Investor Sentiment

This morning we received a research note from a private bank. Buried in the text was a call for lower gold prices, and the analysts listed five reasons why they think gold prices will decline. Our analysis? These guys are completely missing the point. Precious metals are like an insurance policy. It’s a policy you hope you’ll never need to cash in. But if the need ever arises, it’ll probably be because the financial system has collapsed. If that day ever comes, you’ll be thankful that you had the foresight to trade away some paper currency for real savings.

The equity futures euphoria carryover from this weekend, buoyed by sentiment that the Syrian war is postponed if not cancelled, carried over into Tuesday morning despite news that Israel had launched a missile test, which looked at from almost any angle was an attempt at provoking a response from its adversaries. Also the Chinese boost driven by a solid beat in the country's two manufacturing PMIs persisted despite a drop in the August Non-manufacturing PMI reported last night. So once again we have returned to a state where good news is good news and bad news can be ignored. This, even with the Taper announcement just two weeks away. Of note also is that overnight Nokia shares surged 40% after Microsoft announced that it is to buy Nokia mobile business. In tandem, other EU based related names such as STM and Ericsson also gained ground, trading up 3% and 4.5% respectively. Nokia shares traded sharply higher today after Microsoft said it will pay €3.79bln to purchase substantially all of Nokia's devices & services business and will also pay €1.65bln to license Nokia's patents. A fitting farewell present from Steve Ballmer perhaps. Once again, keep an eye on Syria as the president begins his congressional consultations to take the escalation to the next level, with or without provocations from Israel.

As Dirty Harry would say.....

A recent survey of asset managers globally, managing USD 27.4 trillion between them, found that 78% of defined-benefit plans would need annual returns of at least 5% per year to meet their commitments, while 19% required more than 8%, "a target of 5% per year can be reached but only by using leverage, shorting, and derivavtives." And sure enough, as Deutsche Bank (DB) reports, in short, investors have rarely been more levered than today! According to DB, a MoM change in NYSE margin debt >10% has to be taken as a critical warning signal as there are astonishing similarities in the sequence of events among all crises. As the S&P 500 just hit a new all-time high, investors might want to ask themselves when it is a good time to become more cautious – yesterday, in our view. Simply put, the higher margin debt levels rise, the more fragile the underlying basis on which prices trade; with even a less severe sell-off in equities capable of triggering a collapse.

Crashing Australian and a miss in South Korean PMIs, following days of weak Japanese data, and a divergence in the official and HSBC Chinese manufacturing indicators to a 15 month high (HSBC PMI sliding to 11 month low) was just the bad news Asian market needed to break out higher from the recent range and thanks to the return of overnight USDJPY levitation as well as a modest reverse repo liquidity injection by the PBOC overnight, not only did the Nikkei and Shanghai rise 3% and 1.8% respectively, but US futures are right back to where they were before yesterday's dramatic turnaround in the market following a strongly dovish FOMC statement and just shy of the 1700 once more. As for Europe, while there a smattering of noise following the release of final PMIs which did not change the preliminary picture much (Spain 49.8, vs 50.6 exp; Italy 50.4 vs 49.8 exp; France 49.7 vs 49.8 exp; Germany 50.7 vs 50.3 exp) it is all up to the ECB today to preserve the myth of a European improvement coupled with a EUR currency at or near multi-month highs.

The first of three Fed speeches is out, and as expected, it contains nothing new save for the ongoing barage of stock market battering for daring to sell on last week's Bernanke warnings that the Fed's monthly flow is set to begin tapering in September. It continues to be as if the Fed is shocked to learn that nothing else matters in this "economy" and, of course, "market" than what the Fed will do and say.

The unintended consequences of a centrally-planned world continue to peek through at the most unexpected of place, as moments ago the Indian Ruppe just plunged to a new all time record low against the USD, with the USDINR rising over 60 for the first time, triggering stops and overriding any potential USD selling intervention that the RBI may have attempted just below the resistance level which took place 59.985 according to Reuters.

The best way to get to a "buy" signal is to have lower prices.

 The “biggest risk to global financial stability”

In a remarkably candid interview, the President and Executive Chairman of CME Group Inc, Terrence Duffy,  told Bloomberg TV that today gold buyers "don’t want certificates ... They want the real product".  

"What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real  gold.  That’s going to show you, people don’t want certificates, they don’t want anything else.  They want the real product."

The recent slide in the gold price has generated substantial demand for bullion that will likely bring forward a financial and systemic disaster for both central and bullion banks that has been brewing for a long time. To understand why, we must examine their role and motivations in precious metals markets and assess current ownership of physical gold, while putting investor emotion into its proper context. The time when central banks will be unable to continue to manage bullion markets by intervention has probably been brought closer. They will face having to rescue the bullion banks from the crisis of rising gold and silver prices by other means, if only to maintain confidence in paper currencies. This will likely develop into another financial crisis at the worst possible moment, when central banks are already being forced to flood markets with paper currency to keep interest rates down, banks solvent, and to finance governments’ day-to-day spending. History might judge April 2013 as the month when through precipitate action in bullion markets Western central banks and the banking community finally began to lose control over all financial markets.

The resilience of the euro and Australian dollar today, given the heightened rate cut speculation, may be indicative of a reversal of the US dollar's recent fortunes.

This week’s charts span the gamut from market breadth to investor sentiment to an indicator that measures how well the Fed is doing at inflating the markets.

A Roundup of Opinions

While China's trifecta miss of GDP, Retail Sales and Industrial Production all coming lower than expected was likely a factor in the overnight rout of gold, the initial burst of selling started well before the Chinese data hit the tape, or as soon as Japan opened for trading with forced financial institution selling to prefund cash for any and all future JGB VaR-driven margin calls. It was all downhill from there, literally, with overnight selling of gold punctured by brief burst of targeted stop hunting, sending the metal down $116 per ounce, as spot touches $1385 after trading nearly at $1500 yesterday and down $200 in 4 days. End result, whether due to a re-collapsing global economy, margin calls, fears forced Cyprus gold selling will be imposed on all other insolvent European countries, coordinated central bank slams, hedge fund positioning, long unwinds, liquidations, fears about future demand, or whatever the usual selling suspects are, is that gold tumbles an unprecedented 7.8% on 230,000 contracts in one day, and well over 10% in two days, pushing the yellow metal 14 day RSI band to 18, meaning it is now most oversold since 1999. In brief, it is an all out panic, with Goldman still telling clients to sell, i.e., buying every shiny ounce all the way down (not to mention India, where accordingto UBS Friday demand was double the average).