I probably get as many questions about gold as I do any subject. The fascination with the yellow metal permeates all levels of investors, and opinions can be quite strong. But few are more informed than those of good friend and trader extraordinaire, Greg Weldon.
Greg has written a new book called "Gold Trading Boot Camp, how to Master the Basics and Become a Successful Commodities Investor." I highly recommend it for those wanting to get a grasp of how a successful trader's mind works. Greg is one of the best and maybe the most prolific commentators on market trends. Up well before dawn each day, he is a machine. Each day he produces 15-20 pages of in-depth commentary on a huge variety of topics, both fundamental and technical, that informs some of the top trading desks in the world.
I asked him to give us some idea of what his book is about and then give us a top down view of the market for gold as it stands today. For those of you who follow gold, or are merely curious, I think you will find this fascinating.
You can get the book at Amazon.com. It is very readable. Greg has an effortless, unique style that is fun, fast-paced and easy to comprehend with not a lot of technical jargon to make it hard for the beginner yet enough insights that the professionals will be taking lots of notes.
Get the book and enjoy this week's Outside the Box.
John Mauldin, Editor
Outside the Box
MACRO-MARKETS: Gold Trading Boot Camp
UNDER THE MACRO-SCOPE
In my new book, "Gold Trading Boot Camp: Master the Basics and Become a Successful Commodities Investor", I cite four 'realities' around which ALL of the current macro-market movements occur. They are:
- Every single day for more than thirty years, since the abolishment of the "gold standard" (and before), global imbalances that are linked to trade, savings, reserves, exports, output, consumption, income, and credit-debt, have intensified, and, have reached a new peak level of imbalance.
- The global economy is incestuously codependent in its reliance on the US consumer, and thus the health of the global economy is now dependent on the health of the US housing market, and continued creation of credit.
- The global economy is thus dependent on a perpetual debasement of the US Dollar, which leads all paper currencies to devaluation relative to gold, as the only means to avoid a catastrophic debt deflation, credit contraction, and global recession-depression.
- Someday, things will change.
When that 'day' comes, the US (and by extension, global) monetary authorities and political 'officialdom' will be faced with two choices:
- One ... facilitate a recession and hope that debt can be paid down without it leading to an economic implosion, led by a 'cocooning' by the US consumer.
- Two ... facilitate an even greater 'reflation' by pressing the 'Monetary Armageddon' button ... and paying down all US Treasury debt with freshly printed US Dollars. In short, authorities will acquiesce to the steepest devaluation of the US currency ever witnessed in an attempt to reflate domestic US consumption and bail out the US housing market with even cheaper, cheap liquidity.
My book examines the monetary 'history' of Gold, dating back to the end of World War II, discusses the agreements forged in line with the creation of the Bretton Woods monetary system, which made the US Dollar the world's 'Reserve Currency'. It looks at the events leading up to the abandonment of the Gold Standard, and the massive credit boom this decision facilitated.
But more than anything, my book dissects the things that EVERY investor NEEDS to KNOW, when considering where, and how, to invest their money, whether it be in gold, or soybeans, or sugar ... or stocks and bonds.
My book details my own work regiment, and exposes the procedures, techniques, and methodologies I use, each and every day, to provide research and trading advice to hundreds of Wall Street institutions. My clients range from proprietary trading desks, hedge funds, mutual funds, pension funds, Registered Investment Advisors, CTA's, banks, brokers ... and even to individual investors.
My book shows the reader how I do it, each and every day.
My day begins while it is still pitch black out, and most traders are sleeping.
My day begins with a complete, comprehensive, top-down macro examination, whereby I dissect data and macro-economic input from around the world, starting with Asia.
Bottom line ... I want to know ... EVERYTHING.
I want to understand what is happening, EVERYWHERE.
In my opinion, EVERYTHING matters, from the macro, to the micro.
I then inspect the markets themselves, technically, from the bottom-up in a micro-manner, to determine exactly how the top-down macro-influences are being reflected, or not.
Again, everything matters, every little factor might mean something, in the bigger picture, so I slice and dice the data, the psychology, the geo-political risk, and the markets themselves, technically.
