An “early call” to sell Gold – Aussie Dollar is the key

Extract from my November 16th, 2011 newsletter

The Trade: 

Short Sell Gold on break below ~ $1,760 spot price.

Stop at $1,806 or $1,796 (to be determined/refined)

BUT the key to watch is AUD breaking below 1.0050.

Today’s fall in the EUR below 1.3480 along with declines in Copper, Silver and Platinum are providing early and minor confirmations for the Short Gold trade.

Further confirmation of market weakness, especially in equities would be confirmed if the SPX broke below 1,226.

If (once) gold’s decline commences, we’d look for it to test and break levels such as $1,630, $1,540 and $1,450 onto its way down to $1,340.

At a premium to Platinum..

Gold continues to trade at a premium to its more expensive cousin, Platinum. The spread between the two hasn’t been this wide for at least 30 years.

For past 20 years, the price of platinum has traded at an average of $250 higher than gold while the past 10 years has seen it trade at a mean of $405 above gold.

Today, gold is $145 higher that platinum. This is $550 “off” the 10 year average and a $300 deviation from its 3 year average.

Can this be 1973 again?

S&P 500

Today, the “setup” in financial markets looks a lot like 1973.

Back then, the U.S. had high unemployment (and was rising), it had overspent on war in Vietnam, increasing social uprisings and its monetary base has increased notably. The U.K. has a secondary banking crisis

There were tensions in the Middle East which saw Syria and Egypt launch attacks on Israel sparking the Yom Kippur War which lead to the 1973 oil embargo and the oil price doubling.

In August 1971, the U.S. pulled out of Bretton Woods and thus took the US Dollar off the gold standard. This saw the USD fall in value and upset oil producers who were receiving less for the USD denominated oil they were selling.

Between 1971 and November 1973, gold had tripled up to $95 per ounce.

US Dollar Index (DXY)

What then happened in 1973/74?

Stocks fell 40%, oil soared as did gold and agricultural (softs) commodities. Food inflation was already accelerating in 1972. By December 1974, gold rose doubled to $180. Inflation skyrocketed which led to the yield on the U.S. 10 year bond rising sharply. They eventually rose from 6% to 13% within 7 years.

Central banks raised interest rates in attempts to stifle hyperinflation.

What if interest rates in Australia rose to 14% by 2017, or if U.S 10yr bonds today rise from 2% to 6%?

In 1973, the US Dollar rallied as did gold, oil and the “softs”. The traditional inverse correlation of the USD and commodity prices decoupled.

Currently, equities are exhibiting weakness, the US Dollar is rising while oil and gold are “hanging tough”.

Are you seeing any similarities?

Today, my current macro thesis is based on a similar outcome – asset deflation and food and energy inflation. Stagflation.

Nevertheless, my intention is not to be dire but rather call it as I see, read or feel it.

The results of this scenario playing out could see natural gas prices rise, softs rise as will gold and oil, transportation business suffer as will retailers, bond prices fall (especially longer dated), AUD weaken as do industrial and base metals. Using the 1970’s playbook, caution would be warranted when it comes to property as inflation later rapidly decelerated in 1974-76 which when coupled with interest rates that remained high led to new stresses.

If we see a repeat of the 1970’s, then the good thing about it is the 1980’s are around the corner again. Better stock up on fluorescent leg warmers!

Finally, I found the attached link (The Age newspaper, 2005) an interesting summary of 1974.

http://www.theage.com.au/news/National/The-year-the-economy-went-bung/2004/12/31/1104344983057.html 

Wheat

Sugar

US government 10 year bond yield

Investment Themes – Obesity

Image via Wikipedia

A 2009 U.S. Department of Defense study found that 75% of Americans aged between 17 – 24 years old are unable to join their military for one or more of the following reasons.

Either they are too heavy, haven’t graduated from high school, have criminal records or abuse drugs.

Although there are also other disqualifiers such as asthma, my initial response was – Wow!

Being overweight is the leading reason for being medically rejected, which I’ll focus on for this post.

The investment ideas that flow from this statistic can range from kidney dialysis providers, pharmaceutical companies, sweetener alternatives such as Stevia, bariatric “lap-banding” surgery, dietary supplements and fads, orthopaedic knee replacements, shorter life expectancy, funeral services or junk food manufacturers.

Investment Themes – Automation, Self Service & Mobile Payments

I’d like to start a series of blogs that I wish to share focusing on investment themes. I’ll try to keep the topics and paragraphs brief but hopefully it’ll give you an idea of how where I start my pondering from the “top down”, following periods of time reading and “staring at the ceiling”.

Maybe this theme could be re-written as ‘Self-Service”. We are happily self servicing and processing our own tasks, requests and business. Some examples include how I withdraw and deposit my own money from and into my bank account or happily swipe groceries at the check-out and pay bills myself rather than having the bank or post office help me. I am equally excited when I get to press buttons at airport check-ins and I am captive to listening to automated telephone call centre prompts.

Beneficiaries of this trend include companies that adopt automation and self-service technology allowing them to save costs and companies who produce technology ranging from car park payments machines to supermarket scanners.

A trend that is still gaining traction is Mobile Payments. The initial trend has started with payment processors (MasterCard and Visa) promoting the use of debit cards. Many cards now have embedded chips and some allow me to “flash” the card at a terminal without breaking stride whilst exiting a store. Paypal and other companies provide services of having a “mobile wallet”. SMS payments are becoming popular and Mobile Web Payments has wide ranging possibilities. The real growth will be in how we use our mobile phones.

Who is creditworthy?

The word “credit” has it sources ranging back to Latin’s credo, creditus & credere. Translations can be read as “to believe, trust or confide”.

Once again, there is complacency in risk taking, but this time it has a better twist.

In 2008, the saving mantra was that government’s were the “lenders of last resort”. Governments “back-stopped” failing organisations. They were deemed to be the most creditworthy of all.

I think most of us are more creditworthy than many governments. If that is the case, who do you “believe”?

If I borrowed $10 from you, I am “good for it”. In other words, you would “believe” that I can borrow the money, pay an interest for this service and that I’d return the funds within an agreed or understood timeframe.

In a real commercial sense, the lender would ask to secure the debt by taking a “charge” or “lien” over an asset that I own, which is sufficient in value that covers their loan. If I can’t return the borrowed monies, the lender or I, sell an asset to clear the debt, sometimes at a loss.

Governments today aren’t selling assets. They are solving debt problems with more debt.

Laurel & Hardy should attend all government crisis meetings from hereon, at least to remind them “of another fine mess you have got us into”.

Ahhh, the media !

Image by Gary Thomson via Flickr