GOLD ROUT PUTS ME IN GOOD COMPANY / BARRON´S MAGAZINE

Up and Down Wall Street

TUESDAY, APRIL 16, 2013

Gold's Rout Puts Me in Good Company

By RANDALL W. FORSYTH

Bill Gross still likes gold despite an epic plunge. Have governments lost their grip on markets?

 

I may be wrong but at least I'm in good company.

Gold plunged the most in 30 years Monday, April 15, the same date as the current issue of Barron's, which contained the print edition of this column, entitled "Bitcoin for Your Thoughts? Buy Gold."
The red on my computer screen might as well have been from rotten tomatoes. Current month gold futures plunged some $140, over 9%, to $1360.80 an ounce Monday, a two-year low. And in overnight trading, gold was off more, under $1330. (By the time you read this, who knows where the yellow metal will be, so check the Barrons.com home page for the latest quote.)

As for investing minds far greater (and richer) than mine who were wrong-footed by gold, there is Pimco Bond King Bill Gross. He tweeted Monday: "OK, so I made a bad call at the Barron's Roundtable. I would still buy gold here. World reflating."

The problem at the moment is that central banks don't appear to be up to the task. "Don't fight the Fed" is the dog-eared aphorism, but markets seem to be fighting central banks around the globe, which are intent upon reflation. The inflation of financial and other assets, such as residential real estate, had seemed to be proceeding apace but the plan seems to have hit a speed bump of sorts.

The Dow Jones Industrial Average shed some 266 points, or 1.8%, in a continued retreat from its recently set records. More as a point of morbid curiosity, I relate that the broadest measure of the U.S. stock market, the Wilshire 5000, fell 2.5%, which sliced some $475 billion from its value.

That's equal to about five months' slated purchases of Treasury and agency mortgage-backed securities by the Federal Reserve. So far, the Fed's buying has paid off in spades. Since last September, when Fed Chairman Ben Bernanke outlined plans for the current round of quantitative easing (the purchase of government securities with electronically "printed" money), the U.S. stock market had gained some $1.5 trillion -- even after Monday's losses.

But the scheme seems to be working less well in Japan. In direct contravention of the Bank of Japan's plans to double its balance sheet -- with the stated aim of lifting the nation's deflation to 2% inflation through the lowering of the yen -- markets aren't following the government planners' dictates. In the slide in risk assets such as stocks and commodities Monday, the yen also reversed a portion of its decline.

Meanwhile, yields of Japanese government bonds have been on the rise in recent sessions despite the BoJ's bond-buying plans. And in Tuesday morning trading, the Nikkei 225 slid another 1%. All contrary to the aims of "Abenomics," which got a skeptical review in the current print edition of Barron's ("Does Japan Face a Debt Apocalypse?").

Notwithstanding central bankers' best efforts, the global slide in equities and commodities shows "what deflation looks like," according to Walter J. Zimmerman, chief market analysts at United-ICAP technical advisory service." This is a theme he has sounded previously, including here late last year ("Is the Fed Losing the Fight Against Deflation?" Nov. 13).

The deflation undertow is evident in the decline in everything -- stocks, metals and other commodities, and currencies -- except the U.S. dollar, Zimmerman contends. And the definition of deflation is that the dollar gains purchasing power.

David P. Goldman, the head of Macrostrategists advisory, pins the plunge in gold on the increased confidence in dollar's status as the global reserve currency. The last time gold lost its luster was in 1980, when the Fed under Paul Volcker pulled the dollar out of its death spiral by pushing interest rates to near 20%. The monetary squeeze restored the dollar's credibility and punished non-believers who had to dump their precious metals.

One piece of the puzzle that didn't quite fit was the lack of rally in the Treasury market. The yield on the benchmark 10-year notes edged down a couple of basis points, to 1.70% -- around the low of its recent trading range. But it wasn't any huge breakthrough as might be expected to accompany an epic plunge in gold. Perhaps Treasuries were being sold by speculative accounts to meet margin calls for risk assets?

That remains to be seen. In any case, newly resurgent gold bears implicitly argue that governments can maintain the value of the paper money they are issuing with abandon to cover their debts.

While it may be couched in more academic terms, that is what QE comes down to. The plunge in gold might be seen as a reduction in the insurance premium against currency debasement.

The irony of the financial markets is nobody wants anything that's cheap but clamors for what's dear. That's what makes markets.