Golden trade

Gold...Is It a Dead Trade?

The last weeks we have seen spot Gold in US dollar terms tumble from 1750 to 1670 despite global central banks coming out with more aggressive monetary policy and looking dovish.



In theory, much has not changed with regards to the fundamental reasons to own gold as an investment. You still want gold to "protect" you from currency devaluing by the central banks in efforts to strengthen their individual economies (As central banks increase their asset purchases/ balance sheet, we expect more money in the system thereby fueling inflation and devaluing the currencies, this in turn makes domestic products cheaper to foreign companies and boosts an economy's exports). However, Something has clearly changed in the last few weeks for the price of precious metals to basically shrug off an increase in asset purchases by the US Central bank, an increasingly dovish Japanese government that threatens to debase their currency and continued reassurance of cheap money around the world... or has it?

Equity markets don't seem to think so, the Dow and other indices have rallied on the news and activities from central banks. Although other news seems to prop these indices up, I suspect that increasing the amount of liquidity in the global economy is the chief driver.



As it stands, it would seem that increased liquidity has caused a "risk on" mentality to run rampant in the markets. Whereas in the past, increased easing caused investors to be cautious of inflation, they have simply disregarded this notion today because they have seen no impact of inflation due to central banks easing. On one hand, it seems Ben Bernanke is achieving at least part of his goal when it comes to his monetary policy.

Bernanke has time and time again insisted that his aggressive monetary policy will achieve many things in order to strengthen the economy, one of them being the wealth effect (people feeling wealthier when their investments are doing well and in turn spending more money). As we have seen since the beginning of his policies, the stock markets have rallied by double digits and consumer confidence has increased, some would speculate about the causal relationship between the two, but regardless of ones stance on the matter it is impossible to deny that both have happened. So much so that the chatter now that of a consumer led recovery in the U.S. All this is good stuff, but what about the price of gold and why its taking it on the chin you ask?

Well there are a few possible explanations
1. The market is completely discounting the idea of inflation and therefore taking a risk on position in equities rather than a protecting their wealth with gold.
2. Glimmer of presumed brilliance with regards to solving the Euro Zone fiscal woes is causing investors to be more optimistic about the future, therefore increasing their risk appetite.
3. (And ill expand on this) The actual effects of the Fed's increased asset purchases are not being felt yet in the market until these purchases kick in in 2013.

Julia La Roche brilliantly notes that "The FED has committed to purchase $40Bn per month in MBS + $45Bn per month in Treasuries (QE). That’s a total of $1020Bn in QE next year, over $1 Trillion in balance sheet expansion. See right axis of chart below….That takes FEDs total assets from roughly $2.9 Trillion to over $3.9Trillion."

To illustrate the correlation between the price of Gold and the size of the Fed's balance sheet



leaning on her analysis we note that this price correction in gold and precious will be short lived until we begin to see an expansion in the Fed's balance sheet.

Otherwise, the common theme in my analysis is that investors have an optimistic forecast for the future and expect to see a global resurgence in 2013.
Ultimately, it pays off to be well hedged; and having some exposure to precious metals is an excellent way to do so.

Gold is financial antimatter; it is the fear factor which is opposite to the confidence factor.

The fact that it has pulled back doesn’t indicate all fear has vanished, but its saying that the "risk on" trade is popular, and we all know how quickly that can go south

Till later Trade well

My Three Year Investment Idea

My Investment Idea
Precious Metals
Precious metals such as Gold and Silver are at a critical point in our history. They have never been valued so high, nor have they been so accessible to the ordinary investor. Precious metals currently provide a great investment opportunity in my opinion. The value in precious metals such as gold and silver is in its ability to be a preserver of wealth and as a currency value. Historically the wealth of a country was always determined by the amount of Gold the country had in its reserves. Precious metals presents a real measure of wealth because they are not subject to inflation or manipulation. After the second world war, countries decided to value their currency relative to a US Dollar rather than the gold standard, this left their currencies subject to monetary policy done in the United States. Now gold is no longer pegged to any national currency, rather it is more commonly used as an investment or a symbol of wealth.

Today an interesting opportunity presents itself in valuing precious metals such as gold. Since gold is not subject to inflation and the value is relatively reliable, it stands to reason that investors who are unsure about the future value of their home currency will seek a stable alternative to protect their wealth. To be more specific, in the United States, monetary policy in the form of Quantitative easing and low interest rates is causing the value of One US dollar today to be a lot less than it was four or five years ago. With the probability of even more monetary policy in the form of Quantitative easing three (QE3), it seems that the US dollar will lose even more value in the future. For investors that recognize this as a threat to their wealth they will seek out ways to preserve their wealth. The two most common and reliable options are to either invest in companies in the form of stocks or purchase a preserver of wealth or another currency.

Stocks would be a good idea, however the risk inherent in owning stocks are increasing. A company fares as well as the economy does, this would be a worse alternative to preserve investors wealth as the outlook for the economy seems to be “grey” at best. The recent credit crisis has led to a nationwide deleveraging of balance sheets, this means that companies and people are no longer borrowing money to support an expanding economy. This will invariably lead to a slowdown in economic growth which does not bode well for the future outlook for stocks. This leaves the second alternative which is to find another form of wealth preservation in precious metals or other currencies. Many countries in the world are facing the same sort of crisis in deleveraging of balance sheets, therefore buying foreign currency would only serve to shift the issue to a different country. The solution to the issue of wealth preservation in this case would have to be precious metals. Gold and other precious metals will always have value either as an aesthetic or as currency, in addition to that, gold and other precious metals are not subject to manipulation by over production, rather the laws of supply and demand are the two main factors governing the price of precious metals. As demand increases and the supply stays relatively the same, the value of gold and silver should appreciate for investors everywhere. Precious metals are the ultimate inflation hedge and safe haven in times of uncertainty which is what we are experiencing now in North America and Europe.

Investment Vehicle

Precious metals ETF (GLD, SLV, CGL) these are exchange traded funds that track the price of owning the underlying commodity with a 99.91% accuracy

Commodity future – This is a risky option but provides an opportunity to own precious metal with leverage

Physical form (Bullions, bars, E.T.C) – Buying the physical precious metal could prove even more expensive, as the owner would have to be concerned about security and storage.

Mining company stocks- Although the value of a stock has other variables besides the value of the underlying precious metals, buying stock in a company that is exposed to the precious metal of one’s choice is another way to be exposed to the effects of change in the price of the commodity.