recessionary environment to occur amidst very
meaningful global economic change, early glimpses of this being
found in the post 2001-recession period.
We’re entering an environment where the emerging and BRIC
economies will have much more of a meaningful impact on global
economic outcomes than at any time in modern history.
A period where the large industrialized economies are to a
point marginalized on a comparative basis.
Although
these are our personal “guesses” at this point, gold possibly
marching to new highs would be a warning regarding a number of
potential outcomes. New
breakout highs on gold would be suggesting financial sector
deterioration/disruption has not concluded.
You’ll remember our last month’s discussion wherein we
described the commercial real estate issues that surely are
bearing down on financial sector balance sheets.
Gold ascending counter to a post recession weakness pattern
would be suggesting US authorities have overstepped their fiscal
and/or monetary bounds. Or
perhaps gold would be clearly signaling by price divergence that
the inflationary seeds the Fed/Treasury/Administration have
certainly planted will soon turn to “green shoots” themselves.
Although we did not do this on purpose, one post
recessionary period for gold we omitted in the table above was the
post 1970 recession (ended November 1970).
You’ll remember that in August of 1971, Nixon closed the
gold window. In the
three, six, nine and twelve month periods post the 1970 recession,
the gold price rose 3.9%, 9.3%, 8.9% and 16.7% respectively.
Did gold see the inflation of the 1970’s coming head on
at the time? Sure
seems that way. In
short summation, stay tuned. Watch
gold and its price reaction in the post recession environment to
come. It’s in the
divergences relative to historical experience, if they occur, that
the important messages will be found for the current cycle.
In fact, this is one of our primary focal points of the
moment – divergences. Gold
just may become quite the very meaningful macro economic character
marker that few seem focused upon for this reason. But if
indeed gold tells us something very different is afoot in the
current cycle, it will also have direct implications for equities,
fixed income assets, etc. and the investment community in general
that have been trying to discount a typical post recessionary
outcome for a good number of months now already. Gold as the
very important report card? Exactly.
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Gold is not going down simply because nobody is bullish on the economy long term.
This is the most perverse increase in GDP ever and everyone knows it.
Fantastic analysis from an OECD perspective. I like the emphasis at the end on divergence from 'norm' being key, and this:
"IF gold prices continue to remain firm, or perhaps even indeed move higher, gold will be suggesting to us something is very different relative to historical post recessionary cycle experience. This will be the first post recessionary environment to occur amidst very meaningful global economic change, early glimpses of this being found in the post 2001-recession period. We’re entering an environment where the emerging and BRIC economies will have much more of a meaningful impact on global economic outcomes than at any time in modern history. A period where the large industrialized economies are to a point marginalized on a comparative basis."
A new normal? In our little household our buying/selling has followed Beijing more than US/UK for the past few months, and it is paying off. A slow, gradual rise in the gold price, with 'dips' and pullbacks along the way, to allow peasants like me and a heap of Chinese to 'buy the dips' and gradually accumulate (for a slow increase in net worth), which seems to perplex some commentators who are used to sudden spikes and breakout patterns along with sudden cliff-drops, driven by hedge funds and other big purchasers. But Beijing did forecast exactly this kind of movement a few months ago, for those of us who were listening.
Too soon to say if this nice gradual (controlled?) rise is the new reality for gold, or a pattern that will veer out of control if more 'big boyz' jump in, but so far so good for me & my husband (selling at the higher points of metal prices, buying dips, using currency trades to finance our gold/other asset buys). Whatever works, I guess, but this article sort of puts the 'meat' of explanation for me on a strategy we've been following just from seeing a trend.
Thanks for posting this.
There could be some forward-looking validity to that part of the gold discussion, IF one were to believe the prevarications espoused today that we have now truly entered a post-recessionary economic environment. In truth, we have left the recessionary environment. Problem being that we are in a depressionary environment. True statistics (not those that count as the Federal drivel) will one day show that we have already entered this depression and it is about to hit the fan in fairly short order. I can't claim "gold-bug" status; however, as a pragmatic realist with a bent towards capital preservation, I like my chances holding physical gold and silver out several years, at least. Credit/solvency crisis (deflation) when it begins/continues in earnest will evolve into and ultimately beget a currency crisis (inflation/hyperinflation).
"New breakout highs on gold would be suggesting financial sector deterioration/disruption has not concluded."
ahah
"You’ll remember our last month’s discussion wherein we described the commercial real estate issues that surely are bearing down on financial sector balance sheets. Gold ascending counter to a post recession weakness pattern would be suggesting US authorities have overstepped their fiscal and/or monetary bounds."
ahahah
"Or perhaps gold would be clearly signaling by price divergence that the inflationary seeds the Fed/Treasury/Administration have certainly planted will soon turn to 'green shoots' themselves."
ahahahahaha
"But if indeed gold tells us something very different is afoot in the current cycle, it will also have direct implications for equities, fixed income assets, etc. and the investment community in general that have been trying to discount a typical post recessionary outcome for a good number of months now already."
ahahahahahahahahaahahahahahahahaahh
W
I've been reading "Contrary Investor" for years and wondered if I was the only one. If there was only one financial letter I'd read, "CI" is it.
