Gold has taken a pounding of late, falling over $100 during the last seven trading; the June futures contract closed yesterday at $1364.70, a few bucks over its yearly intra-day low of $1360.90, touched on April 15. Year to date, gold is down nearly 19%. It’s been brutal for those of us disproportionately, a relative term in more ways than one, long gold.
As I have said numerous times and written numerous times in this and other forums, determining why an asset or a market has done what it has done is nearly as perilous as predicting what it will do. But trying to glean meaning from market’s moves is instructive, entertaining, and (only) potentially profitable, so, against perhaps my better judgment, I have come up with a theory for gold’s problems.
One of the explanations for gold’s demise, i.e., no reported inflation (except in asset prices, grist for another mill or for later in this mill), would seem to make sense but is nothing new. Why, then, should such explanation account for gold’s performance over the last few days?
Another theory, that traders anticipate that the Fed will begin to wind down its bond buying program (See my 5/11/13 post, THE FED ’S EVOLVING APPROACH: REDUCING UNCERTAINTY BY INCREASING UNCERTAINTY) might hold some water. However, if you believe Mr. Bernanke and his cohorts when they argue that their objective in keeping us drenched in liquidity, and beating the living daylights out of elderly savers, is to support the economy, it doesn’t look like the Fed will take the turbochargers off the printing presses any time soon. The economy still is only slowly recovering.
On the other hand, believing anybody one has not known personally, and far more than casually, for at least twenty years is always a perilous proposition. Believing a politician (And, believe me, these Fed guys are first and foremost politicians or they wouldn’t be where they are.) is perhaps the silliest, most irresponsible activity in which one can engage. So if, as many of us have long suspected, the real object of the Fed’s money flood is to support the stock market, maybe they are going to start turning off the fire hoses.
On the third hand (Where’s Harry Truman when we need him?), perhaps the Fed doesn’t dare slow down because the repercussions for the stock market might be disastrous as newbie risk takers decide they don’t have to own stocks to avoid a steady diet of dog food in their old age.
Despite all these hands, it really doesn’t matter. As long as traders believe that the Fed will be winding down, there will be downward pressure on gold. Whether those traders are right or not is of little or no consequence. So the “Fed might unwind” argument for gold’s defenestration has some credibility.
Yours truly, however, likes another explanation for gold’s sudden unpopularity, to wit, gold has no yield in an almost suddenly yield obsessed world. Gold has, of course, had no yield for the last 7,000 years or so that it has been trusted as a store of value, so what has changed? The thirst for yield in the Bernanke created yield-parched desert has reached the point at which people are seeing mirages, like “safety” in overvalued high dividend yielding stocks. (See my 4/29/13 post, YEAH, THE BIG DIVIDEND PAYERS ARE GETTING RICH, BUT…) In such an environment, people tend to do irrational things…like suddenly feeling the near insatiable urge to toss the old standards over the side in favor of the hottest new item to come down the pike, in this case big dividend payers. (See my 5/13/13 post, A “THIRST FOR RISK”?: SOME BASICS ON RETURN, RISK, AND INVESTING .)
One can take this “no yield so no gold for me, thank you” argument a step further. This disdain for assets with no, or close to no, yield transcends gold and other precious metals. Notice how a virtually (certainly on a real basis) yieldless bond market has done of late. The ten year treasury yield has gone from 1.67% at the end of last month to 1.95%. The ten year reached a low yield of 1.38% last July, when gold was trading with a $1600 handle. Could it be that gold, a yieldless asset, is trading with treasuries, which Mr. Bernanke have rendered virtually yieldless?
One might argue that of course gold will move in the opposite direction of yields, and therefore in the direction of bonds, because gold purchases are financed either by borrowing money or by foregoing yield. But I am arguing causation here; perhaps both gold and bonds are getting pounded not for traditional reasons but because traders, and some investors, are abandoning low and no yield assets en masse in favor of big dividend paying stocks.
All this could be so much navel gazing, however, for two reasons.
First, gold is obviously getting pounded because big holders, or big shorters, are selling. We don’t have to know why and we can’t, in most cases, know why. So what difference does it make? Big money people, or a lot of little people money, no longer like gold and have acted appropriately.
Second, the response of yours truly, and those I advise and would advise, will be to do…nothing. The underlying reason for owning gold, i.e., an utter lack of confidence in the world’s, and perhaps especially, our, central bankers remains intact. So I am staying in gold. (See my 4/15/13 post, GOLD : YES, I’M SCARED…BUT I’M STAYING, perhaps ironically (certainly not presciently) written on the date gold reached its (then) low.) And when it comes time to rebalance, unless things change, I will be buying more gold and silver, just to maintain my long term allocation to that ancient object of kingly desire (gold and silver, not Zsa Zsa Gabor), not because I have any idea where gold will be going in the short to intermediate run.
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