By Pater Tenebrarum at Acting Man blog
This is not going to be a complete update of gold sentiment data, we just want to look at recent press reports on gold and show how they correlate with trader positions and opinions.
Yesterday we happened to look at the market news headlines posted at the start page of Yahoo Financial. These were the top headlines:
A few quotes from the second article:
“…in the absence of a full-scale geopolitical crisis, economic collapse, or other “black swan” event, there is no good reason to hold gold — at least here in the U.S.”
Of course, it is in the nature of “black swan” events that they are unforeseeable, or at least unforeseen by the majority. Their current “absence” is a meaningless datum with respect to the future.
“….even a cursory look at inflation indicators, be they the level of global interest rates, inflation expectations as measured by TIPS (Treasury Inflation Protected Securities) and the direction of inflation, itself, do not suggest that gold, in dollar terms, can, or will, go meaningfully higher in the days ahead.”
A “cursory look at inflation indicators” would not have revealed any major increase in inflation expectations in any of the 10 years during which gold rallied from $250 to $1,900 either. Obviously, there are other drivers that are just as, if not more important, for the gold price.
“….the longer-term view remains bleak.”
Only if one subscribes to the notion that six years (and ongoing) of unbridled central bank activism will have no negative consequences. Even though that flies in the face of sound economic theory and all experience, it is admittedly the consensus right now. When the peak of the last central bank-induced bubble came into view, consensus opinion was very similar. Even once the crisis arrived, gold bears were fond of saying: “If gold cannot rise now, it never will” (i.e., the “longer term view was bleak”).
Next comes the piece de resistance though:
“If you’re still looking for a safe-haven investment, a better option would be large-cap stocks with lots of cash and good management.”
We have heard a lot of things said about stocks in the course of the current bubble era, but this is the very first time we are coming across someone referring to them as a “safe haven”.
On Marketwatch we found this yesterday:
Oil, other commodities will be in the dumps for another decade (gold is one of those “other commodities” the article focuses on. The author informs us at the end of the report that he is throwing the towel and selling all his positions in these sectors. He incidentally also seems to think he knows more about the markets than Jim Rogers. Rogers is not always right about everything, but we have our doubts about that).
On November 6, the AP reported the following: Gleam is gone as gold prices sink to 4-year low. This article is especially interesting, as it informs us about the utter hopelessness of the situation (which is very similar to the NYT article from 1976 we recently quoted):
“Nothing is going gold’s way. Inflation remains tame, the dollar looks strong and Americans are increasingly confident. Even fears that the Federal Reserve would set off another financial crisis have faded as the central bank ends its effort to pump money into the economy. In short, all of the reasons for buying gold over recent years have disappeared, helping to drive prices for the metal to a four-year low.
Among investment strategists, there’s a growing belief that the worst for gold has yet to come. A surprise announcement by the Bank of Japan last Friday that it will expand its efforts to revive that country’s growth sent traders out of Japanese yen and into U.S. dollars. Gold plunged in response. In the U.S., the Fed’s next big step is an interest-rate increase, expected sometime next year. That should make savings accounts, money-market funds and other short-term investments more appealing. A higher benchmark rate would also sap inflation pressures and give the dollar another lift. Current trends, in other words, are all blowing against the yellow metal.
“Perhaps that’s the best thing you can say about gold,” says Edward Meir, a senior commodity consultant at INTL FCStone in New York. “Everybody is bearish on it. Honestly, though, I can’t see any bullish story at all.”
We distinctly remember that back in 2000, “everybody was bearish on it” too. And they sure couldn’t “see any bullish story at all” at the time, otherwise they would undoubtedly have told us about it. :)
A Few Data Points
It is interesting how the recent wave of bearish pronouncements in the press correlates with positioning and survey data. We want to pick out just two, which (similar to the AP article quoted above) were recently pointed out by Steve Hochberg of EWI.
Even more interesting is a data point we haven’t discussed in some time, namely the Daily Sentiment Index. The chart below depicts a 5-day average of this index (which is a survey of futures traders conducted by tradefutures.com). It has just reached a record low of only 5% bulls. This compares to a record high of 96% bulls at the 2011 peak.
Interestingly, GOFO rates have recently dipped into negative territory several times as well. While this is not as significant as it would otherwise be while short term interest rates are pegged near zero by major central banks, it still signifies that there is growing tightness in the physical gold market.
One must be careful with sentiment data during a clear trend, as they simply tend to follow prices to a large extent. They can serve as an additional input, but cannot really be used for precise timing. And yet, once people start saying that there simply is no reason at all to be bullish, and the bullish consensus according to positioning and sentiment data plumbs all time lows or multi-year lows, we have what is essentially a textbook contrarian situation on our hands.
This does not necessarily mean that there won’t be any further price declines (as noted previously, from a technical perspective further short term downside in gold can certainly not be ruled out), but it is undoubtedly a heads-up that the trend may be close to reversing. In this particular case one must also consider that central banks have blown yet another bubble of truly gargantuan proportions. As Mr. Singer of Elliott Management recently noted in his Q3 letter to investors:
“Nobody knows when reality will overtake the rhetoric, lies, phony statistics, wishful thinking, fake prices and tiresome poseurs pretending to be world leaders. The situation is universal, a consequence of terrible leaders and careless (or clueless) citizenry. Global problems are continuing to mount, along with the risk that the consequences of years of bad policies and inept leadership coalesce (as sometimes happens) in a short window of time.”
“Economics also provides its share of delusions, including the debt-fueled bubbles of both the 1920s stock market and the first dotcom boom. The real estate boom of the 2000s was another one, as excess demand was fueled by the combination of near-free money, the most marginal financial products ever invented, and the frenetic selling of houses to people who could not afford them and did not actually own them in any meaningful sense of the word.
“These examples are easy, because they were mass beliefs that were unreasonable in the extreme at the time they were held. Of course, at the time not everyone held the same deluded views, but the disbelievers were (and always are) discredited, demoralized and ignored while the delusions were alive. The problem is that while the delusions remain intact there is no proof available to convince the believers of their folly. Simply repeating that a mass belief is crazy does not make it so (nor convince anyone else that it is nuts). Furthermore, the amount of time necessary to reveal the truth is sometimes too long for nonbelievers to bear, so they just stop trying.
“There is a current set of delusions that is powerful and dangerous: that monetary debasement can be infinitely pursued without consequences; that the financial system is now solid and sound; that the low volatility and high prices of stocks, high-end real estate and bonds are real; that bonds are a safe haven; and that large financial institutions which get into trouble in the future can be unwound in a much safer way than they could be in 2008.
We have discussed each of these elements in the pages of this report and previous ones in an attempt to reveal the fallacy and unsustainability of such beliefs. But, as stated above, they will only enter the history books as mass delusions if they are unmasked in the future as unjustifiable and erroneous beliefs at the time they were held. We think that test will be met, perhaps soon.”
To the list of delusions Mr. Singer enumerates we can now add yet another one, provided by Ron Insana (nomen est omen?): “Big cap stocks are now considered a save haven too”.
It is of course very hard to stay the course when the markets do their best to convince everyone that things are perfectly fine and that, in the case of gold, no-one needs any insurance against the potential consequences of current policies anymore. As Mr. Singer points out: “While the delusions remain intact there is no proof available to convince the believers of their folly”.
However, one must not lose sight of the fact that they won’t stay intact. Once that juncture arrives, a few people will probably remember that they once read somewhere that the bullish consensus on gold had at one point declined to a mere 5%. :)