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Gold on Hold; The New Play May Be in Munis
This article originally appeared in the Daily Capitalist. It was written by DoctoRx who writes market commentary for us.
On Monday, Sept. 19, I suggested that the price of gold was vulnerable, and also suggested that the stock prices of miners were a better intermediate-term bet. This was two days before the FOMC meeting, which much of the "smart money" expected would produce a Jobsian "one thing more" in addition to the expected Operation Twist. Mr. Market was expecting something more like Twist and Shout rather than simply Twist Again.
After the Fed failed to meet expectations, and issued a downbeat assessment of economic prospects, however, it was risk off with a vengeance in the DoctoRx financial environs. The Fed has kicked the economic problem to the administration and Congress, and to the business community at large (where it belongs IMHO). This sudden outbreak of financial prudence strikes me as both a good thing. By selling short-dated maturities, it alleviates the (? temporary) shortage of short-dated Federal debt. And rather than shrinking the balance sheet or letting mortgage-backed securities run off their balance sheet to be replaced by yet more Treasurys, the status quo is maintained.
The Fed will have the advantage of surprise if and when QE 3 leaves port.
On a global basis, the Fed is probably also looking at the probability of money-printing out of Europe. It's their turn to inflate. We've done our part.
The markets are signaling price declines all over the place. Platinum is trading about $40/ounce below gold. This is anomalous. MIT's Billion Prices Project reported price declines in the U. S. in August (see final chart). The Economic Cycle Research Institute on Friday took the rare step of commenting in print that the stock market is at a significant risk for a further decline. Dangerously, Markit's CMBX index (or, more precisely, some of their constituent indicies) that tracks mortage-backed securities broke Friday to yet another new multi-year low.
Right now, the only investment opportunities I see that are both relatively attractive vis-a-vis the alternatives and offer a likelihood of growing nominal capital are investment grade municipal bonds. This could include some of the leveraged muni bond funds that yield over 6% tax-free as well as properly selected individual issues. The latter are generally buy and hold investments, though the larger muni issues have decent liquidity.
The above comment is predicated on the growing sense I have that the U. S. continues to go Japanese financially. This is not a new idea for me. This is what I wrote on January 6, 2009 (in "Land of the Setting Sun"):
We are Japan.
(Though with nukes and military bases in about 92 countries.)
Barack Obama made it more or less official today: trillion dollar deficits are here to stay.
“Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on.”
The dead hand of government will provide tax cuts, either by printing money or borrowing from the savers of the US and the globe, to "stimulate" something by someone: probably by paying down private debt and purchasing necessities at low profit margins for the vendors. This shell game is, as we used to say in the 60's and 70s, played out. Or as they say in the rural South, this dog won't hunt (any longer; he's too old). Additionally, government will print and borrow money to build and rebuild roads and buildings. Perhaps even most of this money won't be wasted or stolen, but based on Japan's experience, I wouldn't bet an economy on it.
Let's consider: Japan lost WW II and set about rebuilding. Its banking system went bust in the 1960s. We helped them put it back together in a way we should have emulated last year, and they embarked on a quarter century of unbelievable growth.
Of course, we all like to quote from our best thoughts, and if you say enough things, some of them will look good in retrospect. I hope readers note that in typical fashion, the quote from Mr. Obama, who was not yet even President, showed that his view was that the economic recovery would come from Washington. He did not say, "the economic recovery that the American people and their businesses are going to make happen".
In any case, this spring I argued that biflationary price risks had tilted to the deflationary side in Goldman Wrong on Rates, Zero Hedge Wrong on Oil as Deflationary Side of Biflation Begins Its Ascendancy when both interest rates and oil prices were much higher than today. Bond rates have gone lower than I foresaw relative to oil prices, which look to have room to decline more (perhaps much more). I exempted gold prices from my "risk off" recommendations then but as documented last week, gold is now off my buy list.
With ZIRP here indefinitely, my bond broker wonders if one way or another, savers are sooner rather than later going to actually pay a fee to park money in an FDIC-insured financial institution. After all, it costs the bank 0.15% (15 basis points) simply for the FDIC coverage, and then it has the costs of handling your account. At the same time, 6-month T-bill rates are negative by 1 basis point. Negative! The implications of this have, I would say with a high degree of confidence, not sunk in to the public's consciousness yet. Therein lies a modest investment opportunity, perhaps. To wit:
Just as what seemed impossible in the 1960s, which is that the U. S. would be in a seemingly endless era of rising interest rates, actually came to pass, we may find a high-quality 4% muni bond of any duration impossible to find soon, as "sticker shock" wears off. Later, one could find 3.5% muni bonds hard to find. If the 30-year T-bond stays at or below 3%, watch for AA muni yields track down to 3% or lower even at the long end, depending on call features and quality of the bond.
And it's not just U. S. buyers who may be interested in these securities. Foreigners looking to park money in the perceived safety of the (still) global near-hegemon may become muni bond buyers at these rates, not caring about the current tax-exempt status that Americans enjoy. (At a time of zero to negative 6-month T-bill rates, it's the financial equivalent of what I have learned has been going on in prime California farmland: foreigners have been buying working farms at breakeven prices based on current profits of the farm, simply to bring their money to a real asset in America.)
I am out of almost all my Treasurys, and right after the Fed announcement Wednesday, I called up my bond broker and said that I thought that munis were the only undervalued asset left now. I said that we ought to see prices rise (rates fall). He called me back later that afternoon and said that, mirabile dictu, one of his firm's bond desks said that they were marking up their inventory the next day. With apologies to Irving Berlin:
There's no hunger like yield hunger, like no hunger I know. Everything about it (i.e. yield) is appealing, everything the traffic will allow . . .
