Saturday, September 10, 2011

Pascoe (Gold) Indicator - Update

Earlier this year I posted a chart showing how Michael Pascoe's articles on Gold could be seen as a contrarian indicator (h/t SaturnV on HC for the idea) with many of them bearish on the metal yet appearing at lows or lulls in the price before a large spike higher.

Here is the previous post (LINK) and below is a summary of Pascoe's Gold commentary over the last several years:

1. On September 27th, 2007, Pascoe had the following to say about Gold:
Gold bugs losing their bite

The more reliable truth is that gold is really just another commodity, albeit one with a rich history. The good news is that demand for gold continues to rise and production doesn't keep up – but there's still a big overhang, thanks mainly to European central banks that still want to sell down their holdings. Super Living
2. This was followed by the below, 2 years later on September 14th, 2009:
Gold drops 25%!

As gold sceptics know, the yellow stuff occasionally has a day in the sun when there's fear and loathing in the financial system or when the herd decides to make gold the next candidate for a speculative bubble, but its price is mainly a reflex currency play for the US dollar. The Age
3. Pascoe was still talking Gold down 10 months later on July 28th, 2010:
Time for gold bulls to feel a little fear

But there are signs that the tide of fear might be about to turn – an event that would be precipitous for the gold price and all who ride on her. It could be the gold bulls' turn to feel fear as pain instead of pleasure. The Age
 4. New year, another negative Gold articlefrom Pascoe. March 18th, 2011:
Buy iodine, sell gold and forget the Aussie

I have been wrong about the gold price for the past several years [At least he's honest! BB], but that still remains more a matter of timing than fundamentals. The major leg of the gold rally was based on a reasonable reason – the need for those with US dollars to get out of them as the American economy and the greenback plunged.

Since that first leg, gold has risen primarily because gold had risen. The momentum trade kicked in, the exchange traded funds (ETFs) took off to capitalise on that and the great gold bubble bubbled on. The Age
5. Only a month later and Pascoe is again laying in the boot. April 27th, 2011:
Rich rust beats dull old gold

The uninvolved might be under the impression that the price of gold has been soaring to record highs lately, some using that as an excuse to bid up the price of shares in Australian gold miners in the hope that higher gold price might flow through to them.

Wrong. Gold actually has been doing nothing much for the best part of a year and remains well below its record high. That's gold in Australian dollars, of course – the only measurement that means something if you're wealth is in Australian dollars to start with. SMH
 6. Then again on May 24th, 2011: 
No silver lining in this cloud
Gold in US dollars is up 28 per cent over the past year, but it's done nothing for Australian investors. As I write, it's trading at $A1,441.03 an ounce – within a few cents of what it was worth this time last year. It's still roughly doubled since the start of 2006 with 2008 the star year as the GFC had its full impact.

Where the speculation in precious metals goes to next is as much a matter of faith as fundamentals, or perhaps fundamentalist faith for the harder core gold bugs, but it has currency plays going for it as long as US economic policy remains an afterthought of a political standoff and Europe fails to face up to its sovereign debt inevitabilities. SMH
7. Finally only a few days ago (September 7th, 2011) Pascoe had more to say on Gold (LINK). His latest commentary comes following a $300-400 spike higher in the metal, so at this point it's difficult to gauge whether the "Pascoe Indicator" has broken or whether we are perhaps at the base of another solid move higher.
Gold bubbling higher is still a bubble
But the fact that the gold price has gone up doesn’t mean that it’s not a bubble. To rephrase that and take out the double negative, the gold price going up is part and parcel of it being a bubble.

In the 1630s when the price of tulips rose from 1000 florins to 2000 florins – several years’ average wages – it just confirmed there was a bubble, not that tulips enjoyed any particularly intrinsic value or that tulips would continue to rise indefinitely and/or hold their value.
Pascoe has been calling the rise in Gold a bubble for years, but for something to be in a bubble that would indicate it is overvalued. I have yet to find any analysis from Pascoe as to what he considers it overvalued against. If Gold rises to nominal peak of $3000 and then following falls back to a low of $2000, was it still a bubble when Pascoe called it one at $1250 and lower?

He suggests the bubble is similar to the tulip mania... does he understand that Gold's rise from undervalued to overvalued is a move that is cyclical in nature? He seems unable to comprehend the difference between a one time speculative mania and the cyclical nature of investment/monetary assets.

He goes on:
Gold’s true believers think gold is different, that it does have some mysterious intrinsic value, rather than its price just reflecting the interaction of speculative supply and demand, with some physical jewellery demand on the side.
I have no doubt that there is speculative buying in Gold driving the price at times, but given that some of the largest demand over the last couple of years has been Central Bank buying, does Pascoe also consider this to be speculative buying? Or does this demand fall on the jewellery side whereby Central Bank officials are turning the Gold bars into bling and wearing it around town?

