GOLD 0.51% $1,391.7 gold futures

Gold - the last man standing

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    Hi guys,

    14 months back, I attempted a detailed analysis of gold here on HC’s gold forum–-the-final-bubble.2517192/?post_id=15293903

    My basic premise was that the fundamentals for gold seemed excellent and that gold would eventually rise to dramatic heights.  Those were the old days when NST was still $2.12; EVN was still 1.16; SBM was still 48c and RSG was still 36c. Oh what a difference a year makes.

    This time around, I’m going to attempt to explain how almost everything else in the financial system is a complete mess and how the fundamentals seem ripe for gold to eventually be the only last man standing. Long read (so grab a coffee if reading) as I’m going to talk of several aspects of the global monetary system and how gold’s rise in last half year is a possible mirror reflection of the terrible fundamentals visible everywhere in all aspects of the global financial system and all sectors, potentially signaling that something big is inevitably going to come down the line, as many of us goldbugs have long believed.

    1/ Oil and general commodity bust

    I passed a detailed comment on the oil forum last August shortly before oil’s spike to around 50 last year, where I’d warned in detail of several bearish factors in the oil scene.

    I did a few updates on the LNG and FAR forums over the year and my most detailed one in May of this year.

    Several of my comments and fears on the oil sector over the last year have materialized  including broader macro concerns, importance of historical level of 40, resistance of 50, broader commodity bust, Chinese and global slowdown, impact of soaring US dollar, geopolitical impacts, falls to 30s and 20s, multiple legs of falls, bloodbaths in the oil sector in December, etc. among many others.

    As I mentioned in my May 2016 update, oil still has a lot of headwinds and a lot of resistance at the 50 level, 60 level etc. Oil since then again attempted to cross 50 but failed to make a meaningful move as I thought.

    Oil has had several weaknesses including part of broader commodity bust, soaring DXY last year, flooding of oil by Saudi and others, shale, etc. As I mentioned 2 months back, IMO bearish risks are more to oil than bullish positives and good luck to oil bulls but the risk-reward ratio is a little scary for me.

    Oil’s collapse over the last 1-2 years is (or should be) a warning sign of the poor macro conditions as oil is one of the most critical and core commodities. Indeed the complete collapse of the commodities sector as a whole over the last few years is a strong warning sign of weak underlying fundamentals

    2/ Property  - Australia

    I’ve done a detailed analysis on Aussie property around 1.5 years back on HC, but the underlying fundamental factors are quite similar everywhere.
    I basically argued that property should either fall or conditions will deteriorate and we’ll end up with conditions reflecting stagflation and/or recession, how the commodity bust will continue to hit both economy and property, how Perth and WA will be the worst hit, how property is artificially high due to easy central bank monetary policy, how the rise will crush Australia, how a point will come when central banks might not be effective anymore, etc. among numerous other points.

    Since then, conditions keep getting worse as thousands of jobs are being lost regularly in all sectors, we’ve had rate cuts galore as the economy weakens and now there are also talks of Australia possibly losing its AAA rating. Perth property has been the worst hit as I thought

    3/ Global property

    Property IMO continues to be a scary bet globally as when the tide turns, it could turn very fast. I’ve mentioned many fundamentals in my Aussie property analysis but really many of those core issues apply to many countries – easy monetary policy artificially boosting global property prices worldwide to the point where they actually leave the everyday guy with no money for anything else and thus leads to boom/bust stagflation/recession oscillations.

    Several UK property funds have been frozen and some are talking of haircuts too – Aviva, Standard Life, M&G, Canada Life, Columbia Threadneedle and Henderson Global Investors, etc.

    More than half of the U.K.’s 25 billion pound ($32.8 billion) property investment sector has been frozen. The very concept of open ended funds for a long term investment like property is a little bizarre IMO and just reflects the excess speculation that has gone on in property. U.K. commercial real-estate sector had seen heavy foreign inflows since 2009—accounting for roughly 45% of the value of total transactions—and driving valuations in some segments of the market, particularly London, up sharply.

    It is the same problem worldwide where foreign inflows from China and other countries are boosting property values in Vancouver, Melbourne, Sydney and several parts of the world. Recent blocking of funds by these funds could be the first major hit to property’s perception as some sort of safe haven by some, and it remains to be seen how many properties are dumped by funds in future.

    4/ Iron

    Like oil, iron is another of the core commodities IMO whose fall signifies weak global macro conditions  and should be a warning sign. I’ve done a detailed analysis a year ago bifurcating my analysis into top tier (BHP, RIO), mid level (FMG) and juniors.
    Iron has put through a decent performance in 2016 but several of the underlying issues like Chinese slowdown, impairments, debt issues, capital raising issues, big miners flooding the world with iron, etc. still remain to some extent.

    5/ Banks and financial institutions

    I’ve mentioned several times on some HC’s forums way back in 2015 that several bank were/are in a bubble and we can see that several banks across the world have been falling to a large extent.

