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Some excellent gold commentary at Minyanville

Friday, August 15, 2008

As regular readers probably know, Kevin Depew of Minyanville was taken to task here the other day for parroting all the other talking heads on TV who apparently don't know enough about how commodity markets work that they jump to the conclusion that a 20 percent decline in price signals something of a major change in trend as it does for equity markets.

While I can't exactly say that I felt bad for having to point out that the price of crude oil has declined 20 percent or more in seven of the last nine years (or something like that), I can't exactly say that I felt good about it either.

As part of the healing process, I'd like to bring to readers' attention some truly excellent commentary by Kevin titled Panic Selling in Gold: What Next? that appeared earlier today over at Minyanville (a big hat tip to anon who pointed this out in the comments section of the previous post).

As for gold, I would like to be more positive on the metal itself, but I believe this selling is related to a buildup of longer-term deflationary pressures in the credit markets that will dwarf the inflationary mask of (formerly surging) food and energy costs.
I most certainly believe gold will eventually be an asset to own in coming years. However, at the onset of deflation, gold will be sold indiscriminately - like all assets - to pay down debt and repair balance sheets.

The initial asset price inflation and central bank reflation efforts that made gold seem attractive during the building of the asset price bubble sow the seeds of the selloff as speculators attracted to the metal simply as a detached, non-fundamental momentum play will need to unwind their leveraged bets. Weak holders will be shaken out and ultimately replaced by those seeking a store of value. That is why the selloff won't make sense on a fundamental basis.

I show on the metal itself DeMark exhaustion sell signals on the long-term quarterly and monthly charts. But, the only people that should really be concerned about whether gold is going up or down right now - other than in the macro sense - are those very people who will likely need to sell and therefore be resonsible for it overshooting on the downside. I expect in the next few years for gold to retrace part of its long-term move, perhaps coming below 600 and, in the worst case, possibly even coming below 500. A 50% retracement of this major bull move would be about 458. But that doesn't change the long-term, secular bull market for gold.
This is one of the best summaries that I've read in recent days for what's been happening in the gold and silver markets and it helps to explain the divergence between the physical market (store of value holders) versus the paper market (the momentum crowd).

Of course there are other theories to help explain this divergence.

As for central bank re-inflation, I think what we've seen over the last year is just a warm-up and that most people underestimates the will of governments and central banks to debase the currency on a scale never before seen in an attempt to get things back to "normal".

Recall that, in the U.S., our memories of the worst financial crisis in history are of the Great Depression and deflation. Unlike other parts of the world, we've never had a good hyper-inflation here and my guess is that we're about to get one.

As long as all paper money around the world is debased at roughly the same rate, most people will think things are fine - we'll have to get the Germans to cooperate.

What do you think Congress, the Fed, and the Treasury Department along with other similar organizations around the world are going to do - just sit on their hands as the entire financial system and global economy spirals deeper into the abyss?

The U.S. government is already on the hook for half of all U.S. mortgage debt for a housing market that is not likely to recover anytime soon - that's a pretty good start, but it's just the beginning.

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rich t said...

Well said Tim... I agree completely with you that the govt is perfectly willing and able to debase as much as they have to in order to prevent a debt deflation from taking hold. That's the key point of disagreement (for me, anyway) with otherwise very smart and well informed deflationistas such as Kevin Depew.


Tim said...

The whole inflation-deflation debate comes down to what governments and central banks will do. You rarely hear that in the discussion but it is the key issue.

James said...

There's been a lot of interesting commentary on gold (almost a record, I think) on Minyanville's premium section last two days. Lance Lewis, their main gold bull, has also pointed out the divergence between the physical and paper markets, and also thinks the Olympics may be the reason for a temporary slowdown in commodities demand from China, and that China will come back on the buy side soon.

Anonymous said...

Antal Fekete writes in a type of code that is very difficult to decipher but he made some very relevant observations. What we are seeing is a fracturing of the money system with some parts deflating (credit instruments) and other parts inflating (paper notes). Deflationists argue that the net effect of credit destruction cannot be offset by physical printing because the great credit leverage machine is now broken for good. You can no longer print up $100 and create $2000 worth of credit instruments in the system. That is why Japan could not inflate its way out of their bust.

