Gold has now fallen some 40% since it’s nominal high in 2011 and many people are thinking that the gold bull is over and it is time to get out. We at Barbarous Relic couldn’t disagree more.
It is clear that all the financial conditions which pushed gold up to over $1,900 an ounce are still very much in existence – if anything, things are worse.
So why is the price of gold falling? Well it seems that many of the weak hands that held gold were working purely on the assumption that the gold price was in direct correlation to the level of QE. When we had QE to infinity, these people were expecting gold price to infinity. Now that the Federal Reserve are making noises about tapering QE the weak hands reason for holding gold has evaporated.
Although we agree that previous QE increased the bullish argument for holding gold, it is not the only factor. It is true that increasing the number currency unit decreases the value of each one, which drives up the price of commodities in those currencies. That is one factor. The other factor, which is currently being ignored, is the actual stability of the currencies. We at the Barbarous Relic look at the western economy and the western financial markets and see a fundamentally unstable system. All major markets are the product of major intervention and the elephant in the room, OTC derivatives, makes the whole thing a house of cards.
For this reason, we see the current fall in price as a huge opportunity and we are aggressive buyers of this gold market.
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The announcement of QEIII has had a somewhat muted response. Gold has risen from the $1,730 region to around $1,770. We will be going some more light selling at around the $1,780 level.
Our gold mining stocks have had a better response – some are up over 20% over the last couple of weeks and we are selling into this considerable strength. This doesn’t mean that we believe that some kind of “top” is in but trading positions must be sold into this kind of strength.
It is clear that the big money in gold is 90% certain of QEIII being announced in the next month or two. If this indeed confirmed, then the gold price will really take off and we will most probably see the nominal high taken out. That will make us very happy on the one hand (our core positions will be worth significantly more than we paid for them). On the other hand, we will regret that we didn’t buy even more at lower prices. Oh well, if you are successful in investing you have to get used to that feeling. In any case, it’s much better then the regret that you bought too much at too high a price.
The flip side of the current situation is that if there in no QEIII announcement in the next couple of months, there will be a serious correction. On the one hand, this will good in that we will be able to continue accumulating gold and gold related securities at low prices (we are, after all, net purchasers of assets). On the other hand, it will be hard, psychologically, to see the chance of booking large profits disappear – it is good to be able to do this once in a while. For this reason, we have decided to open a protective leveraged short on the gold price. This small premium will be lost if there is no correction – in which case we won’t care very much. If, on the other hand, the gold price dramatically corrects – at least we will be able to book some profit and this will make it much easier to face lower prices.
We do what we need to do in order to stay with the program – buy weakness and sell strength and over the long time, increase asset levels and increase cash levels.
It has just been announced that U.S. payrolls rose less than expected in August – just 96,000 jobs were added against an estimate of 130,000. The somewhat muted response to Ben Bernanke’s speech a week ago was due to his comments that although the U.S. economy was in a serious state, the Fed would be looking for further evidence of deterioration before they embarked on further quantitative Easing.
Well, this news will have made the case for QEIII much stronger and that has sent gold up over $20 – it’s currently sitting at $1,725.
It is often said that you should trade the rumour and not the news and we have decided to sell a little gold into this strength (gold that we bought at much lower prices) and book some more profits.
It may be that things are about to get interesting.
Well, I think that a lot of people thought that after Ben Bernanke’s speech on Friday Gold was going to finally break through the $1,700 barrier. After all Ben basically said that the state of the U.S. economy is far from satisfactory and it was taken by most financial journalists as a signal that more Quantitative Easing (QE) will follow soon.
A new round of QE would, of course, be very positive for gold, especially if the Fed starts to get really serious will the amount of ‘easing’.
It is clear today that the $1,700 barrier is not going to be breached quite so easily. On the one hand this is a little disappointing – gold has been on the back foot for many months now and it would be nice to be able to get back into profit booking mode. On the other hand, the longer that gold remains on the back foot the greater the opportunity for accumulation, which will increase our eventual profits when the gold price finally gets into mania territory.
We are happy, therefore, to bide our time and stick to the program.
In his speech at Jackson Hole, Ben Bernanke described the U.S. economy as “far from satisfactory”.
He went on to say that the current level of unemployent is a “grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years”.
His comments were generally taken to mean that the Fed would likely ease monetory policy if the economy does not improve soon, and gold rose by $36 to $1,691.60.
We have sold some gold into this strength.
Gold, as we write is still sitting at around $1,660. We suspect that investors are waiting to see what Ben Bernanke has to say at Jackson Hole later today before they make their move.
If Bernanke makes some definite comments regarding monetary easing, then we will see the gold price move dramatically. The direction of the movement depends upon whether he hints at more or less easing in the immediate future.
We at barbarous relic do not know what he is going to say. To be honest, we don’t particularly care what he says. We are confident in our long-term assessment of the current financial situation and believe that, at some point in the not too distant future, gold is going to be worth a great deal more than it is currently. We therefore don’t know what will happen to the price of gold after Bernanke speaks, but we will react to any price movement, in line with the principles we espouse in this blog.
Gold is holding around the $1,660 level today. It appears that there is some profit taking occurring at the moment, which is putting downward pressure on price. The fact that price is holding up pretty well is confirmation that the market is currently strong and this is a good augur for higher prices to come.
Higher prices are probable, but by no means certain. Also this is what we currently believe, we do not know. So we continue to watch and wait.
Gold has fallen slightly today, to $1,665.
Days like these can be dangerous as it can be tempting to trade just for the sake of it. We are sitting on plenty of cash so why not buy a bit more gold – we KNOW that it is going to worth much more next year?
Well, yes it is true that with everything we know about the current state of the world economy and the level of indebtedness of western governments, we firmly BELIEVE that gold is going to increase substantially in price (priced in fiat currency). What we do not KNOW, however, is how gold is going to eventually arrive at that end price.
One of the greatest determinants of investing success is the correct allocation of capital at various price levels. We cannot control events, and if some event occurs in the future that sends gold down to $1,000 then we want as much capital available to allocate at that level.
People who fear a sharp decrease in gold at the present time are, by definition, over invested at this price level. We at barbarous relic are comfortable with whatever gold price we are given. If events were to suddenly rocket gold to $6,000 an ounce then our core holdings would make us very wealthy and our non-core holdings would be sold into that strength, swelling our cash balance. If the aforementioned low was revisited then we would gleefully “back up the truck” and snap up the ultimate asset at a fire sale price. We would not, however, spend all our cash at this price; we would “allocate” capital. Deep weakness would call for heavy buying but we would have to allow for gold at $800 or $500 or even $250. We wouldn’t KNOW that gold would go there, but we would need to be ready if it did.