Thursday, May 27, 2010

Gold, the currency of dwarfs and taxi drivers

Following on from the inflation/ deflation debate we had better have a look at gold which appears to be denying the deflation leg of the argument and is leaping directly to the "inflation somewhere down the line anyway, only currency they aren't printing and so store of value etc etc " argument. Yup all of that makes sense but I can't quite get to grips with buying the stuff here as I have just had my TDI (Taxi Driver Indicator) triggered on the way home last night "you gotta be long gold innit". And that follows the DPI (Dinner Party Indicator) being triggered a month ago. Now running both indicators through my Polemic MDI Model (Moist Digit Indicator - involves licking your finger and sticking it in the air) and calibrating it via the BLSH algorithm (Buy Low Sell High), I can't help but thinking we aren't far off a large amount of hoopy earings hitting the market and effectively doing to specs what the GA ( Grannies Attic) function did to Mssrs Hunt in the Silver market in the '80s.

The extrapolationists all have their rulers out and are calling for it to head somewhere just outside the orbit of Pluto by 20"insert year here". Meanwhile, the Austrians were dredging the lakes as fast as they could and smelting and selling tons of gold coinage. 'Demand was strong enough to constitute “panic buying,” Austrian mint Muenze Oesterreich AG said on May 12.' but 'Gold demand, down 11 percent in the first quarter from the prior three months' , HOWEVER the World "talk it up" Gold Council said it will be “strong” this year on increased investment and higher jewellery usage and more elaborate Indian weddings.

Open Interest is screamingly high. And if you are buying gold on a disaster scenario play then having it stashed in a warehouse a long walk away and your counterpart now defunct may not be the wisest way to do it.

But let's look at some other stuff...

Against World Real Rates (first chart below, yellow line - EU, US, Japan & UK 10yr Inflation Swaps, GDP-weighted as a proxy for World Real Rates), Gold doesn't really look out of whack. To what extent this is market pricing of easier global policy to deal with the potential deflationary shock from Europe is not clear. But looking at the 10yr World Breakeven (second chart below) clearly shows that the Deflationistas are winning the debate... Perhaps given that both real rates and inflation expectations are now so low, the really overvalued assets are bonds?
Short term, though, we have a ratcheting relationship with the risk-on/risk-off trade. As gold is a loaded position, stress = gold falling. So, if we are seeing a bounce in risk assets ( now a bit more discernable through the month-end fixing cacophony) then gold should drift up again short term giving the taxi drivers one more hurrah. But I am wary... gold may be going to the Moon, if not Pluto, but we need to see a few taxi crashes and dinner party pregnant pauses when gold is mentioned, before we really take off....

And finally, a late foot(ball) note... Hope this TV network's roving reporter isn't using the same map as his colleague to get to the World Cup!


Trader Joe said...

We had actual deflation and a lot more of it in the 1930's when nominal GDP fell by something like 30% and gold went up. in fact there was so much buying interest that FDR had to sever the gold link after promising in his campaign not to. So regardless of whether we get debt deflation or fiat malaise inflation in the coming years, gold can do well in either scenario.

I will grant you the positions are crowded and that's why we get the periodic $50 dumps in a day or two. However long run and from a macro standpoint, what is the catalyst for the top to be in for gold? Anecdotes about taxi drivers and cocktail dinners won't suffice. EVERY major central bank is printing money and China is using Fed policy for an economy growing at 10%. Identify a fundamental, macro catalyst for the top to be in because from my seat I don't see any.

Игры рынка said...

Trader Joe, easily: you can not eat gold. So how will it fit into 20% unemployed and creeping higher who want to eat?

Or you can always say that as long as both parties in a transaction are trading books then price has to go higher until all taxi drivers are fully invested. But then taxi drivers want to eat which will force them to sell their gold and its price will collapse. Nice theory, isnt it?

Richard said...

I understand that during the Serbian wars the local price of gold collapsed against eggs and bread .. To near parity !!

Trader Joe said...

I don't buy that argument; the fact that you "can't eat gold" has always been the case going back thousands of years yet gold has always bought the proverbial nice suit.

Besides, your argument is social collapse when there will be no food to go around, which you can hedge with canned goods in your pantry. And if that scenario eventuates, then the paper currency of the country in question will almost surely be destroyed more than gold.

So, ruling out the apocalypse when society breaks down and everyone hitting the bid for anything that will buy food, i again ask what is the catalyst for gold to selloff?

Игры рынка said...

Trader Joe, so who is buying gold? Trading books or taxi drivers?

I believe this is the answer to you problem.

oxon said...

