Thursday, May 27, 2010
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!