Could Gold Prices be Signaling a Reprieve in Selloffs or a Bottom?

Over at the commodity markets, gold’s and silver’s recent bounce could yet signal a reprieve to the market’s selloff.

On the one hand, this bounce could signify a reaction to extremely oversold levels but may not be indicative of a bottom yet.

On the other hand, if gold and silver have found a bottom then they could likely be signaling the coming tsunami of inflationism, where the tendency is that gold leads other assets in a recovery, perhaps like 2008.

Also, the recent bounce came amidst Greek polls exhibiting improvements of the standings of pro-austerity camp, perhaps indicative of reduced odds of a Greece exit. A victory by pro-bailout camp government would allow the ECB to orchestrate the same operations that it has been conducting at the start of the year.

For most of the past 3 years prices of gold and the US S&P 500 have been correlated but with a time lag. Since March an anomalous divergence occurred, the S&P rose as the gold fell. For most of the past two weeks both gold and the S&P fumbled which seem to have closed the divergence gap.

But over the two days gold rose as stocks fell. Such anomaly will be resolved soon.

Again, gold cannot be seen as a standalone commodity and should be seen in the context of both the general commodity sphere and of other financial assets.

Focusing on gold alone misses the point that gold represents one of the contemporary assets that competes for an investor’s money. Such that changes in the gold prices would likewise affect prices of other relative assets.

Prices are all interconnected, the great Henry Hazlitt explained[1]

No single price, therefore, can be considered an isolated object in itself. It is interrelated with all other prices. It is precisely through these interrelationships that society is able to solve the immensely difficult and always changing problem of how to allocate production among thousands of different commodities and services so that each may be supplied as nearly as possible in relation to the comparative urgency of the need or desire for it.

To fixate only on gold without examining the actions of other assets would risk the misreading of the gold and other asset markets.

Let me further add that a Greece exit or a collapse of the Euro doesn’t automatically mean higher gold prices. This entirely depends on the actions of central banks.

Since gold is not yet money today, based on the incumbent legal tender laws, it would be totally absurd to argue that under today’s fiat money system—where financial contracts have been underwritten on paper currencies mostly denominated in US dollars or the foreign currency alternatives, European euro, British pound, Swiss franc, Japanese yen or even China’s renminbi—all debt liquidations, be it ‘calling in of loans’ or ‘margin calls’ will be consummated in paper money currency and not in gold.

This means that a genuine debt deflation would translate to greater demand for cash balance (based on Irving Fisher’s account of debt deflation[2]) which means more demand for the US dollar and other currencies of ex-euro trade counterparties.

And that’s what has been happening lately to the marketplace, the US dollar (USD) and US Treasuries 10 year prices (UST) has risen opposite to falling gold prices and other financial assets.

This means part of the global system has been enduring stresses from debt liquidations, which again bolsters the relative effects of money and boom bust cycles.

As pointed out before[3], it would be mistake to equate the 1930 eras (gold bullion standard) or the 1940 eras (Bretton Woods standard) with today’s digital and fiat money system. That would be reading trees for forest when gold was officially money then.

And given that gold has long been branded a “barbaric relic” and has practically been taken off the consciousness of the general public in Western nations, gold has hardly been appreciated as money, perhaps until a disaster happens.

It has only been recently and due to sustained gains of gold prices where gold’s importance has begun to percolate into the American public[4].

Yet the Americans see gold more of an investment than as money

But of course, this is different with many Asians who still values gold as money. For example, many Vietnam banks are even paying gold owners fee for storage[5] in defiance of government edict.

Gold’s rise would be premised from central banking inflationism designed to protect the certain political interests, which today have represented the banking institutions and the Federal and national governments.

As proof, the latest quasi bank run in Greece, which I pointed out above, has reportedly been due to concerns over devaluation of the drachma, should Greece exit from the EU and NOT from deflation.

While I remain long term bullish gold, short term I remain neutral and would like see further improvements in gold’s price trend and subsequently the relative trends of other “risk ON” assets.

---

[1] Hazlitt Henry How Should Prices Be Determined? , May 18, 2012

[2] Wikipedia.org Fisher's formulation, Debt Deflation

[3] See Gold Unlikely A Deflation Hedge June 28, 2012

[4] Gallup.com Gold Still Americans' Top Pick Among Long-Term Investments, April 27, 2012

[5] See Vietnam Banks Pay Gold Owners for Storage, April 12, 2012

The US Stock Markets As Target of US Federal Reserve Policies

The US stock markets have been target of US Federal Reserve policies!

This is what I’ve repeatedly been saying all along since 2008! And have been validated anew.

First, Fed officials deny it.

Reports the Wall Street Journal Blog (bold highlights mine)

For many years, central bankers have declined to comment on the performance of stock markets, and have instead justified their actions in purely economic terms. To the extent financial markets entered into it, central bankers were most mindful of bond markets as the mechanism that translated changes in monetary policy into credit availability for businesses and households.

