The Case for Gold
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PLEASE NOTE THAT THIS INFORMATION EXPRESSES THE VIEWS AND OPINIONS OF SEABRIDGE GOLD MANAGEMENT AND IS NOT INTENDED AS INVESTMENT ADVICE. SEABRIDGE GOLD IS NOT LICENSED AS AN INVESTMENT ADVISOR.
When is Bad News Finally Going to be Bad News?
Not yet apparently. The US jobs report release on April 3, 2015 was certainly bad news...the Establishment Survey reported 126,000 net new jobs created in March compared to a consensus expectation of 244,000. The stock market was closed that day, but on Monday, US stocks were higher across the board. Once again, the likelihood that the poor job numbers would slow down the Fed's announced plan to raise interest rates was considered more important than evidence of a slowing economy.
It looks like gold has bottomed
Three things support this conclusion. First, the Commitment of Traders report for March 20/15 tells us that the Managed Money crowd (hedge funds) have pushed their net short position to the same extremes as they did at the November low in gold. Since January 27/15, these traders have increased their shorts from 19,873 contracts to 78,623 while reducing their longs from 173,110 to 97,847. This huge swing in fast money positioning suggests to us that gold has double bottomed. The evidence suggests they are now starting to cover. On the other side of this trade, we have seen the biggest 8-week reduction in the Commercial net short position (150k contracts) since September 9/08.
Gold Ready for a Bounce?
The latest Commitment of Traders report shows that large speculators in the managed money category have got their positions down to a point where we could now see a bounce in the gold price. In our last Flash Note, we forecast a dip in the price needed to reduce these longs and that appears to be close to done.
Short Term, the Trend in Gold is Likely Down
Gold and the gold shares have been heading down. Our guess is that we have another week or so to go before the market signals a buy.
Can the Fed Save the Stock Market?
Recently, a number of gold commentators have written that they do not see a significant decline in the stock market over the next year or so because the Fed will step in with further easing to prevent a rout. The perception is that the Fed can still save the stock market when it wants to. We disagree.
Is Printing Money Bullish for Gold?
Sometimes, but not always. Facts need to be filtered and interpreted through the screen of market beliefs. In 2010, the market believed that Quantitative Easing (translated commonly as money printing) would generate economic growth and consumer price inflation, so money printing was good for gold as well as stocks. More recently, the market has concluded that QE does not create price inflation. Therefore, QE is still regarded as good for stocks but not good for gold. We think this perception could change in the next few months, much to the advantage of gold.
The Central Bank deflation scam
Let's say you run a Central Bank. What's your agenda? You need to keep your financial system liquid and inflating. Why? Well, your economy has way too much debt and you don't want a debt collapse, especially in your Treasury market (which of course you cannot talk about). You need to finance your government's deficits. And you need to keep your banking system afloat, which requires a lot of cheap money to be profitable because the banks keep making stupid mistakes. So, your job is to create inflation. But you can't say that because you can't say why.
Leaning the Wrong Way?
Going into the Fed statement released as at 2 pm on Wednesday the 27th of January, it seems many gold investors were expecting the Fed to change its language on the imminence of raising short term interest rates, which the markets expect around the middle of this year. The economic news had been turning sour and markets were looking shaky. The bet was that a signal indicating a weakening of Fed resolve to raise rates would push gold higher, which it would have.
How is the Federal Reserve like the Swiss National Bank?
On January 15, 2014, the Swiss National Bank (SNB) cancelled the peg which bound its franc to the euro. The result was an immediate and massive revaluation of the franc which caused enormous dislocation around the world. Fortunes were lost, foreign exchange traders went out of business and the credibility of central banks took a very direct hit. Just days before, a top SNB executive had assured a national television audience that no changes were being planned for the peg. Central bank omnipotence is now more open to question.
When Gentlemen Prefer Bonds?
In the financial crisis of 2008, bonds outperformed stocks as investors fled to safety. Not surprisingly, gold also responded to the search for safety, bottoming well before stocks and outpacing all other asset classes in the following three years. As perceived risks declined, especially after the end of the euro crisis, gold fell and stocks also outperformed bonds.