Roubini Turns Bearish On Gold (Again), Suggests Taking Profits And Buying Puts... Much Like He Did In December 2009
Rouibini has never been much of a fan of gold. Which is why we were not too surprised when we read RGE's latest recommendation on the precious metal, which, as expected was to take profits. Doctor Realist says: "September may be a good month to take partial or full profits for an
investor with a long gold position. Alternatively an interested investor
could buy December put options." Of course, had RGE clients followed the good Doctor's advice back from December 2009, there would have been no profits to be had. To wit: "Investors should thus be wary of getting the gold bug and being stuck with this barbarous relic. The recent swings in gold price—up 10 percent one month, down 10 percent the next—prove the point that gold has little intrinsic value and that most of its price movements are based on beliefs and bubbles. As an insurance policy against the tail risk of eventual inflation, it may be useful to hold a small amount of gold in one’s portfolio, but stocking up portfolios with a fiat currency that has marginal practical use, a zero nominal interest rate, high storage costs, and the price of which is subject to volatile whims and bubbles is totally irrational. If you want to hedge against inflation, stock up on Spam or other canned food or buy futures on commodities that have more physical uses and consumer demand....Unlike other commodities, it has little intrinsic value. Much like a fiat currency, gold’s value is based largely on the irrational beliefs of investors. In a depression or near depression, one would be better off stockpiling canned food and other commodities like oil that are useful for riding out Armageddon. You cannot eat gold or burn gold." Ah yes, the good ole "can't eat gold" argument. Yet somehow, despite gold's indigestible qualities, it is precisely gold which today hit an all time high once again, despite RGE's December note and a chorus of other infidels screaming for gold's metaphoric blood. We expect to hear ever more pundits to attempt to top tick the market. Will they succeed? Sure, if the starting sample is a few thousand, one will always be spot on. Pure statistics.
From RGE: There's Something about September
Gold’s Seasonal Characteristics
As gold prices continue to rise, September’s reputation as gold’s favorite month remains intact. Is this coincidence? No—in fact seasonality has its place in the commodity sector beyond agriculture (planting vs. harvest) and energy (heating vs. cooling & driving).
The market reached a record high to US$1276.50/ounce on September 14, 2010. US Dollar/Yen, fell to a 15 year low before the Japanese Ministry of Finance intervened. That slide also contributed to the rally.
The price of gold is headed for its 10th straight annual gain, and is up 16% so far this year. We are only half way through the month and the metal has rallied over 2.3% so far.
Since 1975, September has been the best month for gold in terms of its month-over-month price appreciation. On average, gold in September has appreciated 2.60% above its August price during this period. Of the 34 years in this study, gold has risen month-over-month 23 times in September.
- India—the largest global gold consumer—develops a voracious appetite for the metal beginning in September and extending to the beginning of the following year. September marks the beginning of the Indian wedding season and the start of preparation for Diwali, one of the country’s most important holidays, which typically falls in October or November.
- Jewelry makers begin restocking inventories in advance of the Christmas shopping season, particularly in the U.S. and to a lesser extent by Europe (typically driven by Italy although this year may be an exception here).
- China is the world’s 2nd largest consumer. The Chinese step up gold purchases in preparation for the week-long National Day celebration that begins October 1, and the Chinese New Year occurring soon in the new Roman calendar year.
While the above demand drivers stem from the physical markets, the financial markets for the last few years have been the true price driver. The price of gold continues to appreciate predominantly due to its safe haven characteristics. Recent investor doubts regarding fiat currency made gold an attractive asset, in addition to its characteristic of being a “no default” risk investment. Gold has no counterparty risk, making it one of the few assets left in the world without an attached liability. Yet gold tends to perform well in fat tail events, such as depression/severe deflation or actual/anticipated inflation. While we believe there is still upside potential to gold, we feel it is limited. While the global economy currently fluctuates between these two fat tails, we see upside limited to US$ 1300-1350/ounce (both fundamentally and technically) for the balance of the year, barring an extreme event moving us into fat tail territory. On the downside, US$ 1150/ounce is our target.
September may be a good month to take partial or full profits for an investor with a long gold position. Alternatively an interested investor could buy December put options. December is the second best month for gold, having risen month-on-month on average 2.18% in the period under study. Gold volatility, while not cheap, has come off a few percentage points from July, and has good potential to rise again toward the end of the year.