Jan 142016

Even though investors are constantly told in disclaimer boilerplate that “past performance is no guarantee of future performance” the siren call of historical price charts is hard to resist. In the case of gold and silver, it is impossible to avoid projecting the 1970s bull market on today’s price action due to its epic nature and perfect representation of Dr. Jean-Paul Rodrigue’s bubble behaviour.

Gold bulls would argue that economies and financial systems have not been healed and accordingly the gold price top in 2011 was only a mid-cycle peak similar to the peak of $197.50 in December 1974. In chart form this claim manifests as per below.


The claim looks strong based on the similar behaviour during the initial bull phase – excepting the area marked (1), which is OK as history is said to rhyme, not repeat – and the almost identical retracement in terms of size (50%) and relative duration.

The “relative” speaks to the weakness of this charting analogy as to fit the two time periods one has to “speed up” the 1970s – the recent gold market’s build up and retracement took about twice as long at the similar behaviour during the mid 1970s. Maybe the explanation for this is the greater degree of central bank market activities with QE etc to prevent financial market corrections (and corresponding gold market response).

Based on this chart projection, the current gold market is due for a new bull market as marked at (2) and while the 10:1 ratio will warm the hearts of gold holders with that giddy $9,000 scale on the right hand side of the chart, I would note that on this basis it will take around 5 years before gold reaches its previous $1,900 highs sometime in 2020.

Final point I would make is to emphasise the “rhyme, not repeat”. Note that the final price run involved two parabolic price phases, the first marked (4) at around $400 and then another to $850. My advice would be if you see a parabolic price move, sell – there is no guarantee that it will play out exactly the same this time and a 50% correction is reasonable on the other side of the bubble. The $4,000 in the hand could turn into $2,000 just to maybe get $8,000. While hopefully many are sagely nodding right now that they would be so happy with $4,000, the fact is at that time there will be many plausible arguments put forward that even higher prices are inevitable, just as there was when gold was running up to $1,900. But such is the stuff that bubble tops are made of.

Of course this would not be a trademark Bron balanced blog post without a dream-popping counter argument, as per the alternative chart contortion below.


Here we see a mid-bull cycle surge marked (1) but the financial crisis marked at (2) prevented a retracement and pushed gold on to its eventual high. On the downside we see a similar levitation/denial after the top before the price crashes and continues its depressing deflation.

Note that the timescales on this overlay are identical – a day in the 70s equals a day in the 00s, which is a factor in its favour. By this chart 2016 will continue to see gold fall down to circa $900 marked (3) before staging another run up over the next three years to around $1400 or thereabouts as marked at (4).

The logic behind this potential future is that while the financial system is hardly fixed and there will be risk events ahead that will drive money into gold, central banks have demonstrated a willingness to take action to prevent the sort of complete economic breakdown that would justify a $8,000 gold price.

Ultimately, which of these futures you subscribe to depends on whether you believe in the narrative that central banks are omnipotent. If you think they have fixed things and/or can hold it together, then sell the coming $1,400 blip. If you think it is still to unravel, then buy the $1,000 dip. Good luck either way.

Read this article in German at GoldSeiten.

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

Aug 312015

In this interview, Jim Sinclair says that “we are going into unprecedented deflation, and it’s the reaction of central banks around the world to the concept of deflation that brings about hyperinflation” and the resulting increase in the gold price is therefore “a rally that is not meant to be sold. What is coming up in front of us is the Great Reset where currencies wear their gold like ladies wear a necklace, and the most beautiful necklace will be the strongest currency.”

I find this advice dangerous because many people reading it will go away thinking “OK, so in the next gold bull market I shouldn’t sell”. However, how will you know if the initial bull market is just a speculative bubble that will bust or the start of a hyperinflation?

Secondly, the “great reset” and “beautiful necklace” references are to countries going back to (some) version of a gold standard. Some gold standards involve free trade of gold, but the last one involved expropriation and making gold illegal to hold. If Jim is right and countries want the strongest currency, then that would imply they will want all their citizen’s gold, in which case you get expropriated at some pre-reset price.

The retort to my second point is what is the point of selling out for fiat money if that is being hyperinflated. I agree, but my answer is if you believe in the hyperinflation scenario and that gold is money, then logically you should be converting fiat prices into ounces of gold – now. The advantage of doing this is that if gold is just in a bubble, then the prices of other assets in ounces will be really low, indicating that those other hard assets are cheap and giving you a signal to sell your gold for other assets. Below are some charts of what assets priced in gold look like.


This showed that 1980 and 2011 were exceptional gold bubbles.


Stocks also shows the 1980 and 2011 bubbles. These are just two charts to give you the idea, but you should look across all assets in terms of ounces of gold to get a general picture of gold’s relative value. There is even a website dedicated to this, naturally called http://pricedingold.com/, which has charts of various things in terms of gold.

In a hyperinflation scenario, these charts will look like the one below of the LME base metals index in ounces of gold. Note how the price is a lot more stable for long periods, even though gold changed a lot during these 20 years.


