Over $1.50 for the Euro this morning!
The Pound ran up to $1.675 and, as soon as the Nikkei closed (up 40 points), the dollar dove to just 87.5 Yen. That sent gold flying up to $1,180, copper to $3.18 and silver to $18.80 but oil couldn’t get back over $76.50, which is strange because the last time the dollar was this low oil was $140 a barrel. Why have the commodity speculators abandoned oil and moved on to metals?
For one thing, energy trading is now under Congressional scrutiny – as well it should be, since it is a forced tax on every man, woman and child on the planet. Copper prices don’t affect anybody since no one is building anything anyway and pennies sure aren’t worth saving since you need 5 of them just to buy a piece of gum these days. Silver has industrial uses but there’s not much industry with Industrial Production at less than 80% capacity so no one is complaining (are there any workers left to complain?) about that price and gold consumption is off 34% from last year so the 43% rise in price since last year isn’t tapping more overall global dollars – speculators are just getting much much less for much much more.
Oil collapsed last year because, when push came to shove, people simply couldn’t afford to buy barrels of oil for $140, or $100, or $80. The problem with trying to manipulate the oil market is 86M barrels more come out of the ground every day, whether you want it or not and if people stop consuming then it has to be stored and that can get expensive. As it is now, global stockpiles of crude products are at record levels and it is possible that the US is literally out of room to store natural gas despite massive production cutbacks from cartel members like CHK, XOM and EOG.
So manipulating the price of oil and natural gas gets tough as demand falls off but only 800 tons of gold were consumed in all of Q3, down from 1,206 last year, when gold averaged $825. In India, the world’s largest consumer of gold, demand fell about 50% from 271.2 tons to just 137.6 tons. China picked up the slack as the government stockpiled metals (just another speculator) and demand there went from 116.9 tons to 128.6 tons so a 10% increase in Chinese demand to WOW the investors into thinking there is no stopping this train.
If no one is actually buying gold (a proxy for all our metal speculation) then how does the price go up? Would you be surprised if I said speculators? To keep things simple, we aren’t going to talk about China’s stockpiling or India’s recent $200Bn purchase or the sudden craze to buy gold coins (but really people, does no one remember the last gold craze?) – let’s just talk about one of the many, many speculative ETFs out there – the SPDR Gold Trust (GLD). Out of the 2,400 tons of gold purchased this year (1/3 less than last year) GLD has bought 500 tons of it. This checks out as if we take that 500 tons out of the rest of global demand, we see that only 1,900 tons have been bought outside the ETF, so the whole world’s consumption is down 50%, roughly the same as India’s.
$10Bn has poured into GLD in the past 12 months, causing the ETF to purchase 10M ounces of gold – more than India’s total annual consumption and the year isn’t over yet. That gold has no industrial or consumer use and none of the people trading the bits of paper (if they even have the paper) with GLD stamped on it or staring at GLD on their computer screens have any intention at all of ever owing the gold themselves. One would think, logically, that a stockpile of 1,100 tons of gold that nobody really wants may cause a problem at some point down the road – but only if people ever wise up so nothing to be too concerned about I suppose….
This is not an essay on gold, it’s just an example of all the idiocy that’s going on in the commodities pits at the moment. Demand is way off but the producers of gold cut back production and the holders of gold encourage speculation to spur demand and the brokers on Wall Street see a way to get another speculative bubble going so they can make a quick buck and PRESTO! – we have the same irrational behavior that wiped out investors last year only this time it’s shiny bits of metal nobody actually wants instead of sticky black goo that nobody actually wants so it must be different. Last year oil was going to $200 because demand was infinite and supplies were falling. This year gold is going to $2,000 because the money supply is infinite and demand for gold is rising.
It’s the same old story again and again but, as PT Barnum used to say, there’s a sucker born every minute. But PT Barnum said that in the early 1800’s, when there were only 1Bn people on the planet. That means there are now 6.5 suckers born every minute and that’s 9,360 suckers a day and 3.4M brand new suckers every year – more than enough to account for 10M ounces of gold purchased by GLD speculators – problem solved!
So things seem to balance out quite nicely, there are plenty of suckers to pick up the slack when real demand fails us. Imagine if PT Barnum had CNBC at his disposal – he’d be unstoppable! Sadly, there was no energy or commodity futures market at the time for him to exploit but his book was the roadmap for what modern day hucksters set up in his wake. Playing the commodity markets is fine but keep in mind what Barnum said about speculation in his day:
"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."
