Bloomberg.com is out today with a bullish piece on gold titled Gold Traders Most Bullish Since ’04 on Debt Crisis. There is only one somewhat negative quote; the rest of the article screams “Buy”. But here is the fundamental bad news:
Commodities as measured by the S&P GSCI gauge are heading for their weakest performance since 2008.
It’s the above fact that leaves gold subject to a possible major downdraft if a U. S. or Chinese recession, or “deflation”, actually occurs. In contrast, the gold bull was soundly anchored for a bullish 2011 due to its neutral performance in 2010 vs. other physical commodities, which are said to have risen exactly as much gold last year, 29%.
Yes, gold is “money” (defined a certain way), but if the point of a rising gold price is to track monetary/price inflation, then should not said inflation also be reflected in the prices of a basket of other physical goods which, being “real”, give the lie to the money illusion? So with platinum down nearly 10% in price this year, gold may prove to be a laggard against said basket of commodities if and when they move up, perhaps sharply. But meanwhile, platinum is over $1600/ounce and was as low as about $800 in 2008, so I’m not bullish on platinum given my view of the near-term future of global economic activity. So to summarize, my concern is not the price of gold for the long term, but rather that as occurred in the fall of 2008, a sudden and sharp move down in the price of gold might be in the offing. This pre-existing concern of mine is heightened when I see the sort of article Bloomberg is running.
The other bit of bad news for gold bulls in the article is that oil is the only commodity that has beaten gold this year. I cannot remember a year in which oil has led the commodity hit parade that has not been associated with recession. And the markets in those periods often have followed a similar pattern as in 2008 and this year, as capital surplus oil exporting regions such as the Mideast recycle their profits derived from high oil prices into the Western financial markets. This in turn provides a false sense of comfort to stock traders, who see the stock market “resilient”.
The Fed remains the leader of the financial community’s band/orchestra. So long as the Fed is over-optimistic about the pace of the U. S. economy, which I think is likely the case, I am wary of the stock market. Of course, we’re all guessing here in these roiling markets, and we shall see if anything I have said here pans out as the future unfolds.