The stock market only entered into the picture in times of deep market disruptions, or as part of broader discussions about the “wealth effect,” wherein rising stock prices are thought to make households feel richer, and spend accordingly. Of course, stock market operators have always spoken of the a Fed “put,” in which the central bank will ease policy to arrest sustained stock market declines.

All of that has changed since the Fed restarted late last year a program to buy $600 billion in longer-dated government bonds, in a bid to spur higher levels of growth and get the unemployment rate down faster than would otherwise be the case.

Then they confirm it.

Again from the same WSJ Blog (bold highlights mine)

It isn’t clear whether Bernanke’s shift in focus represents a change in how the Fed does business, or whether his comments represent an effort to justify a policy that hasn’t worked as planned, leaving the chairman to support it in whatever way he can. It’s a potentially dangerous policy stance, because if stocks were to undergo an extended period of losses, it could argue for the Fed to keep policy easier than it may want to.

For Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, the increased prominence of asset prices as a focus of monetary policy is not so much an enduring shift in how policy is made, as it is a recognition of what caused the huge economic and financial problems of recent years.

“This recession and the relatively slow recovery we’ve gone through, a lot of it can be traced back to net worth,” Kocherlakota told reporters after a speech in New York Wednesday. “The fall in net worth is what drove us into recession” and “in those circumstances you can see why asset values, both for land and for stocks, are really going to be a central ingredient in the recovery process,” he said.

To ensure the recovery will take hold, it’s important for the Fed to help re-flate asset prices and given households and businesses a chance to rebuild and rebalance their respective financial positions, the official explained.

“In this kind of post financial crisis, post net worth driven recession, it makes sense to be thinking about asset value as a way to try to generate more stimulus than you do in a typical recession,” Kocherlakota said.

I earlier quoted Ben Bernanke in November 2010 who already validated my views... (bold highlights mine)

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

This has long been Chairman Ben Bernanke’s guiding principle since he was a professor at the Princeton University (unfortunately the link to foreignpolicy.com has been removed, nevertheless can be found in Wikipedia) [emphasis added]

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

If the imperatives of the “wealth effect” or that the Fed sees the importance “to help re-flate asset prices and given households and businesses a chance to rebuild and rebalance their respective financial positions” then ending QE, given current fragile "asset price" conditions, would mean that the FED will overturn her priorities. This would signify as a bizarre logic.

This only gives further clues that the Fed will continue to inflate the system, in spite of the current rhetoric about exits and the culmination of the QE which for me signifies as another episode of poker bluffs.

Incidentally, US household ownership of stocks has been on a big decline since 2007.

According to Gallup,

Even as stocks have returned to lofty heights from their March 2009 lows, the percentage of Americans saying they hold individual stocks, stock mutual funds, or stocks in their 401(k) or IRA fell to 54% in April -- the lowest level since Gallup began monitoring stock ownership annually in 1999. Self-reported stock ownership has trended downward since 2007 -- before the recession and financial crisis began -- when 65% of Americans owned stocks...

Americans still have still been enamored to properties.

Again the Gallup, (emphasis added)

The financial crisis and the losses it produced for many investors have combined with government bailouts and Wall Street scandals to turn many Americans away from investing in stocks. Even as stocks have surged over the past couple of years, it has been hard for most Americans to understand what is happening on Wall Street and why, leaving them hesitant to invest in the stock market.

On the other hand, housing and real estate have also experienced sharp losses in recent years and show no signs of significant recovery; still, many Americans see real estate as the best investment for the long term. In part, this may be because depressed prices in the real estate sector make it a relatively attractive investment when investors hold it for the long term. It could also be that Americans feel more comfortable with and better understand real estate as an investment compared with stocks and Wall Street.

My final two cents.

Rising equity prices seen in the backdrop of falling US household ownership means that the equity gains have primarily been benefiting financials companies, since nonfinancial corporations have also been sated with cash.

Chart from Wall Street Journal Blog

This is the obvious effects of the redistribution of wealth from the households to Wall Street and other Washington cronies.

Two, I doubt Americans see real estate as “best investment”. I’d rather surmise that falling real estate represents cognitive biases of “loss aversion” and the “endowment effect” where homeowners have been reluctant to realize or accept losses and instead hold out on their properties based on hope.

Maybe they are hoping that the crash would just go away soon. Or maybe that Fed policies could relieve them.

Either way, if asset prices has been the essential determinant of spending, as proposed by Fed officials led by Ben Bernanke, then obviously inflationism will be expected to continue.

And this seems one good reason why the campaign or war against commodities has intensified.

