The sleeping gold - II

Markets don’t know how to weigh, allocate, measure, count, subtract or add prices. We did not say that. Richard Thaler said it in 2003 “Can the markets add or subtract?” Though Lamont and Thaler were mentioning about failure of arbitrage to correct mispricing, I don’t think they would have thought that the violation of law of one price rule could extend to the violation of law of equivalent sound bites, that is, every one per cent of move in gold should create an equivalent news bite. The violation (disproportion) is so obvious that though gold has been stagnant and negative from August 2011, registering a net loss of 20 per cent from $1,900 to $1,500, it was the one week move from $1,500 to $1,400 — a fall of seven per cent — that overshadowed all the gold news of the last 68 weeks. And, suddenly we have so many bears out there starting from Goldman to Soros and from central bankers to bloggers.

This is what we said in sleeping gold (February 7 , 2013) “Gold is a premium asset that has slept for 17 months. You can give it a few months here or there, but we don’t think you will get a better chance to buy gold than now. Gold will never move from best to worst. It will wake up.” The asset did shake up (wake up) by having the worst two days fall in 33 years. If the media is celebrating the fastest 10 per cent fall in two days in three decades, ok! it’s news worthy. But how can an asset already falling (ok stagnating) for 17 months get bearish now. Is gold not in bear (stagnation is a corrective) market since August 2011.

Talking about sound bites; the latest Economist podcast has an urgent tone. “Plunging as we speak... officially bear market... US economy looks stable…. Cypriots mooted selling gold reserve…What if Italy with 2,500 tonnes of gold decide… lot of supply out there...not heard from the gold bull Paulson...Soros reduced gold positions …”

The news mill is running overtime. The gold depressed scenario is all over the place with stories like, “Why is gold dead? The gold bull is dead.” The popular John Cassidy from ‘The New Yorker’ has come with more reasons; prosperity, slain inflation, lack of Chinese trigger, Goldman and Bitcoin. Even Bloomberg had a story “Gold’s a hedge against the apocalypse, and so is canned food”.

The gold competitor, Bitcoin, is an electronic currency, where believers plan to use it at Starbucks someday. Now it’s used by a selected online community to pay for programming services. The market is worth a few billion dollars. The e-currency is currently accepted by some mainstream businesses, hoarded by a few and used in black market transactions. The US Treasury extended its anti-money laundering regulations to processors of Bitcoin transactions.

On my way back from Union station Toronto to Sinclair, I look at the blue eyed beggar, wearing a sports cap, standing there at the crossing with an empty Tim Horton’s large coffee mug. I was wondering if Bitcoin would ever mean anything to him? The Bitcoin proponents or the gold bear club has made their case on many assumptions. How low can gold go if the new prosperity is here for good? How sure are we about inflation or deflation? Can Bitcoin get mass acceptance over a tangible generational gold? Just because we have 10 years secular bull behind us, can we call it over? Could calling it over be gambler’s fallacy? And above all if most of us were bearish, are we not standing on the wrong side? Back above $1,500; new reasons and new stories will be there.

The Orpheus view remains inflationary. For us gold is in an on-going 30-year cycle, which started in 2000. Even a minimum time zone of positivity should take gold up till 2015. Bottoming is always time consuming and choppy and 18-24 months of sideways action can be considered a good retracement of the upmove from 2009. If the key lows at $1,300 break prices should head to $1,000. Though that seems a low probability scenario, if that happens gold becomes a screaming buy.

The author is CMT and founder, Orpheus CAPITALS, a global alternative research firm