We were bold ourselves last week and took some speculative upside plays in gold and yesterday we used a little caution and put in an order to cover with a bullish spread on GLL (April) as well as offering .50 for 5 GLL Apr $11 calls in our $100K Virtual Portfolio. We didn’t get filled yesterday but hopefully today and, once those are filled, we’ll look at a possible upside play on UGL, as we will have our defenses in place. Just because we think the move is silly, doesn’t mean we aren’t willing to make money on it! While people buying GLD for $114 per share may hope to make 50% if gold goes to $1,800, we’ll be looking at the UGL Jan $49/53 bull call spread for $2 ($200 per contract), which will gain 100% if gold goes to $1,250. Speculation is all well and good, but you don’t have to be an idiot about it…
The buyers came out in force on the Hang Seng this morning (once the sellers quit after lunch) and drove that market up 188 for the day, reversing an early morning 200-point dip in the last 90 minutes of trading. You see a lot of 8’s in the finishes of the Hang Seng because 8 is considered auspicious so finishes like up 188 points encourage the numerologists to invest the next day. Is the auspicious suspicious or just another one of those happy market coincidences? The Shanghai composite hit a low of 3,188 but then turned around and finished up 66 points for the day (2%) or at 388 on the Dow Jones Shanghai Index. The NIkkei, as I mentioned above, gained 40 points for the day, holding the 9,400 line on the dips.
Europe is up about 1% at 8:30 as banks continued to be weak with news that state-controlled WestLB is negotiating with the German government about offloading assets from its balance sheet into a "bad bank" type model. Interestingly, the panic going on in the banking sector (many Greek banks are in trouble too) is boosting the Euro as it causes many of the weaker [Euro-zone] banks to have to repatriate assets from abroad, cutting the size of their balance sheets, which provides Euro support ahead of the year end. Once the repatriation flows dry up, the euro could fall hard according to BNP currency analysts.
The major threat to the repatriation theory, as BNP Paribas’ analysts concede, is that it’s not just Europe’s banks that are feeling the heat. Earlier this week, Chinese authorities got tough on their banks’ capital requirements — a development that shoved Chinese equities and risk sentiment lower across the board.
The International Monetary Fund also warned this week that only around half of global bank losses have so far been disclosed. In addition, ratings agency Standard & Poor’s has raised concerns about the financial strength of a number of key banks from around the world. In the end, if banks everywhere ramp up their repatriations, then the net effect on currencies should be pretty much neutral, assuming all countries are affected evenly. Still, it’s well worth keeping a close eye on WestLB and its Greek peers for now.
Meanwhile, we have mixed data ahead of our own pre-market, pumped up open with Personal Income up 0.2% (good for you, bad for corporate earnings) and Personal Spending up 0.7% (fueled by fuel inflation) while PCE Prices gained 0.2% and "only" 466,000 more people lost their jobs this week, the least since last September. According to Bloomberg: "After slashing more than 7 million jobs in the past two years, companies may have little margin to cut further without threatening their capacity to ramp up production as the economy recovers. The government may report next week that employers in November shed the fewest jobs in 20 months."
Durable Goods Orders, unfortunately, fell off a cliff – down 0.6% vs up 0.3% expected, which is the usual 300% miss you expect from the usual economic forecasters these days. Ex-Transportation was just tragic at -1.3% vs up 0.5% expected by the same geniuses who get on TV and tell you how they forecast the economy is turning around and gold will hit $2,000 an ounce due to a never-ending supply of suckers. CNBC is even going so far this morning as to blame aircraft orders for the poor durable goods numbers when clearly (to people who actually read the report) it was aircraft that saved it.
We already decided to remain short into yesterday’s close so we’ll see how it plays out. A weak dollar is no reason for us to decide to start buying US stocks but if $1.50 to the Euro is sustained and $1.68 to the Pound is broken over – it will be time for us to do a little speculating of our own but I think the collapse of confidence in the Greek banking system will put the brakes on the dollar slide as there aren’t enough Euros to go around even if investors were confident that a Greek banking crisis won’t spread to already weakened Italy and Spain (and has anyone heard from Russia lately?).
Mother Teresa once said, “We cannot do great things on this Earth, only small things with great love" and some song said "Celebrate the happiness that friends are always giving, make every day a holiday and celebrate just living.” Robert Flatt said: "Thanksgiving like contentment is a learned attribute. The person who hasn’t learned to be content we will not be thankful for he lives with the delusion he deserves more or something better."
Have a happy holiday, we may all soon be thankful that our assets are in dollars as the supply of suckers dries up and the lack of demand comes home to roost!
