Gold prices are retreating. Investors are raising cash, lots of them. We raised some back in May and June, but not nearly enough.
Long rate is heading down. This is in stark contrast to the market expectation at the beginning of the year.
There is one important thing that the markets across asset classes agree on: risky asset prices are heading lower. We're headed to a deflationary environment. And that has been baked into the market expectations, which may become self-fulfilling.
Cash not only will not lose value, it will buy more if you just wait.
Companies, big and small, are holding back. Because they can buy more later.
People who worry about losing jobs don't want to buy homes now. Mortgage rates can't help but to go down. People who have stable jobs are probably better off renting, because they can buy more home later.
Is there value in gold? Not in a deflationary environment and major governments are pursuing austerity.
There is only one entity that can turn this vicious cycle around: The Bernanke Fed.
Showing posts with label Precious metal. Show all posts
Showing posts with label Precious metal. Show all posts
Thursday, July 1, 2010
Thursday, May 6, 2010
How panicky it was today!
As all major indices dropping straight down today, I felt like the episode of August 2007 had returned. That was when the two Bear Stearns mortgage funds were shuttng down, and most quant equity strategies were losing money big time. It was the harbinger of what was to come in 2008.
Could today's event be something similar? Or the market just got short-circuited due to the fear of European contagion?
The selling was across the board. Everything, including stocks that are unrelated to international trade or finance, went down rapidly, before recovering some.
Dow at one point was down nearly 1000 point. Some of the stocks I was watching were down more than 20%. Truely amazing.
I have been reading up on European Union and Euro. I'm inclined to think that the sovereign debt problem is nowhere near the mortgage debt problem we've had. Greece will be dealt with or will linger on and shrink. Portugal and Spain will be dealt with or will linger on and shrink. Euro may continue to drop or even collapse. It will be a source of great volatility. But then so what? It was just a monetary experiment, an idea or a strategy to counter the dominance of the U.S. and the rise of Asia. ECB is not an effective central bank. If the problems it now face will bring it down, so be it. The nations in EU would then have the freedom to choose their own destinies.
The real economies will continue. Businesses that can take advantage of the weak Euro are going to thrive.
So why the panic given the small size of all PIIGS economies? They're neither a critical source of energy or raw material nor a major consumer market. They're not going to derail the global economic recovery led by US and China.
I actually bought some shares during the few minutes of big drop.
Gold price, reflecting the great uncertainty over Euro, has gone over $1200/oz. This is precisely the reason to hold gold. Yet, some of the precious metal funds have been disappointing. For example, Vanguard's VGPMX has not only under-performed some of its peer funds, but have under-performed both GLD and GDX. Now we know for the hedge using gold to play well, we should get the real gold, or gold futures.
We've been right about raising cash, limiting exposure to banks and increasing short. But, rotating more into industrial, material and energy now appears a bit pre-mature.
Could today's event be something similar? Or the market just got short-circuited due to the fear of European contagion?
The selling was across the board. Everything, including stocks that are unrelated to international trade or finance, went down rapidly, before recovering some.
Dow at one point was down nearly 1000 point. Some of the stocks I was watching were down more than 20%. Truely amazing.
I have been reading up on European Union and Euro. I'm inclined to think that the sovereign debt problem is nowhere near the mortgage debt problem we've had. Greece will be dealt with or will linger on and shrink. Portugal and Spain will be dealt with or will linger on and shrink. Euro may continue to drop or even collapse. It will be a source of great volatility. But then so what? It was just a monetary experiment, an idea or a strategy to counter the dominance of the U.S. and the rise of Asia. ECB is not an effective central bank. If the problems it now face will bring it down, so be it. The nations in EU would then have the freedom to choose their own destinies.
The real economies will continue. Businesses that can take advantage of the weak Euro are going to thrive.
So why the panic given the small size of all PIIGS economies? They're neither a critical source of energy or raw material nor a major consumer market. They're not going to derail the global economic recovery led by US and China.
I actually bought some shares during the few minutes of big drop.
Gold price, reflecting the great uncertainty over Euro, has gone over $1200/oz. This is precisely the reason to hold gold. Yet, some of the precious metal funds have been disappointing. For example, Vanguard's VGPMX has not only under-performed some of its peer funds, but have under-performed both GLD and GDX. Now we know for the hedge using gold to play well, we should get the real gold, or gold futures.