After surveying and purveying the macro-global environment, and then the technical structure of each and every market, from foreign exchange, to fixed-income, to stock indexes and Exchange Traded Funds, to petroleum and precious metals, and the entire commodities sector.
Every market might be offering a clue, to the bigger picture puzzle.
I examine it all, on a daily basis.
My book reveals my methodology ... in so doing.
From there, I begin to carve out conclusions, in the form of specific macro-opinion, and micro-trading/investment 'advice', which I then pass along to my clients, within my two daily research products, Weldon's Money Monitor, and The Metal Monitor.
Moreover, every piece of advice I offer my clients, I also act upon myself, putting my own money at risk, each and every day.
In today's 'Outside the Box' I am going to synopsize my latest thoughts, extracted from the last week's worth of research, with a focus on what it all means for the Gold market in particular. And, I thank my good buddy and macro-market colleague John Mauldin for the opportunity to do so.
Currently, I am bullish on bullion again, after having sidestepped the bulk of the recent downside correction following a long period of bullishness dating back to 2001.
First, despite Fed rate hikes ... credit creation is hitting new all-time highs, and does so each and every week, as defined by the Fed's weekly data on US Commercial Bank Lending. Indeed, despite all the rhetoric carried daily by the pop-media, Bank Lending in the Real Estate sector continues to surge, and hits a new all-time high virtually EVERY WEEK.
Similarly, despite a tectonic shift in monetary policy by the Bank of Japan, the end of ZIRP (zero interest rate policy), and the end of 'quantitative easing' ... there has been virtually NO liquidation of the yen-carry-trade, claims to the contrary notwithstanding.
In China, the cumulative January-February bank lending data reveals a RECORD amount of new credit creation. This, despite the efforts of the People's Bank of China to clamp down on credit creation and investment spending. Indeed, even the rate hikes enacted by the PBOC are relatively meaningless, since they are NOT even keeping pace with the parallel rise in CPI. Chinese 'real' short rates are effectively ... ZERO.
In Russia, the Monetary Base is EXPLODING, and holdings of official US Dollar Reserves are expanding at an alarming rate. Indeed, Russia, not long ago on the verge of international debt default and bankruptcy, is now the world's third largest holder of US Dollars, behind only China and Japan.
Indeed, the supply of US Dollars held by foreign central banks, in 'reserve', is mountainous, and reflects the 'bull market' in US Dollar 'seniorage' that has come to DEFINE A MONETARY ERA, one that is also defined by unprecedented credit creation.
I discuss this dynamic, specifically, in my book.
So, let us waste no more time, and let us begin our 'Outside the Box' data dissection, since many of the above noted macro-influences were in plain sight over the last week, within the monetary and economic data released around the world.
From the March 19th issue of Weldon's Money Monitor, we note:
The People's Bank of China raised their official short-term interest rates this morning, hiking the One-Year Deposit Rate to 2.79%, and the One-Year Lending Rate to 6.39%. The move marks the third interest rate hike implemented since policy tightening began last April.
Note the text of the PBOC Policy Statement ...
... "The rate increase is conducive to the reasonable growth of credit and investment, to stabilising prices, to the stable operation of the financial system, to balancing growth and improving the structure of the economy, and to promoting the healthy but rapid development of the economy."
Last week we dissected the latest inflation data on the offer in China, revealing a JUMP in CPI, and even more critical is data released last week which revealed the following:
--- Domestic Chinese Bank Lending ... up 981.4 billion Yuan ($127 billion) cumulatively, in just the first two months of the year.
Indeed, this is equal to ONE-THIRD of ALL the lending done in the ENTIRE YEAR, last year.
In other words, at the pace seen in the Jan-Feb period, credit creation in China would DOUBLE this year, over last year.
In other, other words ... at the pace seen in the Jan-Feb period, credit creation in China would reach THREE-QUARTERS of a TRILLION-DOLLARS, in 2007 alone.
Throw in a quarter of a trillion-dollar trade surplus, and we are talking about ONE TRILLION DOLLARS in Chinese 'liquidity' growth, this year alone.
