Addison Wiggin – August 26, 2011
- Earthquakes, hurricanes, Fed speeches… Strange doings at week’s end
- Gold back in a groove… Behind the post-Comex bounce
- Roubini’s “proof” that gold is in a bubble, debunked
- Chris Mayer surveys the landscape: What are good buys now?
- “Fracking nonsense,” in the estimation of Byron King
Historic times we’re in… there is no record of an earthquake and a hurricane hitting the mid-Atlantic in the same week. Until now.
What few traders not already on vacation bugged out of Manhattan yesterday… leaving the Dow meandering in their wake:
Ditto for the other major indexes. No real market movers today, either. The Commerce Department chimed in with its latest guess at second-quarter GDP, revising it down from 1.3% to 1.0%.
Even our mailbag is empty today. (Ahem.)
Ben Bernanke even tried the “bazooka” approach to move markets today.
“If you have a bazooka in your pocket and people know it,” Treasury Secretary Hank Paulson told a Senate Banking Committee in July of 2008, “you probably won’t have to use it.”
At the time Paulson was attempting to stay panic in the markets by pledging government support for Fannie Mae and Freddie Mac, because the two government-sponsored mortgage lenders were under siege by investors.
Paulson asked Congress for the right to use taxpayer funds to intervene — but hoped the pledge alone would be sufficient.
The market rallied 300 points during the two trading days after Paulson hinted he had a bazooka hidden somewhere in his khakis.
Mr. Bernanke, to his own chagrin, lacks the flair of the rasp-tongued Paulson.
“The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” Bernanke stated in his annual address at the Jackson Hole, Wyo., central banker love fest in this morning. “We discussed the relative merits and costs of such tools at our August meeting. [yada, yada]…”
“The committee will continue to assess the economic outlook,” Mr. Bernanke went on, giving it his all, “in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
Ah, poor Ben. He succeeded only in kicking the Dow down 200 points.
[Ed. note. The stock market has since slid sideways. Occasionally, trending up. Traders were hoping Bernanke would show them a little leg, but all they got was “We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st), instead of one, to allow a fuller discussion.” Sigh.]
After several days of its own uncertain gyrations, gold seems to have found its comfort zone at week’s end. It’s traded in a range between $1,760 and $1,790 for the last 24 hours.
The price had fallen $150 leading up to the Comex’s decision to raise margin requirements Wednesday afternoon. Now it’s already recovered about $25 of that.
Gold’s persistence despite the increase in margin requirements must be driving Nouriel Roubini batty.
The New York University economist, notably credited with recognizing toxic assets before the bust in 2008, launched a fusillade against gold on Twitter this week:
The chart he attached showed the performance of gold since 2001, overlaid with a chart of the Nasdaq beginning in 1990.
“Question for gold bugs,” professor Roubini said in a subsequent tweet, as if to underscore the similarity: “How much of gold long positions are financed now, as Nasdaq was in late ‘90s, with leverage? Do Comex data show that?”
Roubini’s accusation: Gold is subject to the same bubble characteristics that dragged the financial markets through the tech wreck and then the mortgage-backed security mess, leading investors through back-to-back eras of excess… followed by devastation.
If only it were so simple.
“[The chart’s] vertical axes,” writes Adrian Ash at BullionVault.com commenting on Roubini’s use of the graph, “show nominal prices (dollars per ounce for gold, index value for the tech stock Nasdaq).
“That overplays gold’s relative gains, now running at sixfold since the chart’s starting point. The Nasdaq, at its top of only a few months earlier, you’ll recall, towered more than 10 times higher from a decade before.”
A far more accurate gauge, we submit, is a straight-up percentage gain from the same starting points — a gauge that U.S. Global Funds chief Frank Holmes submitted to us last spring:
The vertical axis in this chart reflects the percentage gain of each asset class over like 12-year periods. By these accounts, gold is rising at a steady clip. And is in a relatively stable uptrend.
“I enjoy offshore fishing,” our friend Porter Stansberry wrote yesterday, drawing a useful Friday afternoon analogy… if, in fact, you’re trying to decide if gold is in a bubble or not.
“I have a relatively modest center console fishing boat,” Mr. Stansberry goes on. “I like it because it’s really fast and I can get across to the Bahamas quickly, which is my favorite place to fish. But to get there in a reasonable amount of time, I need calm water.”
“My wife is always surprised that I can tell the surface conditions of the ocean just by looking at the sky. I know because the ocean is the mirror of the sky. While you might not be able to ‘see’ the waves in the sky, waves are caused by wind. You just can’t see the wind.”
“The same thing is true about the price of gold and the stability of fiat currencies. Gold is the mirror of the world’s paper currency system. The price of gold doesn’t reflect the intrinsic value of the metal — which is almost unchanging over time. It reflects the relative value and volatility of paper currencies.”