Perma-gold bugs and Internet 2.0 stock fans alike might wish look around the US of A and note that for now, people are clinging to their unbacked dollars as if they had value. No matter what the endgame of paper currencies has been throughout history, history is a series of timeless moments, and right now, paper money made in the U. S. A. (or the electronic equivalent thereof) remains one of the shrinking list of American-manufactured products in global demand. We pay our bills and buy our food with that product, and in some fashion so does much of the world when trading internationally or via an internal currency peg to the dollar (due to the reserve currency status of the USD), and during difficult financial times, that fact outweighs the argument that only gold and silver are "real money". Right now, the Fed is not creating new money ex nihilo. I see that as a blow to the gold bugs.
Financial go-go now a no-no, as Maureen Dowd might pen.
I continue onward with what recently seemed to be a boringly cautious thought, which is a price target for gold of $2000 fiatscos by or before the end of 2012, but I wouldn't be surprised to see much lower prices at some point in the months ahead as a period of debt deflation moves along while the Fed's printing press stays largely on hold. How low is low for gold? Do I hear $1500? Do I even hear $1300?
Rather than sit with cash yielding zero which might (can it really happen?) go negative, more and more American savers may wish to gather their basis points while they may. I think there's still time to jump to the head of the line in munis.
Stay tuned.
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I hope you bot some futures on the puke in gold, it is very possible that might the time of the NYSE open gold could be positive and your puts open down, after a $100 down move in gold.
Manipulation bitchez.
Silver went to 26 on Monday, amazing! Exactly where it was predicted to land in this time in this March prediction chart(25-32USD corridor in H2 2011).:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a&start=40#p31020
and gold went to 1550! fantastic: Again, exactly where it was expected to be in this April prediction ( which predicted also the bubble-well I expected it to be there in November) - down to 1500-1600 in November 2011.And I expected bubble and crash in October- it happened in September..
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a&start=220#p32176
Remember the scene in "Back to the Future" where Doc Brown asks Marty who the president is in the future? And Marty answers "Ronald Reagan"? Then Doc asks incredulously "Ronald Reagan? The actor!?!"
Think about that tone and voice when I ask "Munis?"
gold was in the bubble when we got out of gold standard and printed some extra money. now its just wealth preservation at a cheap price. at least thats the way i see it.
Gold was never in a bubble by the way. The bubble was always volume of USD, and still is and will get worse.
Should run a book on when Ben will push the print button.
How does the US fund its never ending deficit?
This latest episode is a disaster for BB and all. Though he gets his excuse to print and orders of magnitude higher. Maybe he will let the market plumb some more.
don't worry they will be printing money to buy newly created eurobonds real soon then gold up up and away.
i think 1200 is the lowest for gold and for silver low 20's
Sign me up. I need some more sub-1000 Euro gold.
Interesting you mention this. After I mentioned I invested in munis, some fucking asshat last week had the gall to laugh at me for seeking a 6% yield (with tax break). Well in this market, 6% is pretty darn good for a "safe" play while avoiding market volatility.
It's also why I invest in utilites and energy. People will always need them, period.
Anyway, let's see how I do this week with my GLD puts, wish I had put on a few hunred more k on the trade -- didn't have the balls to hold seven figures shorting GLD through the weekend and didn't want to sweat the Asia open. Sleep > money. But man, GLD sure is some shit paper. The chart, the fundamentals, and all the technicals just screamed, "crash."
with out creating new money there will be blood on the streets. Ben is waiting for people to start begging for the money to be printed that will be created from thin air. its getting really bad and he knows it. #3 qe is a lucky charm for gold bugs. time to load up bitches. where the hell is my credit card.
"Do I hear $1500?"
today's low is 1535
Agree, but still not interested in munis. I like USD/CHF as a way to play the macro themes mentioned.
The EU/EFSF/IMF will kick in a minumum of 2 trillion printed dollars they don't have.
Moron Bernanke will have his hands in this.
It'll be massive inflation after the liquidity sell off rush for cash.
i expect deflationary pressures to remain in the short term, thanks to the non-functioning eurozone. USD is in high demand as it's providing liquidity to the troubled euro economy. once it's over people will realize that the US financials are even worse compared to europe countries, massive inflation will follow.
usd, t bonds and muni bonds are safe at the moment, because people perceive that europe crisis will culminate before anything happens in the US. it's a very myopic perspective, demand for usd will not last, long term outlook is much worse than the trouble eurozone.
PM's are under some pressure lately, but they are not oversold. Gold n silver will make a come back before you know it. so basically the entire article is full of crap; the only thing i can take away from it would be 'trillion dollar deficits are here to stay'. makes me wonder, how come economists never touch off on topics like debt saturation and fiat enslavement?
Yes. The playbook is 2008. This is a liquidation.
The next batch of printing will be in Euro - which will support gold to some extent... but then there are the dollar swaps, which really haven't been invoked yet. This will create dollars out the back door, so to speak.
Whatever gold is pricing in wrt "fundamentals", it is probably a discounting of future inflation - being milder than expected (as signaled by oil, copper etc). All true.
But gold demand remains positive as long as real interest rates are below 2%. Bernanke will not permit deflation. And as the posted article suggests, nominal rates can be zero or even negative, and will remain so for some time.
That's my view and I'm sticking to it (and my gold) for now.