Or it may be telling is the "recession" isn't actually over yet.
Instead of calling it post-recessionary, I dare refer to it as pre-revolutionary.
The writing is on the wall. We keep staring at it, hoping for it to change. It changes for the worse. We stare some more. We hope. We reference our fabulous pasts. We keep worrying. We act. Defensively. Repeat cycle.....
Preparations for Kondratieff Winter occur during Au-tumn
Indeed something is very different relative to historical post recessionary cycle experiences. That difference would be related to an awakening of the slumbering working man/woman. The difference would be others realization that paper assets are a risky game not worth "investing" in. The market, its functions, and the investment options available on the crock market are subjects that are difficult to follow for the everyday Joe.
For an individual that actually is working to drive a productive economy through saving and working are too busy saving in working in order to play the market. Two things have to happen for someone to be able to invest on Capital Hill/Wall Street. One - they have to take time to read financial statements of the major publicly-held companies in the US and two – they would have to interpret that information correctly and determine is profits were meeting share prices, etc, etc, shit I don’t know. Another option is for that person to rely on some advice from a 401K specialist offered to them by their company, the media complex of paid talking heads or venturing off on thier own to find a financial "expert” to invest for them. If they chose the latter option, they are basically abdicating their personal profits realized after being productive in their world.
It’s quite amazing to have any personal profits anymore anyway. You have the theft of personal income through mandatory health care for the elderly (MediCare - insolvent), We also have theft through the mandatory retirement and its required funding stream (Social Security-insolvent). Theft through mandatory bailout/military and its funding stream (Federal Income Tax – 100% of 2008 Federal Income Tax Theft was spent on the military industrial complex and corporate welfare - Max Keiser). All of this is stolen by your friendly Federal bottom-feeding cunt.
Since these fucks find it hard to continue to impose direct tax theft schemes upon us, they turn to tax-incentives to con you into their other funding stream shenanigans. When an individual takes the time necessary to understand how they are being fucked by a system that through them overboard years ago, no amount of tax incentives will entice these people back to the paper money scam that is the United States. The difference lies here, for me at least and I am a moron.
It is quite easy to understand the correlation between gold and fiat currencies. Federal Reserve Notes (paper dilution and off-balance sheet shadow debts) and stock certificates/shares (paper dilution and off-balance sheet shadow debts) can be reproduced at breakneck speed. Gold cannot. If you have more paper flying around and not as much gold, then more paper will be required to get that same amount of gold. It is quite an easy process to understand.
Many individuals are deciding that even after all of the theft by the Wall Street Politicians, anything they can still claim as personal profits will no longer go into these paper scams. I am not trying to play any market; this is not a fucking game. I just want to be left the fuck alone and gold will help to achieve that. Many millions more are coming to this realization. Some have acted and others are on the sideline trying to figure out who is right. The establishment’s lies are no longer working. Soon more will follow, because once you come to this reality, you will scream it to all you know, all the time, and damn the consequences. The seeds are being planted by many people like the ones we see around us in this board. Those of us who see this reality can NEVER go back to the haze of yesterday and thank goodness for this.
I can really identify with the telling everyone part.I have warned friends about bubbles for years, and the reaction is usually one of "you are being negative".But today, the ground is more fertile.It is one of the most effective things you can do...just point out the truth.The banks are zombies.The negative value of the derivatives is many times the GDP of the US.We need to reinstate steagall glass, and send many now prominent people to prison.If enough people become aware we can produce change.I tell anyone who shows the slightest interest about Zero Hedge...because the truth matters, and the criminals can only operate while they still are in the dark.I could not care less if people think I am a crank...it is more important than what people think of me.
After a time, the truth becomes obvious.And then they get angry.And want to do something....
And you are right about never going back.Being aware of the truth and living in it is so much better than living a lie.
.
+ POMO
.
When the music stops, a chair of gold can be sat in--one of paper cannot
There are two ways gold needs to be examined: one, where you are holding most or all of your financial assets denominated in U.S. dollars, and one where you are not.
If you are holding your assets in dollars, and if you believe we are experiencing a reserve currency shift (that has only just begun), then yes by all means get the hell out of dollars. If your assets are denominated in a sovereign fiat currency issued by a central bank populated by monetarist idiots who report to government B schoolers whose name rhymes with "Bummers", then yes by all means get the hell out of your sovereign fiat currency.
If you are holding your assets denominated in a well-managed stable currency, issued by a sovereign authority not bent on perpetual theft-by-inflation, then by all means keep your assets.
What's that you say? There are no such well-managed stable fiat currencies?
Bummers.
A thin and unsatisfactory piece of analysis. Discussing "topping" of gold price while ignoring price suppression courtesy of bullion banks (www.gata.org) is odd. The author mentioned Japan's increasing (post-election) amerophobia but none of the other host of profound geopolitical changes occurring such as death of petrodollar (fisk piece etc), sinorussian (BRIC etc) currency trades/barter swaps etc. All of these have bearing on the price of gold.
"Post-recessionary" does indeed imply that we are through the worst which is imbecilic at best.
Hhhmm.... a strange little essay defined more by what it did not discuss than what it did!