Pascoe claims that the intrinsic value of Gold is a mystery, but it's really not all that difficult to work out where Gold's intrinsic value comes from. Probably one the best explanations I've seen is in the first minute of this clip from movie "The Treasure of the Sierra Madre" in which a prospector provides the example of 1000 men that go looking for Gold. After 6 months only 1 of them is lucky. The value of the Gold not only represents the value from the labor of the one man, but also that of the 999 others that didn’t find anything (total 6000 months, 500 years worth of labor).

We do things a little differently these days, but the principle remains the same. We have Gold miners today digging up 5-10 tonnes of earth (sometimes more) to retrieve an ounce worth of Gold let alone all the processing and refining that follows. For each company that succeeds there are thousands that fail (as pointed out in this post of mine two weeks ago).

Later in the article Pascoe says:
Aside from those hording physical gold, the latest figures from Standard Bank show 14,450 tonnes of gold are now held by exchange traded funds. That’s an extraordinarily large of amount that would weigh more heavily than its physical weight on the gold market if the metal started to lose its shine. Yahoo Finance
Now wait just a minute here... that number sounds a little high given that GLD (the world’s largest gold exchange traded fund) hold only 1240 tonnes. Wikipedia suggests that "As of 25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and institutional investors". I think Pascoe better check his sources more carefully!

Toward the end of the article Pascoe suggests that an "outbreak of rational economic management in the US and Europe" will see to the end of the Gold bubble, which he says will come about with US spending cuts and increased taxation as well as a bailout in Europe. Wow, it all sounds so simple, I wonder why they haven't thought of that already and implemented the changes to resolve the western debt bubble which has caused all this global instability...

Here's the chart with the articles numbered at the time of the above articles:



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  1. If M&D investors were looking at the 10yr gold chart, listening to Pascoe thinking $1900 was a bubble in gold, i could understand how they could be scared away- especially after being burnt on dotcom and RE bubbles. The current gold price is just trivial in my opinion, especially given the current state of affiars.. currencies are about to begin rapidly losing value. What is the price of gold measured in the currency of a bankrupt nation?

    I reckon if you asked 100 random people if they own gold as an investment, you could count the raised arms on one hand - people still look at you like a lunatic when you say you invest in gold - how can it possibly be a bubble? Gold, at current prices is just quietly going about its business, playing the role of barometer for the massive quanitity of money being pumped into this bulging private bank credit bubble. PMs will go dutch tulip many years til we get there BB? When i first discovered PMs in 2008 i was thinking 2-3 years... but its obviously not happening that quick. Perhaps TPTB dont want us frogs jumping out of the water?

  2. Pascoe says in the article that "When gold pops, the race for the doors will be frightening" and I agree that pop will eventually come, but we are yet to see the public pop as the public moves out of overvalued fiat and into hard assets such as Gold. It's still very much a fringe investment/asset.

    I believe we are in the early stages of the 3rd phase of the bull market, my opinion is that we'll probably see the peak within 2-2.5 years from today, but will judge things as the bull market develops.

  3. When gold (PMs) are viewed as what they primarily are - a money metal, and alternative (non-fiat) currency - it's not so hard to pick what is going on, why PMs will bubble, and what will make the PM bubbles pop.

    As for what will make them pop - that's easy, really: it has to be worth holding a paper currency again.

    IMHO, this is mainly a function of the interest rate of the currency, as I assert that this reflects how much the originator of the paper currency values it. And what is valued by the originator is not abused by the originator; and what is not abused by the originator gives someone the first ingredient to consider their currency trustworthy.

    Hence, when govts (the current originators) start treating their currencies well via increasing (to a "high" value) IRs, then the PM "bubbles" will "pop"...but until then, there is simply no where else to go WRT currency/cash, whilst originators are abusing their currencies.

    My 2c

  4. Sure, the 'originator' abuses their right to issue currency and gold continues its run - no arguement there burbwatch. I would question the statement that govt is the current originator, no doubt this is want the bankers would like us to believe;)

    Its my view that fiat works fine provided the power of issuance is restored to its rightful owner - the sovereign nation state. That's the bankers little secret. Is it any wonder they are feverishly trying to bankrupt and dismantle sovereign nations.

  5. Pascoe could be finally right in terms of timing a correction, but I doubt this is the end of the "bubble". Should have a post up on Macrobusiness today explaining this...

    Imagine if you replaced the word "Gold" with "property" for all of his articles....

    The Prince

  6. I don't see anything in his latest article suggesting he sees a correction in the short term (so not sure there would be much for him to be right about), but I do agree a return to the medium term trend is possible (which could bring the price down a couple of hundred dollars).

    Look forward to the post.