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Commentary & Analysis
Gold: too much investment or not enough?
We’ve received a lot of questions in the last 24 hours or so that are very similar to the question we are asking ourselves:
“What the hell is going on?”
As Jack has noted, he understands the reason the euro and risk might bounce after the eurozone leaders “struck a deal,” but we saw moves yesterday that are, thus far to us, inexplicable.
In hindsight, there were so many anticipating a disappointment from Wednesday’s summit that the market was bound to be blind-sided. But yesterday was more than that; it was a full-on rampage.
I won’t list the big winners (it’d be faster to list the small winners). Let’s just say the price bars were tall and the closes were near the highs.
Even before the conclusion of the summit I was watching the rally in crude oil. It surprised me that it was able to clear a level of congestion where several resistance points intersected. But it has so convincingly broken that level that I must be open to more potential upside.
Has someone flipped the switch? After yesterday there exists that eerie feeling of a quantitative easing announcement, where market sentiment has decided on a new direction for the next 6 to 9 months, regardless of what apparent obstacles remain ahead.
We will keep an eye on these obstacles; because ultimately we think the positives of this summit resolution will be reversed once the basic eurozone growth deficiencies are seen impacting the global economy. This, if not sooner, is when eurozone contagion will seep back into market sentiment.
All that said, there was one asset (besides the US dollar) that underperformed yesterday.
While it has had an impressive week overall, it was not as big a recipient of risk appetite yesterday as so many other commodities and assets. What gives?
Over the weekend on some random financial morning radio show I heard an incoherent argument for gold: if stocks go up then gold will go up. That’s as much as I could gather from the blabbering.
Perhaps the guy has been watching the same correlations as I have, showing gold moving surprisingly in line with the S&P 500. But since the relative performances yesterday did not match, I have to ask if something is changing for gold.
A guy I watched in a Reuters interview this morning suggests gold prices must go lower (once interest rates begin to rise) based on its supply characteristics, particularly if investors find a reason to shy away from it. His comments contained elements of bubble-calling. The supplies of gold have built due to stockpiles in ETFs, bullion, and certificates. Ditto for silver…
But this guy went on to say that he thinks fears of a global economic slowdown are exaggerated and would prefer being invested in base metals and crude oil, assets where potential surpluses do not exist.
But the following chart instead suggests gold still an extremely small part of investors overall portfolio and that investment demand is likely not going to change for the worse:
I suggest we could see a repeat of 2010 price action where investors feared a relapse into global recession:
The Bank of Canada has since revised lower their expectations for global growth – down to just above the 3% generally-accepted threshold where anything lower marks a recession.
And since we have already seen margin calls on other assets sap gold’s uptrend, if risk returns soon, led by a contraction in the eurozone, then gold could be free to become a recipient of risk-averse capital flows as investors flee growth-commodities and risk assets.
Basically, let’s watch for a divergence between price action in gold and growth commodities.