Thus the question becomes ... can the PBOC gain 'control' of this rabid growth in credit and excess liquidity ???
Indeed, this weekend's rate hike ... BARELY MATCHES the increase in inflation reported last week, with headline CPI spiking to 2.7% from 2.2% in January, and up HUGE from the +1.0% rate posted in July, just prior to the second PBOC rate hike, implemented in August.
In other words, the PBOC had to raise rates ... JUST to keep pace with CPI.
In other, other words ... the PBOC had to raise rates ... JUST to keep 'real' rates from plunging into NEGATIVE territory.
Within that context, relative to the +1.0% yr-yr rate of CPI reported in July, 'real' rates have PLUMMETED since the PBOC began raising nominal rates more aggressively, thanks to the faster pace of inflation.
This might also help explain WHY Chinese Retail Sales have accelerated, steadily, since August, despite the rate hikes.
This might also help explain WHY Chinese Bank Lending has intensified since August, with the latest two-month explosion even more 'understandable'.
Simply, the PBOC is NOT ... tightening ...
... and ... they are FAR from being, tight.
Indeed, when we focus on China's Consumer Goods CPI, real rates have PLUMMETED even MORE, with the CPI of +0.7% in August, having spiked to +3.0% in February, pushing real rates to a NEGATIVE (-) 0.21% level, even with the this weekend's 0.27% rate hike thrown into the mix.
Again, may be this is why Chinese Retail Sales ROSE to a NEW HIGH rate of growth in February, at + 14.7% yr-yr, up a full percentage point from the already rapid rate of growth seen in July, pegged at +13.7 yr-yr.
The situation in China is supportive to the bullish argument for Gold.
Note the chart below, reflecting the price of Gold in Chinese Yuan plotted weekly dating back to 1991. Simply, it remains deeply embedded in a secular bull market, one that has the FULL support of a full blown monetarily induced credit creation blow-out.
Note that the long-term 5-Year Rate-of-Change has exceeded +100% since January of 2006, and has been greater than +50% since early 2004
Last Tuesday the Bank of Japan met to discuss interest rate policy, and I was called to CNBC's "Power Lunch" show to discuss the outcome (see our home page at weldononline.com to view the video clip of that interview). We turn to another excerpt from Weldon's Money Monitor, from March 22nd:
The Bank of Japan left interest rates unchanged this morning, a move that surprised no one. Yours truly will be on CNBC's Power Lunch today at 1:20 pm EST to discuss the scene, and translate Fukui-speak, as relates to the following post-meeting commentary offered by Governor Fukui. We note this in the context of what the Bank of Japan's Monetary Policy Committee SAID when they hiked rates at the most recent past meeting ...
... "We need to calmly monitor whether moves in financial markets will have an impact on the real economy. Moves in financial markets so far have been a kind of HEALTHY correction. In markets, players have been re-evaluating their risk-taking by themselves."
... "It is possible that core CPI may fall slightly yr-on-yr in February or March. Core CPI is likely to be around zero in the near-term."
Then we note the comments made one month ago, spotlighted in our February 23rd Money Monitor focus on macro-Japan and the BOJ ...
... "Currently, price moves are near zero percent. However, due mainly to the effects of oil prices, it is possible that prices could fall into minus figures.
Indeed, that is EXACTLY what happened, as evidenced by the latest CPI figures, dissected in our March 2nd Money Monitor in which we examined the 'yen-carry-trade', and its high degree of 'positive-correlation' with the stellar upside performance in SO MANY of the credit-reflated asset markets.
In fact, the Bank of Japan has been completely "transparent" within their 'communications' with the markets. They tightened last meeting NOT because of ANY pressure building in prices ... but rather, to squelch intensifying 'pressure' building in asset prices.
Today, Fukui is claiming some measure of ... SUCCESS !!!
He states that the move has been HEALTHY, and moreover, he specifically spotlights the slight, self-induced, move away from total risk abandonment, in terms of the asset markets. The Governor is telling us he is pleased with the result, and, that 'price-price 'pressure remains NON-EXISTENT.