To be honest, instinctively I feel quite like Polemic, but Trader Joe has a point. Also, I know that reading charts is quite embarassing, but bubbles show a very dinstinctive price action - essentially, an exponential, asymptotic ascent. Currently, however, I would describe the gold price as following a linear log-scale uptrend - there's no tell-tale 'take-off' where the price seems to literally rise vertically. Ok tea leaf reading over...

oxon said...

Polemic, the charts you present are really interesting, would it be possible for you to upload charts in higher resolution next time? In Macro Man's days it used to be possible to click on charts to enlarge them. Would be highly appreciated!

Nic said...

Technically I think we have at least another $50 dump coming. This rally has stalled at the 61.8 retrace of this months dump and there is significant bearish divergence on the monthly and weekly charts taking it to 1135 and the rising daily trend line.
When it gets there I will buy some futures but I won't kid myself I have bought anything other than paper someone printed or that there is enough to actually deliver any.
I love the argument about it being the only currency you can't print more of. The people who tell me that usually then go and buy GBS or GLD

FX said...

Paul T Jones put it perfectly, from a traders point of view anyway.

" Everything has its moment"

Trader Joe said...

i don't care who is buying it, but there is a bid from India, taxi drivers, SWFs, David Einhorn, PTJ, Soros, and Paulson & Co.

And still nobody has identified a catalyst, aside from maybe a quick dip on stale and late long positions, that has changed the fundamentals for gold.

I'm talking about US lumber tariffs and guns and butter policies and Bush at the top of the USD bull market in 2002. I'm talking about libor-ois ticking up as banks and private equity hit the highs in mid 2007. I'm talking about Greece announcing it falsified national accounts last year starting the run in the PIGS CDS blowout.

Anyone have anything?

Chan said...

Second Oxon's comment about picture resolutions. Maybe you are copy pasting instead of uploading or some such? It would be nice to zoom in and take a proper look at the graphs.

vvv said...
This comment has been removed by the author.
vvv said...

funny that TDI....

i had a i cabbie tell me last week eurusd is going to parity

and i m from romania - not the most financial savvy country

the contrarian view is looking so appealing..... if it wasnt for those fundamentals

Polemic said...

Hi All

First, I think that we are managing to sort out the imbedded picture problem but please bear with us. MM may have left us the keys to this vehicle, but we are still thumbing through the owner's manual we found in the glove box.

The subject of Gold has kicked off a fair old debate. The very strong opinions out there have nicely illustrated the problem of working out what happens next. Trader Joe's points are solid for the bigger picture as is his pertinent question - " what is the catalyst for gold to sell off"?

I suppose the over simplified answer is "When the owner would rather invest its value elsewhere"
In times of disaster its for food and warmth and safety, but in non social meltdown environments it could simply be in anything he thinks will gain in value faster or fall in value less than it. So cost of funding ( ok not an issue now), bonds/equities/any other commodity etc going to suddenly go up (or even down even, where gold might be sold to fund short margins), or just to buy a new DB9 because he thinks the world is so f*^&ed he might as well enjoy what he can now ( hope this comment hasn't opened up a "Gold's no use because you can't drive it" debate). So any sudden fad in anything else could cause it I suppose.

The TDI and DPI observations are only intended to ask who the next marginal buyer will be if we have already gone tabloid on the reasons to buy it. They are just based on personal experiences that beautifully illustrated tops to me in 2000 equities from NY and London cabbies, the 1997 melt in Thailand, EURGBP in Christmas 2008 and, well... housing anywhere. Its great to see the VVV's example of the TDI alive and well in Romania.

Oxon's points re the shape of the graph are hugely valid too. Maybe using the same sort of theory as TDI and DPI, that eventual hyperbolic thrust will have to be accompanied by a PTPTVPI ( Prime Time TV Program Index) reading which counts weekly airtime dedicated to future shows like "GOLD GOLD GOLD", "The GOLD show", "How to make your own GOLD". "Children's Gold".. " The GOLD Factor" ..

But thanks for all your comments..
Holiday weekend beckons

John said...

It seems to me that the TDI and similar indicators are just warnings that gold may be becoming over-owned. Perhaps it is a more sensible approach to consider how many of the people that you know actually own gold. For me the answer still is very few.

Also when you consider that China only has 1% of its reserves in gold (compared to the U.S. and several European nations that have > 60% ) I don't think that it's at all difficult to see where the next buyer is coming from. What happens to the price if China decides to go to say 5% ?

Venkat said...

Here is a little indicator for you.
Saw this sign in a mall in California

"Turn your unwanted gold into cash!"