In his November 6, 2009 weekly conference call, Don Coxe of Coxe Advisors discussed gold, the economy and commodities.
Coxe says that there are a host of reasons for the recent outperformance of gold, the least of which is the crumbling dollar. As long as interest rates are at zero, the carry trade in the US dollar will continue to flush liquidity into the markets and into gold, and as that involves shorting the dollar the dollar will continue to slump.
It also means that all assets could blow off together should there be any reversal in monetary policy resulting in a rate hike. That may still be a while coming as central bankers have stated a willingness to wait until next summer to revisit rates.
On a supportive note for gold, India and Sri Lanka have bought much of the IMF's 430-tonne overhang of gold inventory, and China is said to be buying the rest.
However, Coxe says, don't be fooled by the fact that gold and equities are doing well at the same time. The rise and outperformance in gold is also due to the appetite of large investors betting on long term prospects for inflation, now.
Good economic news from around the world last week, as well as promising news from the US, is a serious threat to the economy, the market. We had very positive news, for example, coming from India and China that growth would be better than expected, and their commodity demand continues to be sustainable. In the US, while capacity utilization still remains slack, wage demands have remained stable. Unemployment in the 10% range may be understated by the BLS though because of the way they account for part-time employment, says Coxe. Do-over economists have stated that unemployment could be 16-20%. The BLS has quietly said that there could be inflation in food prices.
Coxe said, "Those of us who accept David Dodge's view that this has been a rebound, and not yet a recovery; a rebound from a dramatically oversold territory where it looked liked the world was coming to an end, to some optimism that things were going to get better, and pricing in how good things would be, then what it does, is put enormous pressure on central banks not to feed inflationary fears."
"What we learned from the 70s, is once the inflationary fears start to work into peoples decisions, then all sorts of non-economic decisions are made which makes the inflation forces develop a life of their own. Specifically, changes in inventory policies, such as people buying now, rather than later, because they expect the price to go up, those kinds of things."
"One of the things central bankers learned is that they must move before the surveys of inflation expectations start to show a sustained rise. Its when people predict that there's nowhere for inflation to go but up, and its going up, that then its very difficult to hold off the inflation that occurs. What you have to do then [central banks] is dramatically raise rates."
"So, we've seen those go past 20% in the US before, and those inflation expectations got crushed, and in the process the economy got crushed too."
Good economic news from around the world, and domestically is actually bad news for investors and for the economy, as it means that we could end up in a situation similar to the mid-1970s when we had high unemployment coupled with interest rate hikes. If interest rates remain zero for too long, then the problem may end up being bubble-like economic conditions artificially enhanced by zero interest dollars, and could cause a central bank move swiftly, then, to reign in overheated conditions.
$1,100 gold is a sign that this could be happening. Coxe says that if commodity demand continues to strengthen and wage demands prove to be stickier than expected, the combination could be very bad as it would intensify inflation, and cause policymakers to raise rates at a time when there is high unemployment. That will choke off the fragile recovery and it will choke off the easy money.
Either way, Coxe says that you want to be in gold. You're better off in gold has it will hold its value better than other "risk" assets. $1,100 gold is a warning sign; not a sign of a really good bullish environment to be investing in. Coxe finishes by saying, "Its the outperformance of gold that should give investors pause."
Coxe goes out of his way to make sure he's understood that commodity ETFs that invest in commodity futures are not a effective way to partake in the commodity trade, because of contango/backwardation effects. One way to go, and he makes his disclosures, as advisors is to the way of Coxe Commodity Strategy Fund, and otherwise, via the stocks of the commodities producers as he has discussed on a regular basis in the past.
Coxe also discussed crops, saying that while the warmer November weather was good for farmers, and crop prices came off as a result, they still had not accounted for crop blight.