The new trading week started with small losses in the precious metals complex despite a 0.14% drop in the US dollar and a near-$1 advance in crude oil. Small-scale profit-taking was cited after gold market players attempted a test at the $1,680 resistance area but failed to deliver a victory just yet. A larger than expected decline in Germany’s Ifo index and continued wrangling over what exactly to do about Eurozone bonds and such added to indecision patterns in the early part of Monday’s session.
Spot gold traded at $1,670 on the bid-side while silver remained very close to the $30.75 mark in the minutes following the New York opening. The four principal precious metals are flashing the “overbought” signal in the wake of last week’s “Fedphoria-induced” rallies – their Relative Strength Indicators are all above the 70-mark (historically a level at which taking profit has proven the wiser course of action).
Platinum slipped $3 to $1,542 and palladium fell $1 to $648 per ounce. Rhodium was quoted unchanged at $1,150 per ounce. There is plenty of “meaty” data on tap for the week, including Wednesday’s US GDP reading and the survey of US consumer confidence slated to be released tomorrow.
The above notwithstanding, the upcoming Fed symposium in Jackson Hole, Wyo. is taking the front row-center seat among market players’ preoccupations this week. Some have dubbed the gathering as “Action [in] Jackson” time and are expecting it to yield the unveiling of the much-anticipated (make that: Much-demanded by speculators) QE Fed gesture. This is not to say that the also imminent Fed FOMC meeting is not being factored into the equation – certainly not when viewed within the context of the parsing of and the conclusions that were drawn about the FOMC meeting minutes that were released last week. This, despite some analysts who still see the Fed acting on some type of QE (if any at all) only in October or perhaps early next year to avoid potential political shading of its actions.
Background factors surrounding the European situation have become more muted as Fedspectations rule the trading day. However, even with the euro managing to tread water above the $1.25 level there are certain news items that bear watching before taking the plunge on the long-side in the common currency. To wit, the President of the German central bank — Jens Weidmann — said yesterday that he is categorically against the European Central Bank buying government bonds and that doing so could make saving the euro more difficult down the road. Mr. Weidmann said “central bank financing can be as addictive as a drug.”
Meanwhile, physical demand in the world’s largest gold-consuming nation — India — continues to be weak, at best. The Daily Bhaskar reports that at 31,100 rupees per 10grams, gold is “losing its sheen and rubs buyers the wrong way.” Locals are taking their existing gold ornamental pieces and are asking tradesmen to remake them into upgraded new designs. Net new gold purchases = not many at all. Sources in Jaipur indicate that the regional gold demand has collapsed by about 50%. Pakistan’s Daily Times relays that India’s second-quarter gold imports have fallen by more than 56%. A London-based bullion banker in attendance at Hyderabad’s International Gold Convention said that “for the gold price rally to continue, someone else would have to step in to replace India.”
Now that hurricane Isaac no longer seriously threatens Tampa Bay, the US Republican Party is set to fully start its national convention tomorrow. Some of the policy items to be talked about include a constitutional amendment to grant personhood to embryonic cells and a total ban on abortions, without exceptions. However, reports that the GOP also plans to adopt a platform that calls or an audit of the Fed and — wait for it — the appointment of a committee to study the feasibility of a return to the gold standard by the US have really set many Internet forums ablaze with chatter over the weekend.
The vast majority of such audiences view the GOP gold standard study committee proposal not as some kind of farewell tribute to retiring Rep. Ron Paul and his efforts to educate the masses about “honest” money but more like a done-deal and are expecting to have the greenback pegged to gold sooner rather than later (provided, of course that Messrs. Romney and Ryan prevail in November’s elections). This writer has spent several hours reading the emotionally-laden conversations on such sites by folks who are convinced that a ‘second coming’ is at hand for gold in America. At any price. Literally and figuratively.