We've been right about raising cash, limiting exposure to banks and increasing short. But, rotating more into industrial, material and energy now appears a bit pre-mature.
Monday, February 8, 2010
What precious metal market might be telling us?
Vanguard's precious metal fund (VGPMX) is one of my personal holdings since 2008. It was among the best performing funds of the fund family for 2009, returning 77%. For the first week this year, it shot up 10%, ranked at the very top. But by Feb.8, it had become the worst performing fund in the family, returning -10% YTD.
Gold ETF GLD and gold miner ETF GDX behaved similarly. These are driven by the gold spot price which went from the recent peak above $1200/oz to about $1065/oz as we speak over the last one and half month. The most important factor appeared to be China's announced intention to tighten its monetary policy to comeback over-heated property market and the blewing inflationary pressure. Recent sovereign debt anxiety has added to the dollar strength, helping to bring down the gold price.
What does this reversal tell us? Is precious metal on the secular way down?
The bullish case for precious metal has two sides to it. One dominant thesis is that gold is a good hedge against pending inflation or inflationary expectations. We don't see much inflationary pressure in the TIPs. In fact, economists are expecting deflation in the US as the nation battles the high unemployment rate. How does one square with that observation?
Another theory is that gold is a great store of value, a de facto reserve currency. When US dollar or other major currencies are debased, gold should shine. This argument has gained more support recently. For instance, at the height of the credit crisis of 2008, USD actually strengthened due to flight-to-quality effect (other major currencies such as Euro were even weaker). Gold prices went down briefly as a result, before the global stimulus efforts were kicked into gear. Similarly this last week when Greece's debt crisis resurfaced, dollar strengthened and gold saw a big selloff.
We think the reversal is not something new. The market is telling us what it has been telling us all along: there are deep concerns about future inflation that are coming from global economic growth. That often manifests itself with price increases of commodities. This concern is now compounded by government deficit spending on an unprecedented levels. Market has also been concerned with governments' ability to trim back these spendings when it is time to do it. If there are signs that the governments of major economies will act responsibly, then gold prices have less reason to go up.
When China tightened, the market appeared to be surprised that the pro-growth regime was not as headstrong as many had come to expect. Thus the selloff.
The strengthening of USD due to Euro zone problems may have pulled down the gold price some, but it is only temporary. US deficit spending will either continue to weaken US dollar, or threaten to usher in an era of runaway inflation. Either case is gold bullish. This long term picture may be punctuated by some short term reversals, as we have just seen.
Gold ETF GLD and gold miner ETF GDX behaved similarly. These are driven by the gold spot price which went from the recent peak above $1200/oz to about $1065/oz as we speak over the last one and half month. The most important factor appeared to be China's announced intention to tighten its monetary policy to comeback over-heated property market and the blewing inflationary pressure. Recent sovereign debt anxiety has added to the dollar strength, helping to bring down the gold price.
What does this reversal tell us? Is precious metal on the secular way down?
The bullish case for precious metal has two sides to it. One dominant thesis is that gold is a good hedge against pending inflation or inflationary expectations. We don't see much inflationary pressure in the TIPs. In fact, economists are expecting deflation in the US as the nation battles the high unemployment rate. How does one square with that observation?
Another theory is that gold is a great store of value, a de facto reserve currency. When US dollar or other major currencies are debased, gold should shine. This argument has gained more support recently. For instance, at the height of the credit crisis of 2008, USD actually strengthened due to flight-to-quality effect (other major currencies such as Euro were even weaker). Gold prices went down briefly as a result, before the global stimulus efforts were kicked into gear. Similarly this last week when Greece's debt crisis resurfaced, dollar strengthened and gold saw a big selloff.
We think the reversal is not something new. The market is telling us what it has been telling us all along: there are deep concerns about future inflation that are coming from global economic growth. That often manifests itself with price increases of commodities. This concern is now compounded by government deficit spending on an unprecedented levels. Market has also been concerned with governments' ability to trim back these spendings when it is time to do it. If there are signs that the governments of major economies will act responsibly, then gold prices have less reason to go up.
When China tightened, the market appeared to be surprised that the pro-growth regime was not as headstrong as many had come to expect. Thus the selloff.
The strengthening of USD due to Euro zone problems may have pulled down the gold price some, but it is only temporary. US deficit spending will either continue to weaken US dollar, or threaten to usher in an era of runaway inflation. Either case is gold bullish. This long term picture may be punctuated by some short term reversals, as we have just seen.
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