Saturday, January 27, 2018

What's Up With Gold? And Should We Care?

Our presently bearish view of gold, from a macroeconomic standpoint, continues to make sense to us. Contrary to what some would have you believe, consumer demand (India's wedding season, for example), while it may appear to offer the metal a periodic seasonal boost, is no determinant of whether an investor (as opposed to a short-term trader) should take a position. The supply of gold in the world far outstrips all the functional demand the world marketplace could virtually ever serve up.

So what moves the price of gold? In a word, emotion. Fear, or lack thereof, to be exact. Hence, given our assessment of the global macro backdrop, gold, by itself, really shouldn't be trending as bullishly as it has of late. If you look at the commentary out of Davos this week, for example, frankly, the world ain't currently fearing:
"Let's celebrate what could go right for the moment, because we are in a sweet spot" IMF Director Christine Lagarde
 "It's the first Davos I've been at where we haven't been mostly been talking about a recent or a next crisis" Bank of Canada Governor Stephen Poloz
"Wow, this is fantastic" Bank of England Governor Mark Carney
So what has gold rallying?

Again, it's fear! Not fear of economic Armageddon mind you, but fear that the U.S. dollar will continue its descent. To drive home that point, the price of the yellow metal is actually down against the British pound (of all things [given Brexit]), the Swiss franc, the Australian dollar and the Japanese yen so far this year!

So, again, it's not fear of a looming economic contraction, it's fear over the fate of the U.S. dollar.

Of course the begging question is; why in the world, amid tax cuts, deregulation, and likely more fiscal stimulus to come, would the U.S. dollar be declining???

Well, some would tell you that despite how good the U.S. economy looks, other countries' economies look even better, and, relative to the dollar, their currencies are too cheap. While we understand, and to some degree sympathize with that logic, we don't think it quite justifies the utter drubbing the greenback's been receiving of late. In fact, our thesis is that as the U.S. economy continues to accelerate -- which at this point our analysis suggests is likely -- and, thus, interest rates continue to rise, the dollar should be hard to resist, and gold should be on everybody's sell list.

But, nonetheless, the world's resisting the dollar, and, in dollar terms, it's embracing gold. 

(I must note, we're not talking about a raging bull market in gold [relative to stocks], it's under-performed stocks by 50% so far this year...)

So, one more time, you ask, what's depressing the dollar? And should we even care? 

The answer is clearly the threat of protectionism. And, as we pointed out in our year-end letter, and since, yes, we, as investors, should care. 

I'll let this morning's Wall Street Journal take it from here.... emphasis in last sentence mine...

(Oh, and read yesterday's short blurb for some good-sounding news on the subject.)

Still, concerns about friction resulting from the Trump administration’s “America First” trade policy have weighed on the dollar and supported gold, an asset that some investors favor when they think markets might turn rocky. Earlier this week, the U.S. slapped steep tariffs on washing machines and solar panels, aimed largely at Chinese and other Asian manufacturers.
“The focus right now is on the weaker dollar story, and the fear is there will be a bad [North American Free Trade Agreement] story or a bad trade story in general,” said John Velis, vice president of global macro strategy at State Street Global Markets. If there is retaliation from China or a breakdown in Nafta negotiations, “at some point equities are going to look at this fundamentally and say this is not good,” he added.

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