Shock Monetary Therapy: Should You Cut Back Your Exposure to Gold?

Yesterday’s Markets and Money left off with a conclusion you might find alarming if you own gold or are thinking of buying it. The conclusion was that $1400 was ‘about right’ for the gold price, all things considered. But what exactly did we mean by ‘about right?’ We’ll get to that in just one second.

First, a quick but sincere invitation: join us on Google +.

In the last two years there have been more frequent interruptions in the delivery of the Markets and Money via email. It’s awful to think, but some readers have even had to go without the DR for weeks at a time while internet service providers clear up technical issues. Of course any interruption to your regular receipt of the reckoning is unacceptable!

Accordingly, we’ve begun looking for ways to publish our daily missives so that it’s not always dependent on email. One way we’ve struck on is Google +. You will most definitely NOT receive more email if you sign up. What you WILL get is inclusion in our ‘circles’ (a Google term). That means you’ll be able to view all Markets and Money articles on-line, safely and securely, as well as any other articles your editors link to or like during the course of the week.

If you don’t always have access to email, or if you’re interested in what other sources we’re reading as we put together each day’s edition, joining us on Google + will give some insight. It’s a new project, so we’re not sure how it will go. But by all means check it out and give it a shot if you’re keen.

Now, about that chart and the gold price in yesterday’s DR. The point of the chart was not to impress technical analysts. The point of the chart was to show that if stocks continue to be the popular, anti-cash bet against inflation, the Berkshire B shares will outperform gold. Stocks may rise and gold may fall.

Either way, if the ratio finds support at 14, then it would cost you 14 shares of Berkshire B to buy an ounce of gold. At around $100 US per share, you’re looking at gold declining to US$1400. Now your editor is still a committed gold bull. So how can it be ‘about right’ that we’re expecting (and hoping) for the gold price to decline to $1400?

The gold price has bounced in a range between $1600 and $1800 since August of 2011. That’s a long time to consolidate before making its next move. It hasn’t made its next move, though. In fact it’s been chugging along sideways for so long that some gold speculators are now selling.

For example, George Soros cuts his exposure to gold ETFs in the fourth quarter of last year, according to Mineweb. The same article reports that Louis Bacon Moore’s fund completely liquidated its gold ETF position. At least two billionaire trader/speculators are cutting back on gold. Should you be worried?

On the contrary. You should be grateful. You’ll now have the chance to add to your gold position at lower prices, or build a brand new position if you don’t already have one. The climate of uncertainty and nervousness about long-term gold prices tells us exactly where we’re at in this bull market: the conviction of the bulls is being tested and the weak hands are folding.

Now, we’re not calling George Soros a weak hand. We don’t want to get a letter from his lawyer. What we’re saying is that traders wouldn’t want to lose 12.5% in a couple of months. Selling out now and buying back later at a cheaper price is a much better idea. But that’s all a matter of tactics. The strategy – buying precious metals as a hedge against monetary inflation – is still firmly in place.

You’ll have to be comfortable looking ridiculous and feeling wrong if you adopt this strategy, though. Stocks are making hay. US markets were closed Monday for Presidents Day. But the Nikkei rocketed up over 2% in Tokyo. Japan managed to escape the G-20 meeting with its policy of strength through devaluation firmly intact.

The trade right now, then, is to buy stocks in anticipation of more global currency devaluation. How long can that trade run? The easy answer is, ‘Longer than you think.’ But the real answer may have something to do with the chart below.


The black line shows the Japanese Yen advancing against the US dollar from the onset of the world financial apocalypse. You can see that since October, the new aggressive monetary stance of the Japanese government has talked the Yen down about 30%. Powerful words. Just wait until the deeds begin!

In the meantime, the red line shows what Japanese stocks think of the shock monetary therapy. They like it. Or, investors are so fearful of deliberate inflation targeting that they’ve decided to get out of savings accounts and bonds and into something with the firepower to beat inflation. The Nikkei is the big winner so far.

To be fair, the Japanese are following the Bernanke playbook. Create a diversionary bubble in stocks in order to make people feel rich and spend more. At the very least, it makes your banker friends richer and happier. And who knows, it might even work!

You’ll note that the Yen is still a lot stronger against the US dollar than it was at the start of the global financial apocalypse. Is it possible for the Yen to decline to pre-crisis levels? And if so, would stocks get a mighty tailwind higher? And not just Japanese stocks but Australian and American stocks to?

Well, on a short-term basis – this week – the RSI on the Yen is reading oversold. That means it could gather itself, take a few deep breaths, and THEN head lower. But lower seems to be the trend, and it’s a dominant trend right now.

Of course the answer to all of the questions above is that nobody knows anything. Soros is guessing like the rest us. And we are all guessing, or making our plans, in line with our own preconceived ideas about what IS happening and what SHOULD happen. Where does that leave you?

When in cognitive doubt, and when no data can prove a conclusion, we prefer to go with Fingerspizengefuhl. It’s a German word that literally translates into ‘finger tips feeling’. We first encountered the term when reading about military history and why some commanders are better on the battlefield than others. They are simply more intuitive when the situation is fluid.

Intuition may seem like it’s out of place in games of strategy. For example, we once experimented with what we called an intuitive form of chess a few years back. Rather than employing set strategies, we decided to play impulsively and intuitively. The results were mixed but mostly bad.

You can surprise an orthodox opponent by playing in an unorthodox and unpredictable manner. Traditional defences don’t work against a player who is not attacking in any organised manner. But once your opponent realises this, he’s likely to pick you apart ruthlessly. Playing intuitive chess opens up some serious breaches in your defence, even if you play a few elegant and pleasing moves before getting creamed.

The share market is not a chess game, though. Real money is at stake. Does intuition have any place in it? Wouldn’t it be better to stick with concrete valuations, or investing first principles like ‘buy low’ and ‘sell high’?

Well, in a way, we are mixing intuition with principle. On principle, you can understand that competitive currency devaluation tactics may help a country win an export battle for a quarter or two. But it’s not a tactic that can win a war. Fiat money is the only guaranteed loser in this war, and we reckon gold is the likeliest winner, although not the only one.

And, by the way, since when is economic growth a zero-sum game of warfare? The fact that the dominate media narrative is now about ‘the currency war’ shows you just how grim the prospects for growth are around the world. Europe is in recession. Japan is on its demographic death bed. And the US is turning both European and Japanese at the same time.

Intuitively, investors know that the facts don’t add up to a bull market. But you have to do something with your money. And right now, that something appears to be ‘buy stocks’. Our intuitive conclusion is that investors will buy stocks for a bit longer, sell gold for a bit longer, and then the market will experience another ‘come to Jesus’ moment. More on salvation tomorrow.

Dan Denning
for Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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