Gold Market Radar (February 24, 2013)

Gold Market Radar (February 24, 2013)

For the week, spot gold closed at $1,581.40, down $28.70 per ounce, or 1.78 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 5.01 percent. The U.S. Trade-Weighted Dollar Index gained 1.12 percent for the week.

Strengths

• ISI noted in its Weekly Economic Report that its Company Economic Diffusion Index for the U.S. ticked down from a week earlier. In each of the last three years this index has surged on optimism, only to attain lower highs and then fall to lower lows. These declines from unfulfilled expectation of growth marked what ISI has called a “Growth Problem” and typically these declines line up with downturns in the broader market. In the near term, this could dampen the enthusiasm for the wall of money that is chasing performance and lead to a strengthening of gold prices.
• Despite the call to be ready to vary the pace of monthly bond purchases by several Federal Reserve policymakers, Fed Chairman Bernanke said the economy was far from operating at full strength, reiterating his commitment to monetary easing. Over the past three months, the Fed’s balance sheet has surged almost $200 billion after remaining flat for the last 18 months. Gold price changes have exhibited a strong correlation with the Fed’s balance sheet expansion over the last decade. However, the price of gold has headed south with surging stock prices in January, yet the monetary base continues to rise, thus creating a very bullish scenario for gold in the coming months.
• On Wednesday, the price of gold hit the “death cross,” a technical indicator used by analysts when the 50-day moving average crosses below the 200-day moving average. The hitting of a death cross is normally associated with a continued sell-off. However, Ryan Detrick of Schaeffers Investment Research noted this is a bit of a false indicator when it comes to gold. He showed that the past 22 times gold has hit the death cross, it has gone on to post positive returns for the 1-, 2-, 3-, and 6-month periods after the cross.

Weaknesses

• The SPDR Gold Trust, the world’s largest gold-backed exchange traded fund, reported its bullion holdings decreased by 20.77 tonnes on Wednesday, marking the largest one-day outflow in the last 18 months. The drop coincided with an intraday $40/ounce fall in the gold price, the largest in almost a year. In addition, the Market Vectors Gold Miners ETF traded at its highest daily volume since inception in 2006. Typically, though, this type of high volume liquidation event bodes well for higher bullion and gold stock prices.
• David Rosenberg of Gluskin Sheff noted the currency skirmish (read: full out war) being waged by countries across the globe should have gold peaking; but not only is gold selling off, it has dropped by 1.8 standard deviations over 60 days. Higher inflation expectations are becoming evident across the bond market, where Treasury Inflation-Protected Securities (TIPS) breakeven rates keep grinding higher as the consequences of central bank actions are starting to show. It is ironic that in the same universe where inflation protection is become more valuable, the most natural hedge against inflation risk – gold – is not peaking. David Rosenberg and others suspect there might be something else driving gold, most likely forced selling somewhere from redemptions.
• One would think investors would have learned by now not to believe every politician’s utterance. But investors and the masses seem fairly comfortable absorbing the enormous spread of disinformation by politicians in an effort to keep their constituencies in line. The result has been evident in consumer and investor sentiments, which have largely preferred risky assets over gold.

Opportunities

• In his notes to clients, David Zervos of Jefferies continues to write critically of the central banks’ printing frenzy. This week he argues that the current trade does not involve one currency against another, but rather a trade of ALL currencies against real assets. Banks are printing to force risk-taking, leading investors to buy the limited supply of risky assets before someone else with a bunch of printed reserves beats them to it. The current race among central bankers is to lower rates faster than anybody, and in doing so they are risking the long-run inflation stability which could prove difficult to contain.
• There is major change happening across the top management of gold miners after massive write-downs of enormously expensive projects. For a gold and precious metal investor, this means a serious change in policies and the establishment of a more cautious approach to pursue profits and dividends. The key play new CEOs are charged with is that of containing costs, both in production and in resource increases, and delivering value to shareholders. Next week, BMO Capital Markets is hosting its Global Mining Conference, one of the largest company and investor meetings of the year. Investors are demanding change in practices of the past or expecting a change in management.
• Investor optimism appears irrational at times. The S&P 500 just hit a 5-year high and the NASDAQ is now at 12-year highs. Investors seem to have just taken notice as record inflows into U.S. equity mutual funds surged to their highest level in a decade. Incidentally, record outflows from mutual funds took place at the market bottom of late 2008.

Threats

• India is considering a second gold import tax hike this year as it battles a widening current account deficit. The country, which holds the spot as the world’s biggest gold buyer, is looking at raising the current 6 percent tax rate to 8 percent.
• The fall of gold below the $1,600 level acts as a reminder of Alan Greenspan’s famous “irrational exuberance.” The global trend is one of fiat money chasing anything supported by loose monetary policy on the back of shorts on hard assets such as gold. Low inflation means lower risk premiums, which support high valuations of depreciating assets, and lower premiums for safe havens.
• Gas prices have increased dramatically year to date in what imposes a $60 billion annual drag on the economy’ the housing sector has started to cool down with mortgage applications down 1.7 percent, sequestration budget cuts are approaching fast with a likely hit of 0.5 percent to GDP and higher taxes are being proposed as the cure to head off any cuts in spending. Contrarian investors are likely positioning for a less rosy outlook.