More from Heinz re. Veneroso
to avoid misunderstandings, i must clarify my take on Veneroso further: i have no beef with his STRATEGIC call. it sounds very much reasonable to me, as a longer term outlook. i merely quibble with the slightly alarmist tone regarding gold equities AT THIS POINT IN TIME. iow, i share his expectations regarding the likely longer term outcome, but think the bull still has some short to medium term legs - which is an entirely technical call, as outlined in my earlier reply. as such, it is subject to revision depending on incoming relatively short term oriented data.
it is important to note however, even in terms of the longer term outlook, that it won't do to lump commodities and gold together in a deflationary era. while it's true that they have risen in tandem, and will on occasion of forthcoming corrective action at least initially also fall in tandem, i expect an eventual decoupling on account of gold's 'moneyness'.
in short, while the deflationary era means that NOMINAL gold price gains will likely fall far short in percentage terms compared to those recorded in e.g. the inflationary 70's era, the REAL, purchasing power gains should more than make up for that deficiency.
you could say, what comes to the fore in the deflationary era is gold's role as a 'safe haven' - since it is the only money that is not built on 'promises to pay' and thus can't be victimized in the course of defaults and bank runs and so on.
on the face of it, this seems almost like an exaggeration - after all, who seriously expects the system to crumble? however, what everybody DOES expect is that the central banks will go to any length in DEFENDING the system - with their only weapon, the printing press. also, even an infitesimally small chance that the system could be in danger suffices to entice a percentage of the funds of the wealthy into gold - and this is totally independent of the economy's performance. i.e. the wealthy won't stop buying gold because the economy isn't going well enough to support their gold buying habits, so to speak.
it is their desire to preserve wealth and accumulate the necessary insurance that imo becomes the major gold price driver in a deflationary era.
this contention is already borne out by a phenomenon that according to many gold pundits is an impossibility: namely the fact that t-bonds and gold tend to rally and fall together , i.e. they exhibit a positive correlation, for the past 3 or so years. what most people apparently don't realize: both are bought for the SAME REASON - safety.
a word regarding the speculative positions in gold and currencies: they may be a tad extreme (actually, they have become somewhat LESS extreme in recent weeks) , but the speculators are the price setters in the futures markets. only when they view an item bullishly can that item actually rise in price. their positions are also the most RATIONAL ones in any given market - in most cases and most of the time, anyway (it isn't always true, especially in the stock market).
a few quotes from Veneroso with comments:
"One noted analyst has told me that he posed the question to a large assembly of you attendees: How many of you have bought a gold stock in the last month? Only two raised their hands."
sure enough, the claim that everybody is bullish seems to be further disproved by this (in addition to the points i raised yesterday).
"Typically, the speculative excess takes the form of a parabolic blow off in prices which surely happened in late 2003 in the minor gold stock sector."
this makes me think he's never seen a speculative blow-off. there were large moves in many stocks, it's true, but in terms of the history of 'blow-off' episodes these moves were paltry. no-one outside the gold bug community even NOTICED.
"investors will see in the lagging gold shares value and opportunity and rush in to buy. The gold shares will then catch up to the metal.
This is the reigning consensus among gold investors. It’s what is keeping those investors that are now fully committed, under water and hoping, in the game."
no, it isn't the consensus - not anymore. 'fully committed'? as i've mentioned, the Rydex pm fund has lost 50% of its assets from the high - but has only experienced a 15% price correction. retail investor money has been flooding OUT of the sector this year.
"Almost everyone at this conference is bullish on gold – a far cry from the environment of years ago."
well, years ago, nobody even went to the conference. whether the bullishness is or isn't a contrary indicator depends inter alia on the underlying TREND. if the trend is up, a majority of market participants will be bullish, and correct. and it is dangerous to come to conclusions by using the sentiment of the attendees of all things, a GOLD conference. naturally most of them will be bullish - very few gold bears will want to go to a gold conference. it says nothing about the sentiment in its totality, i.e. including other market participants. look e.g. at WS rating of gold stocks: less than 40% are on 'buys' - the remainder are 'holds' or 'sells' of varying degrees. 'strong buy' might as well not exist. iow, not even the 'professionals' at Wall Street have acknowledged the bull market. no bull market has ever ended without them doing so.
