By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, April 8, 2012
The Telegraph, London
Sunday, April 8, 2012
It has been an unsettling experience for late-comers who joined the gold rush near all-time highs of $1,923 an ounce last September. The slide has become deeply threatening since the US Federal Reserve took quantitative easing (QE3) off the table six weeks ago -- or appeared to do so -- and signalled the start of a new tightening cycle. Spot gold ended the pre-Easter week at $1,636.
"The game has changed," says Dennis Gartman, apostle of the long rally who now scornfully tells gold bugs that he is just a "mercenary," not a member of their cult. "They genuflect in gold's direction; we merely acknowledge that it exists as a trading vehicle and nothing more. There are times to be bullish, and times to be bearish ... to every season, as Ecclesiastes tells us."
Gold has risen sevenfold from its nadir below $260 in 2001, that Indian summer of American hegemony, when the 10-year US Treasury bond was the ultimate "risk-free" asset and Gordon Brown ordered the Bank of England to auction half its metal.
The stock markets of Europe, America, and Japan churned sideways over the same decade, and that precisely is the clinching argument against gold for contrarian traders. You avoid yesterday's stars like the plague. "Gold is far too popular," said James Paulsen from Wells Capital. It has reached a half-century high against a basket of indicators: equities, treasuries, homes, and workers' pay.
Each interim low in price has been lower, and chartists tell us that gold's 100-day moving average has fallen through its 200-day average for the first time since March 2009. It is a variant of the "death's cross." Ugly indeed, though Ashraf Laidi from City Index said the more powerful monthly trend-line remains unbroken.
Whether or not the global economy has really put the nightmare or 2008-2009 behind it and embarked on a durable cycle of growth is of course the elemental question. The answer depends on what you think caused the crisis in the first place.
If you think, as I do, that the root cause was the deformed structure of globalization over the last 20 years -- a $10 trillion reserve accumulation by China and the emerging powers, with an investment bubble in manufacturing to flood saturated markets in the West, disguised for a while by debt bubbles in the Anglo-sphere and Club Med -- then little has changed.
In some respects it is now worse. China's personal consumption has fallen to 37 percent of GDP from 48 percent a decade ago. The mercantilist powers (chiefly China and Germany) are still holding on to their trade surpluses through rigged currencies, the dirty dollar-peg, and the dirty D-Mark peg (euro), exerting a contractionary bias on output in the deficit states -- though China at least recognizes that this must change.
There is still too much world supply and too little demand, the curse of the inter-war years. That at least is the Weltanschauung of the pessimists. If correct, we face a globalized "lost decade," a string of false dawns as each recovery runs into the headwinds of scarce demand, and debt leveraging grinds on.
There are two implications to this: Central banks will have to keep printing money for a long time, and the Asian surplus powers -- as well as Russia and the Gulf states -- will have to find somewhere to park their growing foreign reserves.
"These countries don't want other peoples' paper promises any longer," said Peter Hambro, chair of the Anglo-Russian miner Petrovalovsk. "There is no sign yet that we are returning to a well-balanced and normal financial system. The European Central Bank is accepting bus tickets as collateral and the only way out of this debt and banking crisis will be inflation in the end."
Russia is raising the gold share of its reserves to 10 percent, buying the dips with panache. China is coy, but Wikileaks cables reveal that Beijing is eyeing "large gold reserves" to back the internationalization of the renminbi.
China's declared gold reserves of 1,054 tonnes are tiny, though it may be accumulating on the sly. Sascha Opel from Orsus Consult expects Beijing to boost its holdings by "several thousand tonnes" over the next five years to match the US stash of 8,000 and the Euro zone's 11,000.
We do not know whether China's central bank or wealth funds suffered a 75 percent haircut on Greek bonds -- as Norway's petroleum fund did -- but they are undoubtedly nursing large paper losses in other Club Med bonds, and the precedent for EMU sovereign default is now established. The euro zone has become a danger zone. Rules are not upheld. Some bondholders are spared while others are not.
Last week's jump in Spanish bond yields to 5.61 percent -- from 4.9 percent a month ago -- should puncture the illusions of those such as France's Nicolas Sarkozy who think the EMU crisis has been solved. The stock line in Berlin, Brussels, and Paris is that premier Mariano Rajoy has needlessly stirred up trouble by refusing to abide by Spain's original fiscal targets, but the contraction of the Spanish economy had made the targets meaningless. To adhere to such demands would have been criminal.
As it is, Madrid is embarking on a further fiscal squeeze of 2.5 percent of GDP this year, in the midst of deep recession, with unemployment already at 23.6 percent and rising fast and without offsetting monetary and exchange rate stimulus.
Yes, markets are punishing Spain, not Europe's politicians, but that is because bond vigilantes know that the European Central Bank will be very slow to rescue an EMU "rebel" with fresh bond purchases. Agile funds do not want to be left holding Spanish debt while the country is hung out to teach it a lesson.
In the meantime, the real M1 deposits have contracted at a 10.9 annual rate over the last six months in the peripheral bloc of Italy, Spain, Portugal, Greece, and Ireland, a leading indicator of trouble later this year. "The rate of contraction has accelerated, not slowed," said Simon Ward from Henderson Global Investors.
As for the US, its economy in uncomfortably close to stall speed, and real M1 money has levelled out over the last four months. The underlying pace may not be much more than 1.5 percent. The US Economic Cycle Research Institute is sticking to its recession call, describing the warning signals as "pronounced, persistent, and pervasive."
We will see what happens as markets prepare for the "massive fiscal cliff" at the end of the year -- as Ben Bernanke called it -- when stimulus wears off and a tax rises kick in automatically, and as the delayed effect of Brent crude at $125 feeds through.
Fed hawks are making much noise, as they did in the Spring of 2008, but Goldman Sachs says they will be forced into QE3 whatever they now hope, probably in June. Hence its call that gold will rally to fresh highs of $1,940 over the next year.
Interest rates are falling in real terms as inflation creeps up, and that may be the biggest single driver of gold prices. "Even without QE3, the Fed is still ultra-accommodative and they are about to reverse this," said James Steel, HSBC's gold guru.
Mr Steel said the "marginal cost" for mining gold is around $1,450. That is when miners leave low-grade ore in the ground and weaker producers shut down. It creates a natural floor of sorts. Besides, "peak gold" is a more immediate reality than "peak oil," he said. There has been no equivalent to the shale revolution seen in oil and gas. World output has been stuck for a decade at around 2,700 tonnes a year despite a fourfold increase in investment. There are no great finds, no Wittwatersrand this time.
There will come a day then the bullion super-cycle finally sputters out. My guess is that it will come once Europe's monetary system has returned to a viable footing -- either by real fiscal union or by breakup -- and once China's renminbi becomes fully convertible and takes its place as the third pillar of the world's currency system. We are not there yet.
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