Precious Metals

Is a bonus culture beneficial to the economy?

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors.  New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification.  The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.

A week ago, we asked (rhetorically), whether "Bernanke Has Become A Gold Bug's Best Friend?" While we knew the answer, today's reponse by the market confirms it. Beginning just before 10 am, or the moment Ben's prepared remarks went off embargo, gold and silver have been on a relentless tear (chart 1), with Gold passing $1760/ounce and now just $150 from its all time nominal highs. And while risk is on elsewhere, stocks priced in gold are down 0.9% since their highs yesterday and at their lows in real terms (chart 2), even as they hit new nominal highs, confirming that fear of the coming monetary tsunami will benefit precious metals. So while the lemmings focus on meaningless nominal gains, their real purchasing power just lost another 1%. Thank you Chairsatan - you are a good man.

Gold outperformed (+0.5%) today (as the rest of its commodity peers lost ground on USD strength today) and Copper and Silver underperformed. But for January, Silver is the clear winner in the global asset return race (at almost a 20% gain) with Gold in 2nd place at around +11.2%. JGBs and the DXY (USD) along with UK Gilts and Oil lost the most ground among the major assets we track. The outperformance of the precious metals as the dollar ebbed along with the general 'last year's losers were January's winners' and vice-versa was evident as Asia Ex-Japan and EM equities surged along with Nasdaq (and Copper). Long-dated Treasuries have just limped into the money for the year as they rallied dramatically today - ending the day at their low yields (new record 5Y lows) with 30Y now -12bps on the week. FX markets gave a little of the USD strength back in the afternoon but the rally in stocks was almost entirely unsupported by risk assets in general (as it seemed like a desperate low-volume try to push ES back to VWAP into the close to hold the 50/200DMA golden cross in SPX) after this morning's dismal macro data. Financials rallied to fill some Friday close gaps but gave some back into the close as CDS inched wider and Energy underperformed as Oil came almost 3% off its early morning highs (managing to crawl back above $98 by the close). IG credit outperformed as HY and stocks were largely in sync but open to close, credit outperformed stocks on a beta basis (after overnight exuberance in stock futures faded).

No shame. 

Xinhua, the official press agency of the government of the People's Republic of China reports that a "gold rush" swept through China during the week-long Lunar New Year holiday this year, with demand for precious metals and jewelry surging since the Year of the Dragon began. Data released by China's Beijing Municipal Commission of Commerce shows a 49.7% increase in sales volume for precious metals jewelry and bullion during the week-long holiday (over last year), which lasted from January 22 to 28 over that of last year's Spring Festival. One of Beijing's best-known gold retailers, Caibai, saw sales of gold and silver jewelry and bullion rose 57.6% during the week long New Years holiday  according to data released by the Ministry of Commerce (MOC) on Saturday, Other jewelry stores across the country also saw sales boom during the period, with customers favoring New Year themed gold bars and ingots and other types of Dragon themed jewelries. During the week-long holiday, which lasted from January 22 to 28, the sales volume in just one gold retailer, Caibaiand Guohua, another of Beijing's top gold retailers, reached about 600 million yuan (nearly $100 million). Caibai began selling gold bars as investment items during the 2008 Beijing Olympic Games, but the trend of buying gold or silver bars during the Spring Festival has taken off in the past two years.

Because our political system is corrupted by corporate lobbyists, it leaves the people with few choices. Those who do not wish for a violent revolution are left with the one alternative of taking control of their own money. Money can be anything two parties in a transaction choose it to be. Precious metals is one good choice. Converting ones savings from Federal Reserve Notes into precious metals is not some kooky survivalist ploy. It is empowering a person to vote against the immoral monetary system. Hoarding food is not a kooky survivalist ploy, it is hedging against an immoral banker tax. We all have the moral obligation not to pay the banker tax. Refuse to deposit your funds into a money center bank. Support efforts to end the Federal Reserve System.

