Gold losing its luster day after intervention

In the Lead: “Dude, Where's My Rally?”

The penetration of the ‘boom-bust line’ prompted one HSBC analyst to point to a “sharp deterioration in business conditions across the Chinese manufacturing sector.” Others see a Chinese central bank that might be prompted to ease in some fashion in order to avert a hard(er) landing. Recall that China’s factory output is responsible for 40% of GDP. Commodity bulls are once again turning up the speed of their ‘radar sweeps.’

Over in the USA, the Fed’s Beige Book revealed moderate gains across eleven of the twelve districts that the central bank normally surveys. The exception occurred in the sector being monitored by the St. Louis Fed. Overall, the latest Fed report shows a US economy that is still above the recessionary ‘waterline’ and one that despite decent growth has not brought about a notable decline in unemployment levels. The Labor Department’s official jobs report comes tomorrow. In the interim, we have the small bump higher in the latest weekly jobless claims filings; 6,000 more applications for benefits were reported by the aforementioned US agency. The number is roughly 10,000 filings higher than economists’ consensus projections.

Speaking of projections bullish and otherwise, consider the latest ones coming from the desk of Goldman Sachs. The firm recommended US bank stocks, junk bonds, commodities and Japanese equities for the current year’s top picks when it peered into its crystal ball for 2011. Results from the real world have come in as follows: US bank stocks –down 26%. The S&P 500-down 18%. The Nikkei –down 16%. Commodities-up a “whopping” 1%...As of yesterday, Goldman recommends going short European high-yield corporate debt. It also likes gold for 2012 (as of Nov. 14 when it advised rolling long gold positions). Contrarians take note.

On the other hand, something to also take note of when it comes to the yellow metal is its behavior as a risk asset for most of the current year. Under ‘normal’ historical conditions gold should have vaulted higher, and significantly higher. Remember: A “safe-haven” is an asset that goes against the grain and rises when conventional assets suffer. One Seeking Alpha contributor describes the “failure of flight to safe-haven in gold during the self-destruction of the euro” as a “dagger in the heart of conventional gold valuation.” The rest of the post is worthwhile reading as well, as it contains cogent analysis of gold’s underlying fundamentals.

The most intense phase of gold’s migration from safe-haven asset to risk asset has taken place since late September. The author (“One Eyed Guide” –evidently still in possession of 50% of his sight) notes that “The apparent disconnect of gold from ‘financial stress’ (the trigger for ‘flight to safely’ purchases) cannot be called a hiccup. If there is no safe-haven mechanism that will drive gold higher then, the top could be in, and prudent investors should reduce gold holdings.” That, of course, depends on just how much someone has allocated to gold in recent years.

By our definition of “prudent” an investor ought to hold on tightly to that core 10% insurance position. It is not something to let go of, even in the wake of what we have seen this year; market meltdowns, possible top in gold, etc. Insurance policies on your life are not something you hope to cash in on, hopefully ever. Yes, that fateful day may come yet, but in the interim, if someone convinced you that 30% or 50% of 80% in the metal is what is ‘prudent’ well, you might consider a) the source, b) their motivation, and c) the degree to which you have made your portfolio much riskier than you might be comfortable with, in the process.

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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