Sunday, July 5, 2015

Barry Ritholtz: 2% Decline in US Stocks is Armageddon

Look out, old mate Barry Ritholtz has launched another tirade against Gold and Gold Bugs. His Bloomberg article discusses why Gold did not perform well "during Armageddon" as he described a 2% swing in the (US) stock market...
"This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor's 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85.

One would imagine that such a scenario might be constructive for gold. It has been called the best measure of fear, the only real currency, a refuge for those who plan for panic. So how is it doing these days? Spot prices were soft on Monday, despite the wild volatility in equities, drifting down a few bucks from about $1,180 an ounce to about $1,176. They fell a few dollars more yesterday, and are soft Wednesday.

I thought gold was an investor’s best friend during Armageddon."
Here is the move in the S&P 500.

Barry Ritholtz says equities have experienced wild volatility and Armageddon this week.

Even the 35% surge in the VIX is tame compared with recent spikes.

Chicago Board Options Exchange Volatility Index (VIX)

But what relevance is the US stock market to the citizens of Greece, ground zero of the current standoff between the Greek government and the rest of the Eurogroup (the chaos Ritholtz refers to)? The real measure of Gold's usefulness and performance should be in comparison to the market local to the crisis, surely?

So how is physical Gold performing when compared with the Greek stock market (using the Athens Stock Exchange General Index as a measure)? The ASE is down 54% from the early 2011 peak (in early 2012 was down as much as 72%) and is 35% lower Year on Year.

Athens Stock Exchange General Index

Gold priced in Euros (yes Barry, Gold is purchased in currencies other than the US Dollar around the globe) does not compete with the euphoric mania seen in US stocks over the past 5 years, but it has held up much better than the Greek stock market. It's currently down 24% from the 2011 peak and 9% higher Year on Year.

Gold price in Euros

Though how important is price when the problem for citizens of Greece this week has been their inability to sell (or buy) in the stock market while it was closed? We don't even know what Greek stocks will open at next week (assuming the market reopens by then) after this weekends referendum on the Eurogroup proposals.

Greek banks have also been closed with ATM withdrawal limits imposed.

Framing a 2% fall in the US stock market as Armageddon is a disturbingly offensive narrative for Ritholtz to be carving out from half way around the globe in his comfortable Wall Street office while Greek citizens struggle with drawing life savings out of their bank accounts to spend on food, medical supplies and other goods they may need to get by in an uncertain future. 

In a situation like this physical Gold (and cash) has performed exactly as you might expect, acting as a store of wealth which could be used immediately as a medium of exchange, something frozen or inaccessible stocks and deposits are unable to do. How do you put a price or value on that?

At the moment Greece's currency (Euro) remains a safe asset to hold when kept in cash (bank deposits may get a haircut at some point), the Euro is not at risk in the immediate future as it's not unique to the country facing the escalating financial, banking and debt crisis.

If you want to analyse the performance of Gold in a real Armageddon scenario then you could look to the north east of Greece. Ukraine, whose financial and geopolitical woes are not cushioned by the use of a shared currency, has seen it's currency (Ukrainian Hryvnia) decimated. Here is the performance of Gold:

Gold price in Ukrainian Hryvnia

If I was a citizen of Ukraine I would feel much more comfortable owning physical Gold rather than shares in the local stock market, local currency (stored physically or in a bank) or real estate.

Perhaps Ritholtz fails to understand physical Gold ownership, after all his description of the metal in an article last year only mentioned contractual representation:
"Like all commodities, gold is purchased via futures contracts."
If the US faced a real Armageddon, it's unlikely that Ritholtz's version of Gold would act as a safe haven, it could very well be suspended (just like the Greek stock market last week), while physical Gold remained accessible and tradable (at which point the [over]hyped paper/physical price disconnect would likely occur).

One sentiment I do share with Ritholtz is a surprise at the lack of interest in Gold from US investors (even if the Greek crisis isn't having any impact on them presently). Ritholtz shrugs this off as either a failed narrative for Gold or an improving US economy and performance of other assets. It could also be that:

A) After 4+ years of talk, Grexit has become the boy who cried wolf and the market now doesn't pay the situation the attention it deserves.

B) The market (rightly or wrongly) thinks the Greece crisis no longer matters and will resolve itself without impacting global markets regardless of referendum or agreement outcomes.

C) The Elite with the help of their bullion banker friends at the Crimex are suppressing the price of Gold during these turbulent times in order to maintain the US Dollar hegemony.*

Like Ritholtz I think the Gold blogosphere produces a lot of dishonest narratives (which I regularly write about), but that doesn't justify his attempt to carve out his own, trying to use short term price movements in one country to show that Gold no longer has relevance, when it's clear that it still does for people who are potentially facing or genuinely experiencing financial catastrophe.

----------------------------------------------------

* Hopefully an obvious joke.

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