Gold Market Radar (April 8, 2013)
For the week, spot gold closed at $1,581.82, down $15.67 per ounce from the Thursday Good Friday close, or 0.98 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 7.39 percent. The U.S. Trade-Weighted Dollar Index lost 0.60 percent for the week.
Strengths
- Non-Farm Payrolls released today showed an 88,000 increase for the month of March; the lowest in nine months and lower than the most pessimistic forecast in a Bloomberg survey. The report vindicates Fed Chairman Ben Bernanke’s cautious outlook on labor market improvement and gives more reason for the FOMC to press on with the monthly$85 billion level of monetary easing.
- In previous guidance the Fed stated the current easing cycle would not be halted any time before the unemployment rate reaches the 6.5 percent mark. Despite Friday’s announcement of an 0.1 percent decrease in the unemployment rate to 7.6 percent, the truth behind the numbers shows the labor force participation rate has fallen to the lowest level since 1979, this according to the Labor Department. Such low levels of labor force participation will add difficulty to reaching the Fed’s 6.5 percent unemployment goal as a greater number of job openings attract more people to join the labor force.
- Christopher Wood of CLSA reiterated his bullish position on gold and gold equities by reaffirming his weightings for US dollar denominated pension funds. He advocates for a 45 percent weighting in bullion, for which he currently has a minimum price target of $3,360 per ounce, and a 20 percent allocation to gold mining stocks. His main argument is that a long term dollar-debasement is inevitable with the growing resort to quantitative easing. He appears undisturbed by the current weakness in bullion as he asserts gold is insurance, not a short term trade.
Weaknesses
- It was a rather tumultuous week in the gold markets. SoGen published a report titled “The end of the gold era”; which further explored what it would take to generate a crash in the gold price. The report studied gold from the point of view that gold is a commodity. This is not true, as the financial market prices gold futures with a contango not in backwardation as true commodities are priced. In other words, the market is telling your gold is a financial asset the same as money. An analysis using the wrong framework on how the market actually values an asset is unlikely to reach the right conclusions.
- Despite gold only falling less than 1 percent for the week the gold stocks fell close to 8 percent on average. With the first quarter just over, the window for hedge fund clients to turn in redemption notices to fund managers just opened and it is likely that this may have been a driver of such sloppy price action when there was little headline news.
- Allied Nevada was one of the worst performing names in the senior tiered gold space, losing 24.36 percent for the week. Allied Nevada recently fired their CEO, but that does not change the issue of working with low grade ores, low recoveries, capital needs, and access to facilities that would be needed in the refine their refractory ores in the future.
Opportunities
- ISI reported this week that the Bank of Japan’s balance sheet surged more than $140 billion in just eight days. To put the number into perspective, let us remind you that Bernanke is currently injecting $85 billion per month into the system. Furthermore, Japan being a smaller economy, the $140 billion expansion in Japan would be the equivalent of more than $420 billion in the US, in just eight days! The news from Japan continued when Bank of Japan Governor Haruhiko Kuroda committed to a two year monetary expansion plan set to achieve a 2 percent inflation target and end the 15 years of deflation. To achieve his purpose, the Bank of Japan will purchase longer duration government bonds at a rate of ¥5.2 trillion per month, or about $53.3 billion at the time of writing.
- When Fed Chairman Ben Bernanke steps down in January of 2014 you can expect the market to become very volatile; after all it has happened in several occasions, most notoriously in 1987 when the market toppled 35 percent as Greenspan took over Volcker. As of today, Janet Yellen is widely expected to take Bernanke’s seat for her dovish and supporting stance that will likely see a continuation of the Fed’s unconventional asset purchase strategy. Both Yellen’s dovishness and the transition uncertainty bode well for gold in 2014.
- Ian McAvity noted on his Deliberations publication this week that the current backdrop of money printing and asset bubble deflation risk would make him panic if he were not invested in gold and related stocks at the moment. The way he paints it is that regardless of what you think, with gold and the S&P both trading just above 1550, the downside risk in the S&P is far greater than the downside risk for gold.
Threats
- President Obama’s Federal Budget proposal includes the replacement of traditional CPI measurements by “chained-CPI” measurements going forward. Proponents argue that a chained-CPI is more likely to account for product substitution and give a more realistic picture of inflation’s impact on consumption, while detractors believe it does not account for services that rise faster than inflation and which offer no substitutes, like healthcare.
- On average, chained-CPI would be 25 to 30 basis points lower than the CPI measures in place today. The move would help reduce the government obligations on many fronts that are inflation linked, such as TIPS and social security payments. However, it would make inflation look more benign and detract that the need to own gold as a protection against inflation.
- Economic data is indicating we have a sudden loss of momentum in the economy. The recent Absolute Return Letter from Absolute Partners shows a chart of total net government liabilities including off-balance sheet items relative to GDP. The US measures out at 541 percent; only second to France at 549 percent but worse than Spain and Italy on these measures; sure nothing like what is happening in Europe could affect the US, right? Well Cyprus was swept under the rug; the next potential banking crisis may be Slovenia which just had their five major banks downgraded by Fitch.
