A Proven Contrary Indicator
In early May, the Economist published an editorial on gold, ominously entitled “Buried”. We wanted to comment on it earlier already, but never seemed to get around to it. It is still worth doing so for a number of reasons.
The Economist is a quintessential establishment publication. It occasionally gives lip service to supporting the free market, but anyone who has ever read it with his eyes open must have noticed that 70% of the content is all about how governments should best centrally plan the economy, while most of the rest is concerned with dispensing advice as to how to expand and preserve Anglo-American imperialism. We are exaggerating a bit for effect here, but in essence we think this describes the magazine well. In other words, its economic stance is essentially indistinguishable from that of the Financial Times or most of the rest of the mainstream financial press.
Image credit: Bloomberg
Keynesian shibboleths about “market failure” and the need to prevent it, as well as the alleged need for governments to provide “public goods” and to steer the economy in directions desired by the ruling elite with a variety of taxation and spending schemes as well as monetary interventionism, are dripping from its pages in generous dollops. It never strays beyond the “acceptable” degree of support for free markets, which is essentially book-ended by Milton Friedman (a supporter of central banking, fiat money and positivism in economic science, who comes from an economic school of thought that was regarded as part of the “leftist fringe” in the 1940s as Hans-Hermann Hoppe has pointed out). Needless to say, the default expectation should therefore be that the magazine will be dissing gold – and indeed, it didn’t disappoint.
Another reason is that the magazine has one of the very best records as a contrary indicator whenever it comments on markets. If a market trend makes the cover page of the Economist, it is almost as good as if it were making the front page of the Mirror or the Daily Mail. If you do the exact opposite of what an Economist cover story prediction indicates you should do, you can actually end up being set for life.
A famous example was the “Drowning in Oil” cover story which was published about two months after a multi-decade low in the oil price had been established, literally within two trading days of the slightly higher retest low. The article predicted that crude oil would soon fall from then slightly over $10/bbl. to a mere $5/bbl. – a not inconsiderable decline of more than 50%. Instead it began to soar within a few days of the article’s publication and essentially didn’t stop until it had risen nearly 15-fold – a gain of almost 1,400%.
One of the most ill-timed cover stories of all time – the Economist’s early March 1999 cover “Drowning in Oil”. In the article it was argued that there was such a huge oversupply of oil on the market, that a 50% price decline to $5 per barrel was highly likely.
From the “what really happened” department: within days of being left for dead by the Economist, oil embarked on a 1,400% rally
The Economist’s Disjointed and Irrelevant Musings on Gold
Unfortunately gold hasn’t yet made it to the front page, but the Economist has sacrificed some ink in order to declare it “dead” (or rather, “buried”). We hasten to add than during the recent trading range, every time we have written something mildly positive about gold, it usually felt as though we had jinxed it, often within hours. It is no secret that we are favorably disposed toward gold in the medium to long term, but we do as a rule inject some objectivity by mentioning the potential short to medium term downside risks that could become manifest should important support levels give way. It doesn’t seem very likely to us that this will happen (we believe a lengthy bottoming process is underway), but obviously the probability isn’t zero.
The Economist article is a typical “after the fact” denouncement – we wouldn’t have seen such an article appear in August/September 2011, when gold was still trading near its highs. It is also a disjointed mess, with many irrelevant arguments and non-sequiturs – basically a hit piece. However, since some of these arguments are at times mentioned by both bulls and bears, we thought it worthwhile to discuss their merit (or the lack of same). The article begins:
“Uncertainty is supposed to lift the gold price. But neither upheaval in the Middle East, nor the travails of the euro zone, nor startlingly loose monetary policy in the rich world is brightening the spirits of those who swear by bullion. After a big rally during the financial crisis, the price has sagged to about $1,200 an ounce, a third below its peak in 2011. Little seems likely to turn it round. “We’ve seen everything gold bugs could hope for: endless money printing, 0% interest rates (both short-term and long-term adjusted for inflation), rising debt and debt ratios in the public and private sectors…So where’s the damn hyperinflation?” asks Harry Dent, a newsletter publisher, in a recent blog post.”
(emphasis added)
We would submit that with developed market stock markets at one of their most overvalued levels in history and government bond yields recently trading at absurdly low and even negative yields, there are exactly zero signs of “uncertainty” in the financial markets. The St. Louis Fed’s financial stress index is presently at one of its lowest levels in history. As we have mentioned previously, gold has primarily lost its “euro break-up premium”. The question should actually not be “why is gold down one third from its highs”, but “why is it still up by 400% from its 1999 lows?”