If you see the price of gold going up but the price of a wide range of other assets priced in gold somewhat stable, then that is an indication that there is general inflationary force in the economy. If that is occurring when dollar prices are going up rapidly, then again, consider selling the “rally” but only for a switch into other assets, not fiat.

Over the past 15 years I have spoken to a number of wealthy Perth Mint Depository clients. They all made their money doing productive things, building businesses. A lot of them felt that gold was a dead asset, producing nothing, but they were buying it because they did not see much business opportunity and economic growth going forward and were sheltering their wealth in gold. However, they all had the strategy of keeping an eye on the value of productive assets and were waiting for when they were cheap and then they would sell their gold and buy those assets. They were not interested in selling out at the dollar price peak, their eye was on productive assets and their relative value and they told me they would rather sell out early and miss the peak to buy these assets cheap before other entrepreneurs bid them up.

If you ignore their advice and follow the “rally that is not meant to be sold” tip, I think you are really just treating gold like a pet rock, watching its nominal fiat price go ever higher and getting that nice psychological payback against the gold haters that “we was right”, while others around you are cashing out their gold insurance and buying real assets at bargain prices.

Jul 092015

In response to the Chinese stock market correction, the People’s Daily newspaper has been quoted as saying that “Confidence is more precious than gold. That’s what Chinese investors need at this moment; confidence, not panic.” No point quipping that they also need gold, as we know the Chinese have been accumulating plenty of the stuff. However it is valid to ask what impact China’s current woes may have on gold demand going forward.

[As an aside, the confidence quote seems to be on trotted out frequently, notably in 2008 about the global financial crisis when Chinese Premier Wen Jiabao said “At this moment, confidence is even more precious than gold or any currencies”, or here in 2014 regarding Zimbabwe.]

Louis James of Casey Research thinks it is negative, penning the dramatic headline “Why Millions of People Might Have to Sell Their Gold and Silver”. He says that Chinese equity investors “are suffering a major liquidity crunch. Many won’t have the cash to buy anything, not even gold” and that “huge numbers of investors are facing margin calls. That means that many who own gold will be selling because it’s the one thing they can get a bid on.”

CNN agrees with the “sell gold to pay back loans” narrative adding that stockpiles of metals may have been pledged as collateral (which firms may sell on behalf of investors). They also note that “the Chinese equities market is not just behaving badly because of mere speculative excess being worked off but indicating problems inside the economy”, which if true, could mean less gold demand going forward.

This does not sound good for gold, but UBS was reported as saying that “equities only account for 20 per cent of Chinese household wealth [and] this proportion drops further to about 12 per cent if property is included.” The Economist agrees noting that such a low share of wealth meant that “soaring shares did little to boost consumption and crashing prices will do little to hurt it” which should mean that retail Chinese gold demand should not be affected in any major way.

Nomura, quoted by FT Alphaville, also agrees that the “mechanism that channels the paper wealth of the equity market into real household consumption demand is limited in China”. Regarding the potential for margin calls and sales of collateral, Nomura note that the “leverage of margin financing done through brokerages and trust companies is generally under 3x, and the lender’s position is generally well protected as long as the equity market remains liquid enough”, the result being that we should not see significant sales of gold, assuming much has been pledged as collateral for margin loans.

There has been talk that the Chinese stockmarket correction may redirect investor money back into gold but at this time The Perth Mint is not seeing any evidence of that. Demand out of China for kilobars is low, which our Treasury believes is because bullion banks have tonnes of kilobars in stock (they usually accumulate kilobars when demand comes off and premiums are low with the intention of selling them back when premiums are good) so they are not interested in accumulating any more at the moment. The result is that kilobars premiums are way down. Our Treasury also notes that the gold arbitrage between China and London is low at around 50 cents, also indicative of a lack of interest.

Looking a bit further out, Peter Cooper at Arabian Money argues that the Chinese gold demand could get a boost given that the typical response by central banks to stock market crashes is to “lower interest rates and ease monetary conditions in liberal fashion and worry about the inflationary consequences later”. Where will the money go he asks: “likely the same place as last time: precious metals” when “gold went on a tear from under $800 to $1,923”.

Given that a significant factor behind the Chinese stock bubble was trading by retail investors, I note this article from Want China Times on the recent International Finance Expo in Guangzhou where “a total of 43 companies in the precious metals sector showcased their products created for the online age that involve apps for mobile devices or popular instant messaging service WeChat”. Just as The Perth Mint lowered its minimum investment to $50 via its new Depository Online service, the new Chinese products also “lowered the minimum investment requirement from a few thousand yuan to as low as 8 yuan (US$1.30), making investing in precious metals more accessible to investors new to the market.”

Talking of bubbles, maybe I was prescient in using the chart below in my presentation at Bursa Malaysia’s Gold Conference in June, which shows the previous Chinese stock bubble (for those not familiar with the red line bubble overlay, see Dr. Jean-Paul Rodrigue’s classic Stages in a Bubble).


The current Chinese stock market behaviour also seems to be following the same pattern.


So the Chinese have just as much form with bubble market behaviour as the West does. With 8 yuan minimum gold investments on the horizon, maybe it is fair to ask: goodbye Chinese stock bubble, hello Chinese gold bubble?