Gold sentiment turns negative as dollar rises

In the Lead: “Hubble Bubble Trouble”

The blame for such toned down estimates is being placed on the European situation. However, do note that 3.5 or 3.8 percent global GDP growth is still...growth and not the dip into negative growth territory that is all the rage these days when it comes to predictions for 2012. The US, in GS’ estimation, is slated to grow at about the 1.7% level this year and at the 1.4% one, come next year. That’s certainly not the previously projected 2% rate of expansion, but it is not a “double-dip” paradigm either. A couple of days ago we posted commentary expressing concerns about the effects that certain trip-and-falls might have on China’s economy and possibly that of the planet.

This morning, a Bloomberg New editorial picks up where we left off and warns that the Chinese economic miracle model has its limits and that the country’s leadership – while well aware of the situation – will have to do some heavy-duty acrobatics in order to avert undesirable (some say horrific) outcomes. To wit, and just for one telling example: the IMF figures that the importance of Chinese demand on the planet’s largest economies (the US, Europe, and Japan) has more than doubled over the last ten years. Do not, for a nanosecond, underestimate what the adverse effects of the advent of a Chinese hard-landing would be on the commodities’ (including gold) space.

Speaking of that space, at least in the opinion of certain market observers as well as some academics, the rate at which it has expanded, places it in competition with Edwin Hubble’s bubble-like universe. The Financial Times’ Mark Williams identifies gold ETFs as a potential “wrecking ball” to the market in the event a synchronized stampede towards the single “Exit” door were to occur. Professor of Economics L. Randall Wray, the author of “Understanding Modern Money” goes one step further and labels the recently intensified commodity market speculation as “The Biggest Bubble of All Time.”

In his devastating expose of the commodity sector, Prof. Wray argues that the tell-tale sign that the commodity bubble is light-years (pun intended) ahead of the Tulip Mania or the NASDAQ ones is found in the doubling of prices of the top 25 traded commodities just in the period of from 2004 to 2008. The top 8 commodities of course increased much more than that mere doubling of value. Now, it could be argued that the implosion of 2008 had brought an end to that bubble. It turns out, that such was not (yet) the case.

Prof. Wray notes that “the crisis [of 2008] wiped out real estate markets and the economy. Managed money needed another bubble. They whipped up irrational fears of hyperinflation that supposedly would be caused by Helicopter Ben’s QE1, QE2, and the newly announced QE3 [aka “The Twist”]. Better run to good “inflation hedges” like gold and other commodities. That did the trick. The commodities speculative bubble resumed.”

Back in 2005 this writer listened to one, Frank Veneroso…a venerated voice among commodity fans. He spoke in Zurich, Switzerland to an incredulous audience about the coming “nuclear winter” in base metals. Of course, “summer” lasted until 2008 and then it came back again, for another three-year run. But Mr. Veneroso had seized upon a very important fact; you cannot have rising stockpiles of something while also having incessant price gains in same. Supply and demand went out the window, temporarily, as a determining factor for prices. Often, that occurrence is thought of as a bubble.

“Yes, commodity bubbles happen, but eventually reality sets in and brings the price back down to reality. You don’t get 3, 4, and 5 standard deviation events. A four standard deviation price rise falls outside 99.994% of all outcomes—one in 100,000 years; a five standard deviation price rise is about one in 2 million years. That pretty much covers the time since our ancestors beat things with big sticks,” concludes Prof. Wray. Could the “Veneroso Winter” be in the cards? Stay tuned. If it is, you might wish to pull out your heaviest financial “parka.”

Until tomorrow,

Jon Nadler is a Senior Metals Analyst at Kitco Metals

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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