“The people who are arguing that gold is overvalued are not looking at the right numbers. They ought to be looking at Europe’s banks. They ought to be looking at the amount of short-term obligations that are sitting on the U.S. Treasury’s books.”
“The price of gold is reflecting the likelihood that the world’s sovereign nations decide to bail out Europe’s banks and paper over the U.S. Treasury debt.”
Oil is ending the week around $85 a barrel. The overall commodity complex as represented by the CRB index is back to 335, at the high end of the range it’s traded the last three weeks.
“Commodities are holding up pretty well,” says Chris Mayer. “Over the last 52 weeks, the CRB is up over 20%. This is during a time the U.S. economy was weak. This is during a time the emerging market economies are slowing down. This is during a time Europe is in flames.”
“In any case, commodities are doing a lot better than the world’s equity markets.”
“I was just surveying a list of markets and it struck me how many were down 20% or more — the generally accepted threshold of bear market territory — for the year. Of course, most of Europe falls in this category. But so does Brazil. And so does India.”
The U.S. market, too, has been hit. Small-cap stocks took a bigger hit. The S&P SmallCap 600 is down 14%. And certain sectors have been utterly mauled. The KBW Bank Index is off 32% for the year! Semiconductor stocks also took it on the chin, down 20% so far this year. Nothing is really doing well.
“Where are the opportunities,” Chris goes on, “for those who can stomach stocks and don’t mind waiting a little while to get paid? One place to look is at the simple divergence between two things, like the price of gold and gold stocks.
“Gold stocks are mostly down for the year, while gold is up 30%. Unless gold heads straight back down, which I think unlikely, gold stocks are really cheap. The price of gold will probably suffer a downdraft at some point. Those are inevitable. It will also be temporary. I think gold investors can work with $1,800 gold, in which case gold miners will make a lot of money.”
Our special report compiling our editors’ very best gold plays of the moment is still as timely as ever. So is the urgent teleconference we recorded last week.
You can get them both… plus an extreme discount on attendance at our Emergency Summit this October in Baltimore. We’re still going all out to make it worth your while. Dates and other essential details are right here.
While the mild aftershocks from the East Coast earthquake are over, we’re getting damage reports from the cranial cavities of certain people who blame the quake on… drilling for natural gas.
Hydraulic fracturing, or “fracking,” is the process that’s created huge new supplies of natural gas in recent years, thanks to technology that can squeeze the gas out of shale rock.
“Some are saying that a recent rise in fracking could be the culprit” for the quake, says a highly speculative article on the website of RT, Russia’s English-language news channel. In fact, it doesn’t even cite who the “some” are. But the notion has turned up elsewhere, including Daily Kos.
“There’s no fracking going on anywhere near the epicenter of the quake,” says our resident energy geologist Byron King… whose email we have carefully edited to hew to the Presbyterian Standard.
“The rock formations between the epicenter and the nearest fracking, about 136 miles away in West Virginia, could not conceivably provide any sort of channel for fracking fluids or fluid pressures. The structure and the physics are all wrong.”
“The quake, apparently, occurred within a known fault zone that dates back to Mesozoic time. Geologically, stuff happens… meaning every few thousand or tens of thousands of years, you get movement. Sometimes stuff happens during the brief period when human beings dwell above. The last ‘big one’ was 114 years ago in the eastern USA.”
“I love the Krugman quote,” writes a reader after yesterday’s issue. He was especially struck by the part about the government response to an invasion by space aliens could bring about economic recovery in 18 months.”
“Hmmm, 18 months… why does that number sound familiar? Oh, yeah!: 18 months is about the same time in took in 1920-21 for the economy to come out of a steep recession when the government did NOTHING. Nada… zip… zero… zilch.”
“How many years has this been dragging on now? So let’s weigh our options… hmmm… the government could do nothing and we’d already be on a path to recovery or aliens (not the kind from our southern neighbor) could invade and we could say to hell with the budget, and we could recover that way.”
“Shame that there is about an equal chance of either of those situations playing out.”
“I don’t know,” muses a reader weighing in on the communitarian-utopia thread this week. “I’m interested in what a little ‘communitarianism’ in the U.S might do.”
“Not sure what private industry has done for us lately. Except reserve Wall Street for the pathetically rich.”
The 5: We sympathize with your frustration. The problem with a “communitarian” vision is the one Orwell defined in Animal Farm — some animals will inevitably be more equal than others.
It comes back to our oft-stated guidance: Sauve qui peut.
Have a good weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. New York’s Mayor Bloomberg just ordered people in low-lying areas to bug out for the hurricane. And with that, we see after-hours traders are flooding back into gold. It just crossed the $1,800 waterline once again.
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