Global Macro Trading Journal

[Specterx]

Quote from darkhorse:

Nothing more than a SWAG, but perhaps gold is better supported than gold stocks by a steady undercurrent of central bank buying.

Which, one would think, is gold-bull supportive -- unless the governments of the world are once again wrong.

If central banks are the axe in gold -- bull market buyers with a lag -- do they know something everyone else doesn't? Or are they operating on a dated thesis (fighting the last war once again) and not to be followed? Is it not odd in the first place to contemplate governments getting it right?

Things that make you go 'hmm'... and part of the reason why gold is such a black box. (Silver, on the other hand, a nice short... at least for now...)

I don't see any particular significance to it either way. Since January 2008 CBs have purchased around 970 tons net, of which 200 tons was purchased by India from the IMF - not over public markets. Against current official gold reserves of over 31,000 tons this means that, at best, a little over 3% of the current stock has been accumulated in the last four years. I have a hard time imagining central banks single-handedly floating the gold market on such a paltry volume of purchases.

Which is not at all to say CBs aren't driving the bull: over the same period the Fed's balance sheet has more than tripled via the accumulation of Treasuries, agency securities and MBS, and US TMS2 has increased by 70%.

It's of course possible they're buying secretly through hidden offshore vehicles and elaborate obfuscation schemes, but in that case it seems like a good idea to join them.

 

[Specterx]

Quote from Daal:

Still since I believe commodities are in a bull market that balanced portfolio should beat the 60/40 one by quite a bit(Of course, this is a bet on my part).
My plan is to go towards that kind of portfolio when I feel that its safer to take on more risk, during a China panic of some kind.

Isn't a China panic likely to mark the end of the industrial-commodities bull? Especially if China heads down the road predicted by e.g. Pettis and the Austrians (a decade+ of very slow growth and restructuring as it works off the malinvestments and capital consumption of the past decade).

Of course commodities should go up in nominal terms so long as the printing continues, but perhaps not in real terms. Either way being long both the commodity country stocks and commodity funds seems like it could be overkill, unless you're doing it as a tactical trade with a timeframe in mind where you rebalance back to a 'normal' portfolio.

The link you posted incidentally recommends putting 60% in bonds and TIPS, and only 20% equities...

 

[darkhorse]

Quote from Specterx:

I don't see any particular significance to it either way. Since January 2008 CBs have purchased around 970 tons net, of which 200 tons was purchased by India from the IMF - not over public markets. Against current official gold reserves of over 31,000 tons this means that, at best, a little over 3% of the current stock has been accumulated in the last four years. I have a hard time imagining central banks single-handedly floating the gold market on such a paltry volume of purchases.

Not single-handedly, but with articles like "Central bank gold buying at 40 year high" they are driving the investment case in a public relations sense, with investor holdings almost the same size as CB holdings.

Those who "believe" in gold do so very fervently, with a faith that does not directly translate to gold stocks.

In fact, one might argue that GLD, perhaps the most successful ETF ever besides SPY, is another factor in gold stock weakness -- all the easier for Joe Sixpack to get "the real thing," i.e. straight gold exposure, vs messing about with production cost calculations, notoriously bad management decisions etc.

 

[Daal]

Quote from Specterx:

Isn't a China panic likely to mark the end of the industrial-commodities bull? Especially if China heads down the road predicted by e.g. Pettis and the Austrians (a decade+ of very slow growth and restructuring as it works off the malinvestments and capital consumption of the past decade).

Of course commodities should go up in nominal terms so long as the printing continues, but perhaps not in real terms. Either way being long both the commodity country stocks and commodity funds seems like it could be overkill, unless you're doing it as a tactical trade with a timeframe in mind where you rebalance back to a 'normal' portfolio.

The link you posted incidentally recommends putting 60% in bonds and TIPS, and only 20% equities...

From what I understand about commodity cycles they happen because under investment for a couple of decades or so. This under investment needs to be closed for it to create a cycle in the other direction. There was a commodity "bull market" during the Great Depression. Comm prices dropped by something like 1/3 while equities went down almost 90%. So its not just a demand story(No doubt though, Chinese demand made it more extreme to the upside)

Of course, I won't be happy losing a third of my money but to me this is the worse case scenario. Baseline is that World GDP continues to grow and so does commodity demand

 

[Specterx]

Quote from darkhorse:

Not single-handedly, but with articles like "Central bank gold buying at 40 year high" they are driving the investment case in a public relations sense, with investor holdings almost the same size as CB holdings.

Those who "believe" in gold do so very fervently, with a faith that does not directly translate to gold stocks.

In fact, one might argue that GLD, perhaps the most successful ETF ever besides SPY, is another factor in gold stock weakness -- all the easier for Joe Sixpack to get "the real thing," i.e. straight gold exposure, vs messing about with production cost calculations, notoriously bad management decisions etc.

It's IMO far more likely that indexing and basket-trading are to blame as gold producers are often lumped together with industrial-commodity miners: weakness in one drags down the other and a weak SPX doesn't help.

If this is the case and once again assuming the metal holds up, they ought to eventually decouple.

 

[Specterx]

Quote from Daal:

From what I understand about commodity cycles they happen because under investment for a couple of decades or so. This under investment needs to be closed for it to create a cycle in the other direction.

It's hard to imagine there's any kind of outstanding 'investment gap' in the commodities space after decades of explosive credit and monetary growth, enormous visibly excessive demand in China, etc.

Quite the contrary, in some areas (petroleum demand for instance) high prices are causing major demand destruction. Falling prices (or prices that lag inflation, gold or TIPS etc) seems like the next step.

 

[Daal]

Quote from Specterx:

It's hard to imagine there's any kind of outstanding 'investment gap' in the commodities space after decades of explosive credit and monetary growth, enormous visibly excessive demand in China, etc.

Quite the contrary, in some areas (petroleum demand for instance) high prices are causing major demand destruction. Falling prices (or prices that lag inflation, gold or TIPS etc) seems like the next step.

What is your evidence there is overcapacity in commodity production?I'm talking direct numbers

 

[Debaser82]

http://www.newscientist.com/data/images/archive/2605/26051202.jpg

Fwiw

 

[Specterx]

Quote from Debaser82:

http://www.newscientist.com/data/images/archive/2605/26051202.jpg

Fwiw

See http://en.wikipedia.org/wiki/Hotelling's_rule which predicts the price of exhaustible resources will increase at the rate of interest.

In actual data the 20th-century increase appears to have been even less - albeit with enormous interim volatility.

Just look at the CRB: it's presently at 300. It was also at 300 in 1981, and was actually in a steady downtrend from 1980 to 2002. If somebody had explained globalization, the Asian tigers, China, rise of global middle class etc. etc. to you in 1981, is this the result you'd expect?

Some of the recent increase is surely due to money supply expansion etc., but gold is a much better way take advantage of this: gold and CRB moved almost in lockstep from 1982-2005 but gold has since outperformed massively.

 

[Daal]

As far as credit growth is concerned, most of the credit during the 2000's went to housing, consumer spending, student loans not corporate spending. I haven't checked but I'm pretty sure the Fed flow of funds report back this statement