Global Migration Trends: 700 Million Desire To Live Overseas Permanently

If migration would be liberalized, some 700 million people is likely move overseas permanently. That's based on Gallup's estimates...

``Gallup finds about 16% of the world's adults would like to move to another country permanently if they had the chance. This translates to roughly 700 million worldwide -- more than the entire adult population of North and South America combined."

And the most preferred destination for global immigrants would be the US.

Again from Gallup, The United States is the top desired destination country for the 700 million adults who would like to relocate permanently to another country. Nearly one-quarter (24%) of these respondents, which translates to more than 165 million adults worldwide, name the United States as their desired future residence. With an additional estimated 45 million saying they would like to move to Canada, Northern America is one of the two most desired regions.

But of course, while the US would be the most desired destination, one would have to reckon with their prospective emigrants. Simply said, while the world sees the US as their prime location for immigration, several Americans would opt to to live overseas.

Here Gallup measures prospective net migration flows via Potential Net Migration Index.

According to Gallup, ``The Potential Net Migration Index is the estimated number of adults who would like to move permanently out of a country subtracted from the estimated number who would like to move into it, as a proportion of the total adult population. The results are based on nationally representative surveys of more than 260,000 adults worldwide. The higher the resulting positive PNMI value, the larger the potential net adult population gain. In Turkey, for example, subtracting the estimated 7 million adults who would like to move abroad from the 2 million adults who would like to move to Turkey and dividing that number by the total adult population (52 million) results in a PNMI value of -10%."

``Across the 135 countries surveyed between 2007 and 2009, Singapore posts the highest Potential Net Migration Index of all countries and areas, with a net migration index value of +260%. Saudi Arabia (+180%), New Zealand (+175%), Canada (+170%), and Australia (+145%) round out the top five.

``Interestingly, the United States, which is the top desired destination among all potential migrants, does not make the top five in terms of potential net population growth. The United States' net migration value of +60% places it farther down the list, after Canada and several other developed nations that dominate the top of the list. One important caveat to consider, however, is that the population size of a destination country is related to its ranking.

``Developing countries, in contrast, dominate the bottom of the list. The countries with the highest negative Potential Net Migration Index values are the Democratic Republic of the Congo (Kinshasa) (-60%), Sierra Leone (-55%), and Zimbabwe (-55%), Haiti (-50%), and El Salvador (-50%)."

Gallup estimates a potential net migration index for the Philippines as -20.

The top 5 nations with the largest positive net migration index are commodity exporting countries except for Singapore. Moreover, 4 of the 5 are in Asia (except Saudi-maybe the preferred choice for most of Muslim Migrants) and are economies that have been ranked as economically free, i.e. Saudi Arabia 59th, Singapore 2nd, Australia 3rd, New Zealand 5th and Canada 7th (Heritage Foundation)

Tenuous Relationship Between Presidential Approval And Stock Market Returns

In our July post, Presidential Approval Ratings and Stock Market Returns we argued that stock market returns have little causal relationship with the popularity ratings of the incumbent President.

We said ``popularity measures seem to be an inaccurate way to evaluate, gauge or predict stockmarket activities, trends or returns. That's because popularity is mostly about superficiality and inherently fickle."

In contrast to certain analysts who say that Presidential approval has important contributions in determining spending and investment choices which gets filtered into the stock market valuations, it would seem to us that the attribution of a causal link, instead, represent as a heuristic or cognitive bias known as "clustering illusions" or the tendency to see patterns where none exists (wikipedia.org).

Gallup's recent article seems to validate our thesis.

Some of the presidential approval-stock market performance correlationship charts per administration during the last two decades...

Barack Obama

George Bush Jr.

Bill Clinton

George Bush Sr.

Ronald Reagan

Jimmy Carter

In conclusion, the Gallup says, (all bold highlights mine)

``In any case, Gallup trends suggest no systematic pattern by which Democratic presidents (who may be viewed on Wall Street as more anti-business than Republicans) find their job approval ratings inversely related to job approval, nor a consistent pattern by which Republican presidents find a positive correlation.

``More generally, from president to president, and from time period to time period within presidencies, the market and job approval ratings have moved in widely varying directions, displaying no systematic relationship."

It's the policies employed that should matter more than simple popularity.

Obama's Job Approval: Different Polling Agencies, Different Results

From Rasmussen Reports

From Gallup

From Pew Research

The firm's ideology or political affiliations could be driving these divergent poll results.

Polls: Signs of Increasing Skepticism on Global Warming in the US?

This from Gallup's latest article "Increased Number Think Global Warming Is Exaggerated"

All charts from Gallup.

In the US, while Global Warming adherents remain a significant majority, although recent signs suggests of declining interests by the public over such concerns.

There seems to be a mounting sentiment over "exaggerated" accounts of global warming.