"The U.S. is growing at or above trend. It does not want to stop. It allegedly is talking the dollar down in order to reduce its trade deficit which helps its economy at the expense of its trading partners. In effect, it is beggaring its weaker neighbors."
this is one of the most important points made in the entire presentation - and it invalidates the point made later on, about the likelihood of intervention and the likelihood of it succeeding. the fact is (we can glean that inter alia from the very much non-committal statements on currencies issued after G-8 and G-20 meetings lately) that at the moment, the interests of various G-8 member nations diverge to such a degree that co-ordinated, joint intervention is simply not in the cards UNTIL a crisis arrives.
"The European and Japanese policy makers, fearful that dollar weakness will throw their weak economies back into recession, have been pushing the U.S. to engage in coordinated intervention to reverse the speculative positions of the dollar bears. The U.S. has refused. As a consequence anger is rising among these policy makers and it is spreading to encompass the likes of China and other emerging economies. We are hearing strong and angry language on this issue from the U.S.’s trading partners like we have not heard for many many years. Efforts are now being made by these countries toward a very broad coordinated intervention that may exclude the U.S. but may encompass China and many others.
Will such intervention work? The speculators who are short the dollar say no. But the historical record says otherwise. When speculation and the dollar are at extremes intervention works. It turned the dollar down on March 1st, 1985 – the day of the dollar high. It turned the yen down against the dollar on the yen high in 1995. It set in motion the big dollar rally in 1996."
i would side with the speculators here. the difference is that in all these historical examples, the US WAS a partner to the interventions. also, what this ignores is that even so, intervention only works when it comes in conjunction with a trend change that would have happened ANYWAY. no intervention AGAINST a trend that isn't complete yet is likely to succeed (see the pound's ERM debacle of the early 90's).
Veneroso also quotes Russell: "“How far can the dollar drop? The dollar, like a stock, can do "anything," but note the strong support in the 80 area. My guess, and it's only a guess, is that the worst we will see ahead, at least for a while, will be a dollar drop to the 80 level. And knocking the dollar down that last 4 points to 80, assuming it gets there, will be difficult. Why? The negative facts about the dollar are too well known, and too many people are now on the negative side of the dollar.”"
well, this is true as far as it goes. the dollar is oversold, has declined too many weeks in a row not to experience a bounce, everybody's short, and there is multi-decade, extra strong support at 80 in the dollar index. the only problem as i see it is that everybody knows this. Russell isn't revealing any great secrets here - everybody and his auntie is waiting for a dollar rally here for the above reasons. but what if no rally comes, or only a weak one? it won't do to dismiss this possibility out of hand, since currency trends tend to be very inert. what if the MULTI DECADE SUPPORT BREAKS? imo this could very well happen sooner than most people now think - and it could be what precipitates a panic. i admit, the bounce is the HIGHER PROBABILITY outcome.
but before comitting oneself to the idea of a long and strong corrective rally, one should wait if it actually begins to HAPPEN.
conclusion: from what data we currently have (hard data as opposed to merely anecdotal stuff) , it appears likely that while Veneroso probably has the long term big picture outlook right, he's too early with this call. and contrary to the widely accepted notion that contrarians must be dollar bulls (and by implication, gold bears) it is not so obvious to me that this really IS the contrarian call here. the bottom picking in the dollar reminds me a bit of the top picking exercises in the 1990's equity bubble.
recall that the LAST dollar rally brought scores of former gold bulls out of the woodwork with (sometimes loony) theories that claimed to prove a big rally in the dollar was in the cards. it was also claimed that this was the 'contrarian call' - apparently on the grounds that if you call for a rally in something that has been falling for 3 years it's automatically contrarian to do so. but it isn't. a contrarian must look at BOTH the trend, and what reactions it evokes. it's a very similar situation in bond land. if i showed the chart of the t-bond to someone without them knowing what it depicts, almost everyone would agree that they're looking at an item in a strong secular bull market. the market is barely off multi-decade highs. and yet, i can count the extant bond bulls on the fingers of one hand. in that sense the bond market has even more going for it, since we can't say there's really a shortage of gold bulls. but when i see something make multi-year highs (as gold !
has just done) and scores of analysts come out to explain why this is bearish, the contrarian in me says this can't be. at leat, NOT YET. |
