In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.
From Chris Wood's Greed & Fear:
The fun and games this week has been in the gold market. As discussed here last month the risk of a break of the key technical level of US$1,520/oz has now eventuated. Rather than viewing this as confirmation of the end of the gold bull market, investors should see this as a massive buying opportunity while also being aware, based on the technicals, that gold could trade down to the US$1,200/oz level. Still GREED & fear would resume buying now and buy more if gold falls further.
As might be expected, the gold bugs are alleging an attack on gold by the establishment to break the 12-year long bull run in bullion. GREED & fear has no insight on this point; though it is certainly the case that the sell side, led by a famous investment bank, has been making the bear case for gold all year. This bear case makes sense for those who believe the American economy is “normalising” and that Billyboy Ben will be ending quanto easing and resuming monetary tightening earlier than the market currently expects. Still GREED & fear does not believe in such “normalisation”, nor should investors.
Indeed the reality, as discussed at some length in the latest Asia Maxima (The conceit of central bankers, 2Q13), is that central banks are competing to become ever more unconventional. This is best reflected in the revolution at the Bank of Japan. But it is also increasingly evident, as discussed here last week, that Flexible Mario at the ECB is itching to become more unconventional if and when Berlin lets him.
For such reasons this is a buying opportunity too good for investors to miss. This is why GREED & fear will today add another five percentage points to gold bullion in the global portfolio for a US dollar-denominated pension and will add more if gold declines to the US$1,200/oz level as is quite possible given the technicals. This will be paid for by selling the investment in the Japan long-only portfolio. GREED & fear remains of the view that the Tokyo market will rally further but Japanese equities have become a very high beta story, courtesy of the accomplished gaijin handler Kuroda, and therefore are not really appropriate in a pension portfolio.
Meanwhile amidst all the media blather in recent days about gold leading the decline in commodities on the back of the weaker China growth data, GREED & fear would like to reiterate one critical, albeit elementary, point. That is that gold is not a “commodity” but money. Indeed gold is the purest form of “money” available not contaminated by the current fiat paper system, a system increasingly corrupted by the manipulation of the high priests of paper money, otherwise known as “central bankers”.
If this is the “big picture”, GREED & fear will admit to a certain surprise that gold has broken down over the past week rather than a month or two ago when the US data was better. For if hopes of normalisation in America have been driving the trade gold should now be less vulnerable as the trend in American data has clearly deteriorated in recent weeks; be it employment data, retail sales or the ISM series. Thus, the IMS Non-manufacturing Index fell by 1.6 points to a seven-month low of 54.4 in March. While US retail sales declined by 0.4%MoM in March, the worst decline in nine months. Indeed retail sales rose by 2.8%YoY in nominal terms in March, the slowest annual growth since November 2009, and are up only 1.3%YoY in real terms.
It is also bizarre that gold should have cracked after the Bank of Japan has just committed to a far greater monetary base expansion, relative to the size of the Japanese economy, than any manoeuvre so far attempted by Bernanke. Thus, the BoJ plans to double the monetary base from Y138tn or 29% of GDP at the end of 2012 to Y270tn or about 54% of GDP by the end of 2014. By contrast, the US monetary base has expanded from US$840bn or 6% of GDP in mid-2008 to US$2.9tn or 19% of GDP in March. Indeed the BoJ aims to increase its balance sheet by Y5.2tn (US$54bn) per month in 2013, equivalent to an annualised 13% of 2012 GDP. This compares with the Fed’s current US$85bn/month balance sheet expansion, which is equivalent to an annualised 6.5% of 2012 US GDP.
This is why the chart of gold prices in yen terms peaked as recently as 9 April and why macro traders willing to leverage should use the current correction to buy gold by borrowing yen. This to GREED & fear is now a much more straightforward trade than shorting the yen against the US dollar since GREED & fear continues to believe that the Fed is not about to end or even slow quanto easing, let alone raise rates from zero.
Meanwhile, investors should also keep an eye on the extent of liquidation in gold. The most important area to watch here is the gold ETFs, given the recent popularity of investors in this supposedly “user friendly” vehicle. Thus, total gold holdings by ETFs tracked by Bloomberg surged from 0.5m oz in 2004 to a peak of 84.6m oz on 20 December 2012 and have since fallen by 8.6m oz or 10.2% to 76m oz, with most of the decline seen in the past two months.
As for the outstanding speculative short positions they are still quite high though not as high as the peak reached in February. Thus, speculators’ gross short positions in Comex gold rose from 7.4m oz at the end of 2012 to 13.1m oz on 19 February, the highest level since July 1999, and were 11.7m oz on 9 April.
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Finally, long after the current brief gold correction is long forgotten, and gold is trading at fresh all time nominal and real highs, we wonder: just how many rogue Goldman and/or Morgan Stanley and/or JPM traders will be charged by the CFTC for having put on a massive gold short derivative position on their books, and which they kept adding to only to see the market finally blow up in their face and cost their firm untold millions in losses, which nobody, nobody had any idea about, and which was solely at the behest of the, appropriately named, rogue trader... Just like this fine young gentleman from Morgan Stanley Goldman Sachs.