Short-Term Caution on Gold Bullion: Still Preferring the Miners

I’m beginning to get a lot of ”uh-oh” thoughts about gold’s price.  In no special order, here are some of the reasons:

1. “Dr. Copper” is stinking up the joint.  Copper set a 2011 low today.  Its price is unchanged from spring 2007, when gold was only around $650 per ounce.  With copper looking weak and potentially crashable should China’s construction boom turn to bust, the divergence between copper’s multi-year performance and that of gold concerns me now. 

2.  Bloomberg reports deflationary price pressures in Hong Kong in Hong Kong Developers Set to Accelerate Sales:

Hong Kong developers may have to accelerate sales of new housing projects even as buying sentiment wanes amid the global equity rout and as the city intensifies efforts to curb property prices.

Builders including Cheung Kong (Holdings) Ltd. and Sun Hung Kai Properties Ltd. may begin selling new projects including the La Splendeur and The Wings in the Tseung Kwan O district in the city’s northeast this month, according to Wong Leung-sing, a research director at Centaline Property Agency Ltd. The developers, along with others in the city, are expected to offer as many as 2,700 apartments this month, he said.

Hong Kong’s home sales have slowed on concern the city will slip into a recession. Real estate prices fell for the first time in seven months in July after the government introduced new housing curbs in June, while banks accelerated the increase in mortgage rates last week to the highest in 28 months.

“Developers are facing a dilemma here,” Wong said. “On one hand, if they don’t sell now, things may get even worse. On the other hand, rushing all those units out won’t guarantee them good prices.” . . .

The Hang Seng Property Index, which tracks the city’s seven biggest developers including Cheung Kong and Sun Hung Kai, fell 1.5 percent at 10:18 a.m. local time, bringing its loss this year to 23 percent. The benchmark Hang Seng Index has fallen 18 percent over the same period.

It sounds to me as though the great Chinese/Hong Kong real estate machine may be set to go the way of all real estate booms.  This is gold bearish.  The Chinese know how to sell gold as well as buy it, and there are lots of them who like to buy cheap.

3.  Investment houses have started drinking the golden Kool-Aid; its not just bloggers anymore:

Gold will probably top $2,000 an ounce by year-end amid surging investor demand, a Bloomberg survey showed.

Prices will rise to a peak of $2,038 before Dec. 31, based on the average of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s annual conference in Montreal. Next year, gold will peak at $2,268, according to the average in the survey.

Gold has surged 25 percent this year, touching a record $1,923.70 in New York on Sept. 6. The metal climbed as escalating debt woes in Europe and the prospect of faltering U.S. growth boosted demand.

“This is largely a crisis of confidence, and gold is a safe haven,” Rujan Panjwani, the president of Edelweiss Financial Services Ltd., said in an interview at the conference. “I see little chance of gold falling.”

“Little chance of it falling” is now the lead quote, rather than something bearish or at least cautionary?  Look out below?  Worse, the “safe haven” story is, per se, nonsense (IMHO, of course).  There is no such thing as an investment safe haven other than, perhaps, cash and the like.  The major correlation since gold was delinked from the dollar in 1971 has been between “real” interest rates and gold’s price change; but many people know that now, and therefore that relationship may not be safe to play much longer.  More fundamentally, the prediction of those surveyed was for gold to rise at a rapid annual rate.  The article does not say, but let’s assume that gold was at $1850/ounce and that the survey was taken recently.  The prediction was therefore for a 10% rise in, shall we say, 4 months (beginning of September to end of year).  This annualizes to above a 30% annual rate.  That’s a very aggressive goal.  

All the respondents knew that we have entered a seasonally strong time for gold prices when they made their bullish calls.  Guess what?  The Asians who typically buy now have been watching the price soar this summer; many of them have already either bought, or will buy less than expected, or will even take a raincheck because, surprise, they are not Americans.  One thing they do not do is take out loans to buy gold.

4.  The blogosphere I follow is ”all in” on gold.  Mish is a deflationist, but he is bullish; Jesse announced quite bullish price targets Sunday; Jim Sinclair is writing as if the mammoth battle he called for at $1764/ounce has already been won (so easily?) when he said today that “It is hard not to be bullish on gold”; and King World News is proving that lots of former non-gold bugs are suddenly converts.  And of course there are Zero Hedge and many others.  So those who invest along with experts such as those listed above may be more “all in” than they can handle should GLD merely test them by dropping to its 30 week simple moving average, which would be a 12% drop based on today’s GLD price of $173 and today’s 150 day sma of $152. 

5.   Let’s think like hedge funds, for which the trade until recently was long bullion, short miners.  Let’s fast forward to February 2012.  If gold were to drop in price 5% to about $1700 by then, it would still be about 30% above its Feb. 2011 price.  Meanwhile, stabilization at that price, especially if it were in association with further moderation in oil prices, could be quite bullish for the mining stocks:  analysts could then get comfortable with a price above $1500 and thus up their earnings estimates.  (As it is, Barrick is selling at less than 10X estimated 2012 earnings.)  So if I’m a hedgie, I may be reversing the trade and going long miners, short bullion. 

6.   Gold is about 40% above its year-ago price and well above its 200 day moving average.  This makes it a tempting source of profits for traders and investors who have found this a tough year unless they were long Treasury bonds (or lots of gold/silver). 

7.  Expectations are high for the FOMC meeting this week to feed some candy to investors.  The Fed may oblige, but what is already priced in?

8.  On August 11,  I said:  . . . I find the general field of gold mining stocks to be doubleplus good.  (Note this was in the context of being positive on both stocks in general and gold bullion; and indeed, the GDX has outperformed both the SPY and GLD since then.  Thus the “doubleplus” term related to the miners looking better to me than either stocks or bullion.  As of Monday night, Sept. 19, I concur with myself as of then regarding the relative values of those asset classes; but bullion itself is looking toppier than it then was.

And of course, a liquidation event, such as would flow from a disorderly bankruptcy out of Greece, would be an all-bets-off event; but it remains hard to believe that adequate preparations for that event have not been made.  Though you never can be sure. 

Note that none of my points involve scare tactics used by bears, such as, “What if such and such were to happen?”  And then they list something horrifying to most gold bugs, such as an outbreak of “deflation”; or the problems of the world disappearing to be replaced by 1996-style non-inflationary growth.  What I have cited is fact-based, with conjecture based on facts as specified.   

Longer term, the investment houses are required to take any bull market to new levels, but short term, I liked it better when I was a much lonelier gold bull two years and and again one year ago; and when Fed money-printing was a legitimate surprise to the markets.  But no matter what they do, the centrally-planned economy still stinks.  And in the absence of wage gains, I’m sticking to biflation as my price theme, with a continued short-term focus on the deflation side of things as I delineated months ago in such posts as  Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy when I called for lower interest rates and lower oil prices. 

Occasionally cash is a good asset class, even with ZIRP.  Nothing ventured, nothing lost.