    Some of us here might be aware that Deutsche Bank and Credit Suisse are possibly two of the riskier banks which could potentially cause the next Lehman moment. DB especially which has links everywhere.
    Even IMF said that among the globally systemically important banks, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse. Several of those banks like Credit Suisse and DB are at lifetime lows, which should be a scary sign to the global financial system

    Others like RBS, Banco Santander, Lloyds, Barclays, etc. have lost around 50% or more of their market cap in the last year and were butchered in the aftermath of Brexit. When billions of dollars of market cap are being wiped out with such ease, it is a scary sign. Keep in mind that the ASX 200 is very heavily weighted in favour of the the Big 4 banks. Once a contagion risk spreads here and they start falling, every share could get hammered simply due to the fall in the ASX led by the big 4. There are many factors affecting financial sector like dependence on property, loans to the energy sector which got affected by oil’s sharp downturn, surge in non performing loans, big impairments etc.,  There are problems elsewhere too with Germany’s Landesbank and Italy’s Monte dei Paschi.
    And let us not even talk about the trillions of dollars of derivatives, all making the financial sector a scary place just like 2008

    6/ Brexit and risk of similar exits

    The seemingly short chaos of Brexit was misleading. This is potentially just the start with several other countries down the line deciding to leave the EU. Obviously, each of those could lead to similar chaos in all asset classes. AT time of Brexit, all asset classes got hammered and there was only asset class that zoomed – gold

    7/ Sharp currency fluctuations in recent times

    Sharp currency fluctuations are again signaling the need for something stable like gold to come into the mix again as was the case with the majority of history.  GBP’s massive movement in the face of Brexit and sharp fluctuations in JPY, USD, etc. are other examples. What is most notable of this rise of gold is that it has come in the face of a soaring dollar, which is an indication of gold’s acceptance as one of the ultimate currencies and safe havens.

    8/ Sovereign Debt, interest rates and greatest bond bubble in history

    Here is a short article highlighting the risks.

    We have trillions of dollars of sovereign debt with negative interest rates in several countries like Japan, and several European countries. Yields move inversely to prices and we are thus in a massive bond bubble, and imagine the unprecedented chaos if and when interest rates ever move back to positive territory. Remember the chaos caused last December when Fed just barely raised interest rates.

    What this has also caused is a global contagion of low rates all artificially leading to easy monetary policies, bankrupt companies and countries hanging on due to low rates, etc. A concept of a market determining price mechanism is also fast getting eroded.

    Ideally the concept of a negative interest rate itself should make no sense and flies in the face of conventional  economic theory. Why would anyone pay someone to borrow in normal circumstances? Again, the concept that negative interest rates could cause inflation also seems flawed as savers are now forced to save even more to offset the hits to their savings.

    Negative interest rates however are very positive for gold and I mentioned this in my last year’s analysis (point 21) that concepts like cashless society and negative interest rates are very positive for gold.

    9/ Junk bonds

    As I mentioned above, artificially low interest rates have led to bankrupt countries and even companies hanging on, as investors desperately chase yield. I’ve previously mentioned in 2015 that junk bonds also thus seem to be in a bubble and there were several junk bonds in the energy sector that had to be written off.
    A well know high yield bond ETF HYG was getting  hit bad last year but then picked up over the last few months

    Here is a good article explain in how a liquidity mismatch could come about where investors’ funds are frozen as was the case with the UK property funds mentioned earlier

    10/ Helicopter money

    The concept of helicopter money is again increasing significance in recent times and many believe that this could end up as the monetary end game with the central banks printing large sums of money and distributing it to the public in order to stimulate the economy
    Critics of this concept argue that in an attempt to cause some inflation, the worst outcome of this is runaway inflation and possibly hyperinflation. Many gold commenters also believe this to be the end game for gold (very positive for gold) and everything else, as central bankers run out of all ammunition and are left with nothing else but helicopter money.

    11/ Pensions, retirement benefits, social security, entitlements

    Pension funds are unable to cope up with the current conditions of artificially low interest rates as they have to meet liabilities without the possibility of secure income. How can they earn their income in an environment of negative interest rates? They are thus forced to take excessive risks in the stock market, etc. Central States Pension Fund (US) has already talked of cutting down pensioner benefits or risk becoming insolvent later. UK’s Universities Superannuation Scheme has also flagged issues.

    Governments themselves are potentially going to be unable to fund their social security and entitlements obligations and even now they are continuously in deficit.
    All this could lead to a lot of unrest and issues down the line as retirees who thought that they were going to get what they were promised potentially end up with nothing.

    12/ Job losses, rising unemployment

    As many know, there have been massive job losses in all better paying sectors in several countries and several of the new jobs have gone to the lower paying jobs. All this is screaming of severely weak underlying conditions.

    13/ Retail, consumer staples,etc.

    Several major retailers closed a lot of stores including Walmart, JC Penney, etc.
    Here in Australia, look at the weak performance of major Woolies despite being in consumer staples in the last year, as there is desperate cost undercutting by the biggies to get business.
    Look at performance of MYR too over the last few years.
    If things were all so good, then why is the retail sector not reflecting all that.

    14/ Factory orders – 19 months of fall

    US factory orders have fallen for 19 months in succession – the longest streak in history. S&P 500 has often tracked factory orders; so of course there is a risk of fall. If new US factory orders have continuously being following since so many months, then where is this recovery that we keep hearing about.

