Gold’s recent move down is tracking our forecast.We saw an initial shock to gold as the pressure of higher rates moved through the system. What is perhaps lost on most market observers is the slowing pace of global liquidity flowing into the system. You could call the current situation a problem of velocity synchronicity.
Printing piles of money that banks sit on does nothing to money velocities. The multiplier effect pushes money forward and the US, in this respect, has been successful at getting velocities up. Japan, after many years of trying, is almost standing still concerning velocity, and Europe is actually going backwards because austerity is negating the huge increase in the monetary base. This global phenomenon is responsible for dragging gold down.
Our view for 2013 is for investors to use the coming pullback as the last chance to rotate out of bonds and move to stocks and gold. I submit this video link for your consideration.We like to think that gold and stocks are tied at the hip. Consider what it does to gold if the german DAX doubles in price ? http://t.co/bbRdyMmc
Our work shows two windows of weakness before embarking on the great ascent.
The principle we use long term is the mismatch of financing needs to savings. The central banks will be forced to fill this void but this will not prevent rates from rising. It will pressure housing in a second leg down. This resumption will in turn put pressure on the commercial banks as collateral values sink again. In our opinion, this is where we go hyperdrive as the rate of money creation is increased to sustain the illusion, to float what needs to be floated.
Studies of Weimar have clearly shown the variability of stocks and gold on the way up. At times, gold performs better, but at other times, stocks do better. In a two horse race, why not own both? So it is with this in mind that I put the following warning about gold's coming volatility: Prepare to be tested and realize that it is part of a very long process.
I use the 25th of July as the start of hyper-money creation. It represents the topping of the bond market. The recent move to 3% on the long end of the curve has giving us confidence that we have seen the turning point.A pre-condition to hyperinflation is about having higher rates.
The US is showing the best money velocity and the best pick up in economic numbers. By our money measures, rates should have normalized higher already. Problems in Europe did prevent this from happening but no more as mean reversion can happen more quickly than anticipated. In a recent commentary to our subscribers we even went as far as underlining the possibility of a bond flash crash.
Investors will never sell on the first shock but they will on the second. The last 3 years had us frontrunning demand of bonds. We will be now frontrunning supply.
Enormous financing needs await us in the future. The lack of future savings assures us not only rising rates but rising real rates!
In our view, the coming lost decade will be for bonds. We also holds that retail investors leaving bonds will not return to stocks. The re-allocation of large institutions from bonds to stocks is already a fait accompli and suggests how flows can move to stocks.
Yves Lamoureux http://lamoureuxandco.com