7 Expert Opinions on Gold's Slide, and What's Next
From Cyprus and treasuries to the devolution of social mood, Minyanville weighs in on gold's slide downward.
Gold, Diamonds, and Bitcoins
By Andrew Keene
Gold is breaking down and is currently down more than $515 from its all-time high of $1,894. The price is getting slashed more than 5% from Friday in the worst sell-off since 1980. We have heard all the rumors from Cyprus liquidation, to fears of Italy and Portugal, to George Soros selling. To put it simply, anything in this world is worth the difference between what a buyer is willing to pay and a seller is willing to sell it for. In this case, it is gold.
Gold does not have much industrial production and it does not offer the same value to the world as oil, silver, and copper. Easily put, what is the difference between gold and diamonds -- or even bitcoins. The problem is that the more countries that own gold, the more they have to sell it once it breaks down. Nothing is a one-day event and I think gold could decline further as the next downside support on the monthly chart does not even come in until $1,200.
Andrew Keene is president of KeeneOnTheMarket.com (KOTM). He has been a market maker on the CBOE floor for the past decade and at one point, was the largest on-floor independent Apple options trader in the world. Read his recent articles, here.
The Yellow Metal Has Made Its March
By Peter Prudden
This is the first true asset class liquidation we have witnessed since the fall of 2011, and during that time, as gold traded into $1,900 an ounce, we told you to be on a bubble alert per the charts below. Todd Harrison, Michael Sedacca, and I all pointed to a similar pattern witnessed in crude oil during the early summer sizzle of 2008. Many will point to the fundamental long term approach on gold; few understand that during the dog days of our country's debt downgrade in August 2011, gold priced in most of its long-term upward appreciation. What we have now are latecomers holding on to the belief that currencies will blow up based upon accommodative policy measures initiated by global central banks, which essentially aligns their view with a point of no return. A value investor should turn a blind eye to this current crash-like state, as I believe the yellow metal has already made its march. Investors who were keen to the upward appreciation dating back to 2002 have long left the party. Loose hands and laundromat owners are left holding the bag with the belief that human psychology can't be sold.
Peter Prudden is the General Partner of SISU Advisors LP and the Managing Member of Prudden & Company LLC. Read more of his commentary, here.
No "Plunge Protection Team" This Time
By Filippo Zucchi
My sense is that gold is getting liquidated in no small part because of the orgy of structured products that were created and sold to investors near the highs through the lure of fat "yields." Those promised yields were little more than the proceeds from the sales of covered call, strangles, or collar-type options strategies on the GLD or the futures; the moment the price knifed through the protective strikes investors were effectively left long the GLD/metal without protection. Considering these products were marketed to folks who probably have no clue how options work, it's easy to see how they would dump at the first mention that their "magic yield" went missing in action, and they were long a chunk of metal to boot. Throw in all the other reasons/excuses (Cyprus, China, etc, etc, etc) and it's 1987 all over again, only this time with gold/structured products rather than stocks and portfolio insurance.
The 20%-plus single-day crash in 1987 was only a blip in a secular bull market for equities. The added problem for gold is that there is no "Plunge Protection Team" to swoop in and buy futures they way they did the morning of October 20, 1987. The gold beating will indeed continue until morale improves, that is until some very sad/unwitting gold owners are wiped out. That will make relying on technical levels much harder than normal. Waiting for the selling to dry up is much more prudent. I'll likely miss the first "V" spike off the bottom, but I doubt large buyers will move the price as they accumulate, so I am not really concerned about being forced to chase.
Full disclosure from Monday, April 15: I was stopped out overnight of my entire long gold futures position at $1,450, including a recent small add at $1,492.
Fil Zucchi is the founder and manager of Zebra Investment Advisors LLC, a Virginia registered investment advisor, and Zebra Fund, LLC, a long/short hedge fund. He is a frequent contributor to Minyanville. Read his recent articles, here.
Stocks and Metals Get Crushed: Now What?
By Todd Harrison
Below is an updated chart of commodities vs. the S&P (INDEXSP:.INX). I opted to begin this juxtaposition at the beginning of 2009 as that's when the system formerly known as capitalism began stretching its legs.
You will note that the commodity complex led stocks higher before peaking in 2011 and trading lower. Stocks followed -- but suddenly reversed course and continued higher -- at least until yesterday. I won't offer that this was a function of government intervention as it doesn't really matter; in markets, as in life, we must trade the hand we've been dealt, not the one we want.
There are two camps out there; I'm sure you've heard whispers from both.
Camp 1: The carnage in gold -- a 15% loss from Friday to last night's lows -- is bullish as investors migrate away from the "fear trade" and cash readies to deploy into stocks. Gold rallied on geopolitical uncertainty and/or as a fiat currency hedge; as our world becomes a better, safer place, as evidenced by the strength in credit markets and the oft-mention rally to all-time highs, gold is a source of funds for riskier assets.
Camp 2: There are no "safe-havens" in financial markets (we were taken to task for asserting this in September 2011 when gold was at $1900). And while circumstances have changed-credit markets and balance sheets are buff due to previous and current policies-our current situation is not entirely dissimilar from what we shared in September 2008; this time, however, instead of "credit" we can insert "psychology" or "trust" in the passages below:
The credit crisis has already infected the economy, starting with the homebuilders, spreading to the financials, engulfing financials in drag such as General Electric (NYSE:GE), General Motors (NYSE:GM) and Ford (NYSE:F) and will eventually phase through retail, technology, credit card companies, and commodities.
That's the orderly scenario, a stair-step through industries until debt is destroyed and a more sustainable economic foundation takes root. It's akin to credit cancer, and once it spreads through our entire financial body, we'll be in a position to enjoy the long-discussed globalization-themed "outside-in" recovery.
The other option is an outright car crash, a collision where credit seizes, capital markets freeze, price discovery permeates, and social mood shifts as we come to terms with the new world order. Neither of these options is something one would wish for, but hope has never been a viable investment thesis.
Yes indeed, the "other side" of all-time highs is the swift and sullen shift in social mood, a theme we've fingered for years but wish we missed.
I'm not saying its game-over. I'm simply sharing the scary truth that the world is a fragile and dangerous place despite the price action in the marketplace; and when-not if, when-that shifts, we'll have to absorb, digest, and navigate the repercussions, for we didn't take our medicine after the first phase of the financial crisis; if anything, we simply took more drugs that further masked the symptoms.
Todd Harrison, founder and CEO of Minyanville Media, Inc., has 21 years of experience on Wall Street. He is the author of The Other Side of Wall Street: In Business, It Pays to Be an Animal; In Life, It Pays to Be Yourself (FT Press, 2011). Read more of his work for Minyanville, here.
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