While Silver had a better week than Gold (+5.4% vs 4.3%), Gold managed its biggest gain in three months as the Fed's QE-ness seemed to separate the precious metals from other asset classes. Oil underperformed relative to the USD's weakness (-2% on the week in DXY) managing only a 1.3% gain (and ending below $100). Silver and Gold have no managed four weeks in a row of gains as the latter has more than retraced half of the all-time high sell-off range. With 5 minutes to go, NYSE volume was -32% from yesterday, by the close of the cash markets it was only down 2.5% leaving the week -10% from last week (so 32% of the day's NYSE volume was done in the last 1.3% of the day). In credit, HYG underperformed stocks, HY credit stayed synced with stocks and IG outperformed (touching 100bps as we closed). Treasuries ended the day (and week) at their low yields with 5s to 10s all lower by around 14bps on the week and 30Y rallying to -4bps on the week by the close. FX markets were a little odd as EURUSD squeezed higher and higher all day (largely ignored until a late ramp) by stocks as JPY's strength kept EURJPY (carry driver) relatively flat. EURUSD ended at 1.3227 (up around 300pips on the week) at its highest in 7 weeks as CFTC net shorts rose once again to new record highs at 171k. Broadly speaking risk assets and ES (the e-mini S&P 500 futures contract) have been highly correlated all week. This afternoon saw CONTEXT pull ES higher (mainly on EURJPY strength, and Oil stability versus TSY/Curve compression) but after the cash market close, ES limped back down to its VWAP to end its worst-performing week of the year (+0.15%) though not down (which we are sure would scare investors away) as stocks handily underperformed credit on the week as high beta starts to unwind.

UPDATE: Stocks leaking back now, Financials lagging, Utes leading

TSYs are 5-10bps lower in yield (aside from 30Y), ES (and credit) rallying but underperforming on a beta basis to TSY/EUR, EUR stronger at 1.3050 now (USD weaker), and precious metals jumping (Gold back up to $1685).

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."

Where did all the bears go?  We cannot find more than one person willing to be outright bearish.  What is particularly strange is that the reasons most people are bullish seem to have little, if anything to do with fundamentals – either macro or micro.  The reason for being long that is closest to being “fundamental” is that Europe is muddling through.  We're not sure Europe is muddling through, but in any case, wasn’t the bullish case for US stocks that we were decoupling?  Conspicuously absent as a reason to be long is earnings. It seems as though everyone is reasonably long (though not fully committed), but thinks everyone else is underweight.  It really feels like the “consensus” is that everyone else is underweight so you better be long for when that money comes into the market. The conversations are far more bearish than the positioning.

Investors are waiting on the outcome of a 2 day Federal Reserve meeting which ends on Wednesday.  Here they are following any signs that interest rates will remain low, as that could put pressure on the U.S. dollar. The Tokyo Commodity Exchange, December, gold contracts climbed as high as 4,167 yen/gram, its biggest gain since mid-December. The gains initially propelled cash gold even though trading was slow during the Lunar New Year break. Japan has been notably absent in the gold market in recent years. This may be changing as concerns about the Japanese economy and continuing debasement of the yen may be leading to Japanese diversification into gold.  The scale of domestic savings in Japan remains enormous. This would be a new and potentially extremely important source of demand in the gold market which could help contribute to much higher gold prices. 

Time for a mea maxima culpa: I've been wrong about everything: the stock market, the economy, globalization, energy, everything. Heck, I've even been wrong about the American diet and poor fitness; it's now clear that ice cream sundaes are health food that have been shown to extend life dramatically. Fast food is nutritious and cheap, a great combination, and there is basically nothing in the mind-body that can't be fixed in a jiffy with a handful of pills, all of which are almost free once you qualify for government healthcare programs. The economy has not just dodged recession, it's in full-blown recovery. The only two indicators that are going down are the VIX volatility index, which might just fall to near-zero as investors realize there's no longer any downside in the market and therefore no need to buy hedges, and the unemployment rate, which is steadily declining. 2012 is like 1956, 1964, 1984 and 1996: the economy is booming, and a sitting president has wisely overseen the application of brilliant policies by the Pentagon, State and Treasury departments and the Federal Reserve. The policies were simple: when "more of the same" didn't work, do even more of the same. That did the trick in everything from waging war to finding new energy sources to stabilizing the financial and housing markets.  This quote from President Calvin Coolidge neatly sums up 2012: If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.

Reuters report that the EU has agreed to freeze the assets of the Iranian central bank and ban all trade in gold and other precious metals with the Iranian Central Bank and other public bodies in Iran. According to IMF data, at the last official count (in 1996), Iran had reserves of just over 168 tonnes of gold. The FT reported in March 2011 that Iran has bought large amounts of bullion on the international market to diversify away from the dollar, citing a senior Bank of England official. Currency wars continue and are deepening. Many Asian markets are closed for the Lunar New Year holiday which has led to lower volumes. Of note was there was an unusual burst of gold futures buying on the TOCOM in Japan, which has helped the cash market to breach resistance at $1,666 an ounce.  Investors are also waiting for euro zone finance ministers to decide the terms of a Greek debt restructuring later today.  This would be the second bailout package for Greece.

All you need to read.