As the top chart shows, gold's brief recovery now looks more and more like a "dead cat bounce." Further weakness is likely in store, as the second chart suggests. As I mentioned last month, gold appears to be re-linking to commodities.
This is a big deal, as the chart above suggests. Gold had been trouncing just about everything for 10 years or so, but now things are reversing. Equities—productive investment—are now in favor while gold—speculative investment—is out of favor.
I'd argue that a more plausible explanation for gold's recent price movements is presented here by the inimitable Eddy Elfenbein:
ReplyDeletehttp://goo.gl/nPtmm
As opposed to the supposed contrast of "speculative investment" vs. "productive investment", I would argue that Elfenbein's notion of inflation and real rates is a much stronger driver of gold's direction.
As the passage points out, inflation over the past 2 months is tracing at an annualized pace of -3.27% deflation. This means that real rates are rising (real = nominal minus inflation). Gold does badly when real rates are rising and does better when real rates are falling. I think this perspective makes much more sense.
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ReplyDelete@WSM, your posting and link are persuasive.
ReplyDeleteGold is not like the other commodities, it is much more speculative. Wen other commodities go up in price, economics comes into into play The old supply and demand. They hit a ceiling, and often a correction, and this can play out over years.
ReplyDeleteGold is worth whatever the buyer thinks it is worth. The metric is buried deep in the amygdala of the brain.
And they like to buy gold in India and China---2/3rds of gold sold there. Most to gifts and jewelry, although Indians buy gold to hide assets from the government. One could see strong demand for gold in decades ahead, as those nations develop larger middle- and upper-classes. We are talking about 2.5 billion people, or something like that.
One thing is for sure---the Fed and the price of gold are hardy connected anymore. The Fed has ramped up QE programs in the last two years, and gold has sunk. So printing money causes the price of gold to go down? Only if you go by what you see.
I think gold is anticipating the fed's ending QE whatever. markets are very forward looking and I'd bet that sometime this year the fed will scale back its purchases.
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ReplyDeletehttp://www.businessinsider.com/larry-kudlow-says-bernanke-may-have-gotten-it-right-2013-3
ReplyDeleteThis guy at the AEI wrote an interesting piece.
ReplyDeleteFinally, the right-wing is coming to embrace some monetary growth policies....
http://www.aei-ideas.org/2013/05/how-about-a-massive-tax-cut-financed-by-the-fed/
This rally is about "irrational exuberance" . The excessive money printing in Japan has created an sure thing with the carry trade, adding massive leverage and the fast money moves from security (perceived at least) to the sure thing -- the carry trade. there is a direct and inverse correlation between the action of the BoJ and the price of gold -- lets face it most buyers were looking for the momentum trade on gold...once it faded they moved along. Not all assets can be in bubble territory at the same time.
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