The Gold Warrior

 Posted by at 9:08 pm  Bubbles, Investing
Oct 142015

“Fourty four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events” says Chris Cole of Artemis Capital in his recent paper titled Volatility and the Allegory of the Prisoner’s Dilemma: False Peace, Moral Hazard, and Shadow Convexity.

Izabella Kaminska at FT Alphaville, praised it as “rare glimpse into his imaginarium” but I wonder if this was also a way to downplay its talk about tail event risks which are “equated with a loss of faith in the entire dollar system”. Precious metal investors will consider it far from imaginary and find much to agree with, such as:

“We are nearing the end of a thirty year ‘monetary super-cycle’ that created a ‘debt super-cycle’, a giant tower of babel in the capitalist system. As markets now fully price the expectation of central bank control” it is not possible for those central banks to “remove extraordinary monetary accommodation with risking a complete collapse of the system”.

Chris makes a number of complex points in an entertaining way but ultimately I see the piece as a case against complacency. One point that caught my eye and which I think goes a long way to explaining gold’s bear market is his identification of a shift from the central bank put, “policy action employed in response to, but not prior to, the onset of a crisis”, to pre-emptive central banking, which is “monetary action in anticipation of future financial stress to avert a market crash before it starts”.

Chris says that this “shift toward pre-emptive central banking occurred in the summer 2012: first with Mario Draghi’s pledge to do ‘whatever it takes’ to save the Euro on July 26th; and followed thereafter by Bernanke’s QE3 speech at Jackson Hole on August 30th.” He demonstrates this shift on a chart of the VIX and financial stress indexes. I have reproduced this chart, with the gold price overlayed, below.


Note that the period between Draghi’s ‘whatever it takes’ and Bernanke’s QE3 was gold’s last hurrah before its relentless downward trend. Once the markets realised that central bankers would intervene to prevent excessive losses, gold lost favour and we entered the weird world where “bad news is good news [but bad for gold] and vice versa because the intervention is more important than fundamentals”.

However, Chris argues that by artificially suppressing volatility all central banks have done is encourage “rampant moral hazard” and merely “taken tail risk from the present and shifted it into the future … the risk is not gone”. His solution is to “to own volatility on both the right and left tail of the return distribution … when markets are euphoric buy optionality to protect against deflation” in asset prices.

Izabella notes that such insurance is “expensive. For a reason. There’s a cost to maintaining resilient independent defences that depend on no-one.” I think it is obvious to this audience what that insurance might be, but Izabella notes a possible solution to this era of “central bank arms race of devaluation” as being “a united central bank equilibrium where all currencies became tied to one central global bank”.

Izabella summarises Chris’ comments about Mad Max 2 as “the ultimate long convexity film, because only someone with nothing to lose (no skin in the game) can really defend those who do”. Many have argued that gold sits outside of the financial system – being no one’s debt/obligation – making this “no skin in the game” asset capable of defending the rest of one’s investments from central bank hubris. Might it also make it an independent reference point to which currencies could be tied?

Frank Holmes of US Global Investors is known for talking about gold’s Love Trade and Fear Trade. Buried in Chris’ 50 page piece is a line which I think could be appropriated as the ultimate gold sales letter call to action:

“Buy the fear and you will be protected from the horror.”

The Gold Warrior

  • Shavi Tupyraz

    Here is a Zerohedge headline: Gold will end next year at $1400/oz

    which refers to a GoldCore blog

    which refers to an article in The Week

    which refers to an article from Bloomberg

    which refers to an earler article on

    which refers to a commentary from Capital Economics

    but selectively skips over the other opinions expressed in The Week :

    * the metal has faltered this morning in London, with a sharp drop taking gold down to around $1,166. It seems gold traders are not yet confident the commodity will push on beyond its current range.

    * Daily FX says if the $1,170 resistance level continues to hold then traders should target a price drop to around $1,155 initially and perhaps lower later.

    * Ric Spooner, a chief analyst at CMC Markets in Sydney, said that if gold were to break these barriers – at $1,170 and $1,177 respectively – it could head substantially higher. But he doubted that it would, saying it would take “a real change of heart on the Fed to push prices clearly through this resistance”.

    * Denmark’s Saxo Bank: ” a “break below $1,080 an ounce” would now change their outlook that the gold price will hit $1,250 by the end of the year.”

    * the metal will not decisively break free from its current constraints until the Fed moves, whenever that may be, allowing focus to fall on fundamentals such as high physical demand and low reserves. Higher interest rates make non-yielding commodities such as gold less attractive.

    * gold has jumped from its recent lows around $1,100, but it consistently runs out of support at around $1,150 as traders sell rallies.

    * it is worth noting that at $1,150 or thereabouts gold tends to hit resistance, with traders seeing this as a point to bank the gains.

    * Investment bank Macquarie wrote in a note that the gold price would remain “weak” until the Fed finally does hike rates, which it still expects will happen before the end of the year despite the latest poor data.

    * According to The Bullion Desk the bank said physical demand is currently only being maintained by a weak dollar, which makes gold cheaper for many overseas investors. It added that investors remain “uninterested” in gold as “immediate threats” to the global economy have mostly dissipated.