Anonymous said...

... that won't stop them from trying

Greyhair said...


I know it's largely a matter of semantics and definitions, but it seems like Depew is describing a bubble that's unwinding. And because there's a bubble in anything doesn't mean that it's still not valuable or in a long term bull market. The same would apply to housing and tech stocks.

I agree that gold, and oil for that matter, are long term good bets. But, contrary to what I think you've written before, the recent parabolic run-ups have been driven largely by speculation and resulted in a bubble. As speculators are wrung out, the underlying fundamentals will continue to drive the longer term trends in prices. The question in both (gold and oil) is how far down they have to go to wring out the weak hands.

Kevin Depew said...

Thank you for the even-handed commentary, Tim. I have to say that the "20% bear market" comment I made on NBR was meant in jest, but if it didn't translate well then that's my fault, certainly not yours for pointing it out.

Great site and well done showing all sides of the issues. At Minyanville our goal is to (hopefully) express all sides of the arguments so people can make up their own minds. I am in the deflationist camp, but it is critical that investors and traders understand that the most important thing is to allow for some margin of error, whatever the thesis may be. All or nothing dogmatic viewpoints and opinions are poisonous to portfolios.

Thanks for continuing the debate and open-minded discussions here.

Tim said...


Thanks for the kind words (I often take pot-shots at others, never knowing what their response might be, but it impresses me every time I hear a reasoned reply).

I can only imagine what goes through one's head as they're speaking to millions of people on a business news show. I didn't get the joke, hence my reaction, but apparently others did.

Inflation, deflation, reflation - we live in interesting times.

Tim said...


I'm with you on everything there - the run-up in oil was overdone and this is the fall-out.

The interesting thing is that speculators have provided a valuable service in alerting everyone that a major supply demand problem exists. Unfortunately, after the internet and housing bubbles, most won't see it as that.

Anonymous said...

Thanks for posting Kevin's remarks.
I particularly enjoy his tongue in cheek remarks when he invokes the 'MrT gold sell indicator'

If you mean by speculation highly geared 'investments' bought on margin, then yes markets are extremely overheated. It also means that declines quickly turn into rather large air pockets.

Japan failed to reflate because most of the borrowed Yen immediately left Japan and ended up inflating other markets and economies. When this carry trade unwinds, I think Japan will have plenty of inflation.
The US may face similar problems when their creditors sell up their US bonds and the resulting deluge of USDollars is repatriated to the US.

staghounds said...

I wish that anyone could show me a deflation of a fiat money that has actually happened.


In all of history.

Or have we we started using the term "deflation" to mean a realtive rise in value of one commodity, stock share, or other instrument over another?

If so, that's some sloppy and harmful redefining.

Anonymous said...


Yes, a good reason why reflation will not work - can't force people to put money back into bubble assets. However, the effects of a busted credit engine are more significant, imo.

Anonymous said...

Gold back to $500, eh? Where were all these brave pronouncements a week ago?

We'll have a $1 Trillion deficit in 2009, with more bailout/handouts to come from govn't that all require printing money, stocks will tank as the REAL bad news comes in (low or negative earnings), real interest rates are still negative, the credit card debt disaster hasn't hit yet, yet somehow investors will flee gold for something else.

I ask again. What? What wil they go into that will earn them enough to equal even the bogus inflation number, much less the real one (10% or more)? If you think Americans will sit and earn 2.5% (paying taxes on that in many cases) while inflation rages at 10% you're mistaken.

The only asset classes that aren't damaged by all this bad news is PM and commodities. And unlike oil, gold's value isn't dependent on there being a strong demand for its physical use.

It may not soar, but its' hard to see how it will fall. All this high finance talk is interesting. But some of us actually stop and use common sense.

Stocks falling, bonds falling and paying shyte rates, CD's in banks pay nothing and you risk bank failure, money markets dangerous and paying nothing. But yeah, we'll all flock out of gold.

All these pronouncements over ONE 20% correction. Yet financials drop 60% and they're "excellent buys!"

Anonymous said...

correction: a MONTH ago on the pronouncements.

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