And most of the shift in sentiment seem to emanate from the middle age to the elderly or from the age group of 30-65 or older. In other words, signs of skepticism have grown in most age groups except for the youth.

In addition, relative to other environmental issues, global warming seems to be losing ground in terms of priority.

According to Gallup, "the solitary drop in concern this year about global warming, among the eight specific environmental issues Gallup tested, suggests that something unique may be happening with the issue."(bold highlight mine)

Yet, the article can't seem to ascertain the reasons behind the sagging trend, "It is not clear whether the troubled economy has drawn attention away from the global warming message or whether other factors are at work. It will be important to see whether the 2009 findings hold up in next year's update of the annual environmental survey."

No problem. Experts realizing this have been quick to work on the arrest of the ebbing flow of interests with recent environmental disclosures by claiming sea levels have been rising twice as fast than originally thought of.

Unknown to most the issue of global warming is MORE than just about science or environment but mostly about political ideology (socialism) and dogmatism, money (funding grants, business or economic or financial interest groups & etc..), political power and control (limit civil liberties, suppression of economic growth). Thus some vested interest groups have been fighting strenuously to assert control by influencing public sentiment.

To aptly quote Jeff Jacoby at the Boston.com,

``There is no shame in conceding that science still has a long way to go before it fully understands the immense complexity of the Earth's ever-changing climate(s). It would be shameful not to concede it. The climate models on which so much global-warming alarmism rests "do not begin to describe the real world that we live in," says Freeman Dyson, the eminent physicist and futurist. "The real world is muddy and messy and full of things that we do not yet understand."

``But for many people, the science of climate change is not nearly as important as the religion of climate change. When Al Gore insisted yet again at a conference last Thursday that there can be no debate about global warming, he was speaking not with the authority of a man of science, but with the closed-minded dogmatism of a religious zealot. Dogma and zealotry have their virtues, no doubt. But if we want to understand where global warming has gone, those aren't the tools we need."

Remember failed math models [see earlier post How Math Models Can Lead To Disaster] played a big role for the mess that brought into this financial crisis.

And importantly math models have essentially less variables to deal with than nature itself.

So, caveat emptor.

Weaning Away from a Bailout Culture? Crack Up Boom Next?

A sense of desperation led us to deduce that Americans have drastically turned towards the bailout syndrome to seek relief from their economic and financial travails.

And such sentiment has been powerful enough to have even driven the recent election outcome. And because of popular demand, the political landscape appears to have likewise accommodated such sentiment.

But times could be changing, as Americans appear to be waking up to the realization of the futility of embracing bailouts as elixirs.

That’s if we go by the polls.

Courtesy of Gallup

According to Gallup, ``With lawmakers weighing the prospect of a multi-billion dollar bailout for the U.S. auto industry, Gallup finds Americans falling out of favor with its $700 billion predecessor. Since October, Americans have flipped from being more positive than negative on the Wall Street bailout, 50% to 41%, to being slightly more negative than positive, 47% to 46%."

And the same dynamics seem to be surfacing even in the auto industry.

Courtesy of Gallup

According to Gallup, ``A slight majority of 51% of Americans say they oppose the federal government's giving major financial assistance to the Big Three U.S. automotive companies, while 43% favor it -- representing a slight decrease in support compared to three weeks ago. However, if it is stressed that one of the Big Three companies were certain to fail without government assistance, support rises to the majority level of 52% and opposition falls to 42%.

All these reminds us of the admonition of Ludwig von Mises, ``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

Could these signal the emergence of a crack up boom?

Gallup Polls: Filipinos Say US Election Matters, McCain Slightly Favored

Politicking is the lifeblood of Filipinos.

So even US elections are considered to be an important issue to Filipinos. That’s according to Gallup Polls.

From Gallup, ``The Philippines and the United States share strong historical ties and maintain close bilateral relations, which President Gloria Macapagal-Arroyo seeks to further expand. The United States has also traditionally been the Philippines' largest source of foreign investment and is one of its largest trade partners, so Filipinos have a vested interest in the next U.S. president's policy toward their country and their economic and diplomatic partners closer to home.” (highlight mine)

The latest survey shows nearly a majority of 49% of Filipinos considers the US elections as important, the rest are distributed as 27% no difference and 24% undecided.

And when considering the preference for the next US President, among all the countries surveyed by Gallup, “only Georgia and the Philippines” appear to support Republican Candidate Senator John McCain in a world overwhelmingly dominated by Democratic candidate Barack Obama supporters. It’s a nearly a 4-to-1 margin for Sen. Obama! (Wow Filipinos as contrarians, incredible!)

Here are latest Polls results …

Broken into regions, the National Capital Region (NCR) seems always the hotbed for the opposition even during local elections and is the only region in the Philippines where the pro-Obama preference has a clear edge.

The rest of the survey you can find in the Gallup article here.

As for my choice: None of the Above.