    Strange how both Zerohedge and GoldCore could have missed all those comments and focused only on the solitary opinion that Gold will end next year at $1400

    It really doesn’t matter whether Gold does or does not now stay above $1170 – my point is simply “Thank goodness for balanced reporting”

    • Bob

      Shav, you seem adept at pointing out the ad nauseam obviousness of opinions being like assholes, but must you disparage Zerohedge & GoldCore for not kowtowing to cartel MOPE? The dismal science is not exact, lending itself to much opinion and spin, but when it flies in the face of an exact science like math, that is where the less ignorant draw the line. ZH & GC are way ahead of you in that regard, so cut them some slack, pretty please!

      • Shavi Tupyraz

        Hello Bob, and thankyou for your response

        The truth – as I sense you may perhaps agree – is that none of us know for certain what will happen over any given timeframe, and that none of us are in a position to directly influence the general course of events solely by expressing our opinions (whether valid or not).

        Zerohedge in particular styles itself as a news medium and appears to base its articles largely on material gleaned from a wide array of other sources, some of which are fringe or “alternative”; my concern is not whether those sources are or are not correct in their opinions, but whether Zerohedge is impartial and balanced in its selection, and in my view it currently is not, choosing the sensational over the substantial, and preferring the “Moonshot” over the Mundane

        Whilst it cannot directly influence either events or markets, Zerohedge can and probably does influence investment decisions made by those who rely upon the accuracy and integrity of the articles it publishes; in this context I believe it may be a potentially misleading and dangerous source of information to those who are not aware of its inherent bias and reluctance to offer a balanced view; the example I cited above is a good illustration of this highly selective regurgitation in action, which completely suppressed less sensational but equally valid opinions running contrary to Zerohedge’s preferred sensational narrative

        With this in mind I certainly am not minded to cut them – or anyone else – any slack any time soon; it is for other people who read my comments to decide whether they care about Zerohedge’s bias, whether they think my analysis is either reasonable or necessary, or whether they happen to agree with either side of the debate. My intention is solely to draw attention to the fact that there are two sides to any debate, but that you are unlikely to find them in sources such as Zerohedge

        I wish you, joey and all the others every success in your investments; right now, I have no speculative position in precious metals (although I continue to hold a significant amount of physical Gold just down the road from Koos’s firm’s shop) and am for the time being concentrating on the steady recovery in Chinese stocks, in respect of which my current Hot Tip is Liaoning SG Automotive Group

        • Bob

          Congrats on your significant physical stash, it shows great wisdom, and I now consider you a fellow enlightened stacker!

          One mans highly selective regurgitation is another’s selectively weeding out the trash. Spin coming from investment and bullion banks is the very MOPE that should be weeded out! Thankfully ZH bias does a decent job standing up to it, because it is absolutely not equally valid. We have an irredeemable debt based monetary system that mathematically cannot survive no matter how the cartel spins it. It is not nice to steer less educated people into thinking otherwise, which is what cartel MOPE does. Most of your so-called renowned economists (think Krugman) are idiot hacks, and they push the cartel MOPE BS for a paycheck like cheap sickly whores.

          It is not like folks don’t have Bloomberg and CNBC if they want to remain blissfully ignorant.

  • joey

    Oh, Look Children. Gold up yet again! $1186

    I wonder if you Krugman intellects had the insight to have taken advantage of Australian Gold stocks? I’m one of the dumb ones that have. We now have many coming aboard, welcome.

    See what this fund manager has to say about Australian gold stocks

    It also seems that the smart ones here (or not so) know why there is this Supply and astronomical demand for gold and silver and how they interact in today’s economy? They also seem to know very little on corporate corruption?

    I’m still to understand what motivates Mr Suchecki ? Whatever it is, it’s not pro metals.

    • Victor Fantastico

      just because you toss a coin and it comes up Heads doesn’t make you Einstein; just because Bron points out that it has two sides, an edge, and is bent doesn’t make him Dr Evil.

      The “Children” you refer to will one day grow up: will you?

    • Bob

      Joey, I disagree, I think Mr. Suchecki’s post is very pro-metals because it concisely
      points out how the cartel actions of pre-emptive strikes and MOPE effectively scared the fast money out of the metals (causing the big drop from 2011). The sheople just followed the cartel MOPE and trend set by the fast money, not educated enough for objective thinking in order to discern the math on their own, thanks to the sorry government baby-sitting provided in schools. Us few that are doing the math are realizing the Fed is out of ammo, the debt Ponzi is nearing its conclusion, and such (economically unproductive) manipulations, interventions, and MOPE from the cartel is fast losing its mojo. Stack on!

  • Bob

    Good one Mr. Suchecki! Thanks for posting it!

    That which cannot last (ridiculous, debt Ponzi monetary system) won’t, the only thing we can do is choose how to deal with it. I for one choose the no counterparty risk path by stacking on.

    Protect yourselves from the coming horror people!

  • dolph9

    There is one thing I’m fairly confident of. If something (fiat currency) can be conjured from nothing, it has no value. This must be the case.
    Doesn’t mean I don’t want it! Just don’t make it your religion. If you do, you’ll never have enough, and you’ll never actually spend it.
    Earn and spend fiat currency, and save in real assets, including gold.

  • Shavi Tupyraz

    Billionaire Singer says:
    “I am the eggman, they are the eggmen, I am the walrus, goo goo g’ joob”

    and another Billionaire Singer* says:
    “Gold Is “Under Owned” and “Only Real Money””

    take your pick whether Billionaire Singers know what they are talking about

    * this one also said: “It should be a part of every investment portfolio, maybe five to ten percent.” and ask yourself whether that is also true of your portfolio (or whether you are stuffed to the gills with metal)

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