    15/ Other indicators of weak fundamentals and possible recession warning signs

    Falling business sales since 2 years; rising inventory to sales ratio indicating lots of unsold stuff (remember Dick Smith, guys); corporate earning declining since 4 quarters; profits on S&P500 down compared to last year; rise in bankruptcies; slowing rail traffic; loss of mining jobs; huge job cuts; slow growth; etc.

    Stock slumps across the world last year’s-8-largest-economies

    16/ Education bubble

    There is a massive trillion dollar education debt in the US and questions have to be asked as to how it is going to be paid with massive job losses across the board, stagnant wages, increased use of automation and robotics, etc.

    17/ Saudi issues

    Saudi is one of the most significant countries. Refer my oil analysis for several issues being faced by Saudi. They have semi socialist policies which will be hard to maintain, big budget deficit due to the oil war, cash reserves dramatically going down, possible issues of Riyal devaluation, etc. all which led them to an unprecedented move to float its crown jewel Aramco. Since Saudi is such an important player in oil, chaos in Saudi could likely lead to global chaos

    19/ Japan issues

    Japan has been trying its best to weaken its currency even going to the extent of negative interest rates and yet its currency has strengthened massively recently against the USD. Massive debt, ageing population and no growth since an eternity. There has been much speculation that Japan could be one of the first countries to launch helicopter money. Bank of Japan has become one of biggest owners of stock market as it tries to prop up the market. So many issues all around

    20/ China issues

    Speculation by cheap funding and massive debt as is the case with many countries. Possible heavy devaluation of the yuan at some sort of time. Property markets in a bubble.  Possible collapse of their banking system with several non performing loans

    In short, a massive debt fuelled economy, as China has gone on a huge debt binge in last couple of years building ghost cities and other malinvestment.

    21/ Baltic dry index collapse

    Baltic dry index is a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea.

    Baltic dry index has been falling since several years and is at a massively lower level compared to the booming days of the last decade just prior to the GFC.
    So clearly the global trade conditions are not that good and this has long been a sign of weak fundamentals.

    22/ Coal collapse
    Decline of coal in the last few years has been simply jawdropping as top 4 US coal miners (Peabody, Alpha natural resources, Walter energy and Archcoal) lost 99.9% (over $44 billion of their valuation) since 2011, with Peabody, Archcoal and Alpha declaring bankruptcy.
    Murray Energy Corp., the largest privately held coal miner in the U.S., has warned that it may soon undertake one of the biggest layoffs in the sector

    23/ Tech and start up bubble

    I’ve pointed out earlier on HC that Tech and start ups have been in a massive bubble since long. Many of them have multi billion dollar valuations without revenues to back it, and are riding the tech hype. Sharp falls of Twitter and Linkedin over last year could be first sign that the bubble is in trouble. Note however Linkedin made an amazing recovery due to Microsoft takeover


    There have already been a lot of tech layoffs this year

    Even giant Apple is feeling the pain with a 24% fall in last 12 months. Once the entire tech sector bubble bursts, it could lead to another major crisis, 2000 style

    24/ Emerging market bubbles

    Easy money has flown into several emerging market countries creating bubbles in property and local stock markets.
    A clear sign was the chaos in EM’s in 2013 when Fed first announced intentions to end QE. Lots more to come IMO in time to come and especially if US dollar index ever appreciates over 100, when all money will flow to US, causing chaos in EM’s

    25/ Conclusion

    Many of us goldbugs already know a lot or most of the above. However, many people would be new to gold and I also thought of coming up with something for them, as gold's rise would definitely have attracted new eyes to the gold forum in recent times. Also this is NOT meant to be any expert opinion on any sectors but just a brief snapshot and my very humble opinion of many of them, which of course could be wrong (just giving it my best shot to give a rough idea).

    Purpose of my comment was to highlight that gold’s massive rise this year is possibly finally reflecting some or all of the serious poor underlying fundamentals of the global monetary system,which keeps worsening by the day. I also wanted to highlight to people new to the gold sector that global macro conditions are indeed terribly bad, have been bad since a while and keep getting worse.

    Keep in mind that gold is rising with a soaring US dollar, which is very unusual. It implies that gold is coming into its own as a currency and safe haven. With the recent US employment report, gold should have fallen but instead held its own and GDX and GDXJ showed good rises again; ideally a strong signal of a solid bull market.

    As was the case with my last year’s analysis, I’m not predicting anything in the short term but am simply highlighting longer term fundamentals. I mentioned in my last year’s analysis in point 1 that GLD hammering in 2013 was the main cause for start of bear market. Remember that this could always happen again as physical gold and paper gold have an eventual disconnect as even some well known gold commenters believe. It is unknown how gold stocks would react in such a scenario in an intermediate time frame while the disconnect is sorted out, and this is always an underlying risk IMO.

    In longer run though, there are so many reasons (as I highlighted last year) why gold is one of the safer investments and IMO, possibly going to end up (already showing signs) as the last man standing as gold eventually goes on to form the final bubble of them all.

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