Who the hell needs an umbrella in the middle of a draught? Snow boots in a roasting desert? A National Rifle Association bumper sticker at a UC Berkeley sit-in? For traders, the bigger question is why they should be long gold during one of the most aggressive “RISK ON” rallies in recent years, when asset prices of every description, except precious metals, are going through the roof?
When Bernanke announced QE4 hot on the heels of QE3, the kneejerk reaction of most investors was to load up on gold, myself included. After all, monetary expansion and rising prices for the barbarous relic is one of the cleanest correlations out there. But three months later, we are still waiting for the great bull market to begin in earnest. What gives?
The usual suspects are trotted out. While QE7 looks great on paper, it has yet to hit the actual monetary data, which has largely been flat. Many blame John Paulsen, one of the world’s largest single gold owners, whose flagship gold fund was down 21% in 2012, and has been hit by substantial redemptions for the second year in a row. The yellow metal still has a huge twelve-year gain, from $270 to $1,667, making it ripe for tax loss selling.
There could be deeper reasons far beyond the short-term considerations listed above. Last week brought us the first sniff of the greatest reallocation trade of our lifetimes, out of bonds into stocks. A series of failed Treasury bond auctions took the yield on ten-year paper up from 1.60% to 1.82% in short order. What’s more, this could be a preview of a far bigger shift of funds to come in January. Rising interest rates is bad news for the yellow metal, as it raises the opportunity cost of owning the stuff.
What has made gold particularly devilish to trade in the last quarter is that it snuck out and had a sex change operation when we weren’t looking, no doubt covered by Medicare. It reliably traded as a “RISK ON” asset for the first eight months of this year, tracking the S&P 500 tick for tick. It suddenly morphed into a “RISK OFF” one when the Fed sprung QE3 on us on September 13.
Asset classes do this to us sometimes, which makes predicting their movement even more problematic, and why so few of us actually pull this off, unless they are complete liars. It happens when short-term technical issues overwhelm longer-term fundamental influences, or when there is an epochal sea change in direction.
If that is the case, then there will be a better time to own gold in a few months, once the current kumbaya love fest in Washington works its way through the financial system. Get resolution of the fiscal cliff, the New Year bond to stock reallocation, the next debt ceiling negotiation, and robust Q4 US economic data out of the way, and gold may have a chance to run. Until then, I prefer to cheer from the sidelines, which is why I stopped out of my long position with a Trade Alert yesterday.
I don’t expect gold to crash, just to get boring. Remember, real interest rates are still negative, which is gold supportive. I would be amazed to see it under $1,550 again. For adrenaline junkies like myself, that is not good enough.
For the longer term fundamental case for owning the barbarous relic, please refer to my earlier piece on “If You Had Any Doubts About Gold” by clicking here, and “The Ultra Bull Case for Gold” by clicking here. The new money the Fed is creating can hide, but not forever.
A Great Tax Selling Target
You Can Be Such a Tease!