Unfortunately, it appears that the participants in these numerous — and mainly gold-bullish by virtue of extrapolation — discussions have not spent any time reading the veritable explosion of media articles, op-eds, commentaries, etc. that have sprung up on the subject matter during the past 72 hours. In fact, we have rarely, if ever, seen such an immediate and widespread response to an idea (politically-motivated or not) as we have just witnessed with this GOP proposition.
Evidently, when it comes to the possible reestablishment of a gold standard, there are just as many voices that wish to be heard as being in opposition to it. Here now, is the roundup of such statements, in no particular order. We dedicate the remainder of today’s commentary to them not because sound money is a bad idea (it never was) but because what the proponents of this particular set of measures are advocating bears very close scrutiny by all of us who are not in possession of the credentials of the folks who wrote and/or spoke the following observations:
- Reuters News cited Capital Economics analysts as opining that “it is hard to conceive of the circumstances under which no one would want to hold dollars” in the event the full backing of US debt leads to instant $10,000 per ounce gold. The news agency also cited the World Gold Council, which noted that such a revival of the Tea Party’s favorite metal is “unlikely.”
- NY Times columnist and Nobel Prize-winning economist Paul Krugman remarked that “returning to the gold standard is an almost comically (and cosmically) bad idea. Mr. Krugman points to a chart that reveals that, since 1968, gold’s so-called “stable purchasing power” has been anything but stable. Rep. Ron Paul has his followers all but convinced that the gold standard is the key to stable prices.
- The Atlantic’s Matthew O’Brien calls the gold standard the “world’s worst economic idea” and uses only two charts to drive that point home; one showing CPI inflation under the gold standard from 1919 to 1933, and the other depicting CPI inflation since the Fed’s QEs have been with us. Mr. O’Brien remarks that in the period since the Fed began quantitative easing, there has been 23 times less variance in prices than there was under the gold standard. The tally of economists wishing to bring back gold backing for the US dollar was…zero during a recent poll.
- NYU professor “Dr. Doom” Nouriel Roubini tweeted on Friday last week that “Republicans eye return to gold standard & to another Great Depression as the gold standard contributed to the first one.”
- Law professor and best-selling author Susan Estrich says of the GOP’s “extremist” platform that includes the gold standard and audit the Fed propositions that it is one that does not reflect the candidate’s views and that it is thus a sign of weakness. Ms. Estrich notes that the passage of a platform that “throws federalism to the wind, forces rape and incest victims into maternity wards, and reads like a complete pucker-up to libertarian Ron Paul rather than the Wall Street-savvy nominee” indicates that Mr. Romney was not strong enough to stand up to the ideologues, or that he did not dare try.
Thus, GOP convention and rhetoric aside, we come back to the Fed (which is still in business) and to Ben Bernanke (who still has a job). Long-time market observer Martin Murenbeeld of Dundee Wealth notes that “the driving force now [in gold] is the constant theme of stimulus. When we do monetary stimulus, all kinds of risky assets tend to correlate.” What’s this, a long-time fan of gold including the yellow metal into the “risky asset” category? Well, stranger things can (and do) happen.
To wit: Professor Mehmet Dicle (Loyola University New Orleans) notes that a) there is little evidence that gold prices have provided protection against inflation in the 1999-2007 period and that b) gold’s reputation as a stock market hedge is largely undeserved. Between 2002 and 2009 the average 60-day gold-S&P 500 correlation was close to zero and this year that relationship is a positive 0.3 implying that gold and stocks have moved largely in tandem. There is your risk asset connotation. But, at the end of the day, one asset manager at MFS Investment Management concludes that he “cannot find a persistent pattern for how gold behaves.” We could, of course, add humans to that puzzling question of behavior patterns.
Perhaps the best course of action is to ignore the equally convincing noises coming from these highly polarized camps and continue to keep that prudent, insurance policy-flavored, long-term ten percent “solution” in your own basket of hard-earned assets. Perhaps the sky will remain firmly in place. So what? Bequeath the stack to the kids. Or your favorite charity.