Tellingly, in terms of the Bank of Japan's desire NOT to be too far 'ahead' of the price-inflation 'curve', the Central Bank was VERY careful last month when they raised funding rates ...
... as evidenced by the concurrent move to flood the system with cash when Call Money rose above the new 'target'. In fact, the day immediately following the rate hike announcement, Overnight Call Money spiked to a multi-year high of 0.58%, versus the newly implemented target of 0.50%, and the BOJ offered nearly $20 billion, or 2.3 trillion yen, in same day funding, a RECORD single-day liquidity add.
Further, amid all the hype surrounding the liquidation of the 'yen-carry-trade', a 'trade' that is far from singular ... we note that there has been HEAVY TWO-WAY 'trading' in the Yen, and the move has NOT been a 'one-way' street by any means.
Rather, there has been sizable selling of Yen that has met the wave of buying that was originally 'caused' by liquidation of monetarily reflated assets, particularly in emerging markets and global stock indexes/ETFs.
For sure, the upward pressure on the Yen during the end-Feb/early-March period came in just four trading sessions. It was hardly a long running, sustained push, and, was enough to unearth some significant 'resistance'. Talk of a yen-carry-trade liquidation was severely OVER-DONE.
Resistance comes from the selling of Yen has been evident within the weekly MOF report revealing capital investment flows. In short, there has been HUGE selling of Japanese stocks by foreign investors, dating back to end-December, and, sold (-) 429.8 billion yen worth in the most recent week alone (week ending March 10th).
More importantly, more recently, within the last two weeks alone, foreign investors have dumped (-) 865 billion yen, or $7 billion, of short-term Japanese T-Bills and FBs.
Repatriating this money into EUR or USD has stymied the liquidation of the yen-carry-trade ... for now.
We looked at the complete LACK of reflation in Japanese stocks, relative to Gold, amid the push in Yen-Gold back towards its 2006 secular bull market highs above 80,000 yen per ounce ... as noted in the chart below.
Bottom Line, the Japanese macro-monetary and micro-market situation(s) remain bullion bullish.
Then on Wednesday the US Federal Reserve met, and left US interest rates unchanged, while adjusting their policy statement to reflect a LESS 'hawkish' tone. In our Money Monitor from March 21st, we noted the following dynamics:
There ARE, valid, fundamental 'reasons' for Gold to be rallying most intently, relative to US yields ... evidenced in the following data dissection, as we take a scalpel to the latest monetary/credit/bank-lending data on the offer from the Federal Reserve itself ...
... first, as presented in the weekly Commercial Bank Lending data:
Loans and Leases in Bank Credit ... $6.174 trillion, a NEW ALL-TIME HIGH, up + $7.4 billion in the latest week, and up by + $26.2 billion over the last four weeks, ended March 7th.
Real-Estate Loans Outstanding ... ROSE in the latest week, as it has EVERY week in the last four weeks, hitting a NEW ALL-TIME HIGH in the most recent week (ended March 7th) at $3.381 trillion.
Yes, that is ... trillion.
Let us not forget, that it was only within the last twelve months that Commercial Bank Real-Estate loans outstanding first moved above $3 trillion, having been at $2.970 trillion as of February last year.
In other words ... since February of last year, and as recently as last week ... real-estate loans have been EXPANDING, and hitting NEWER NEW HIGHS.
In other words ... $411 billion in the last twelve months.
In other words ... up + 13.8% yr-yr.
So, IF indeed, the Federal Reserve DOES, openly and transparently, begin debating a shift towards a rate cutting campaign ... against credit growth that is pushing ever newer, new highs ...
... gold SHOULD benefit.
This becomes particularly MORE true, if the USD feels intensified downside pressure as a result of any acceleration in the narrowing of FX-derived 'interest-rate-diffs'. This remains to be seen.
WORSE, within the Commercial Bank data we note, on the OTHER 'side' of the balance sheet ledger ...
Commercial Banks Deposits Held ... FELL in the latest week, completely at ODDS with the across-the-board rise in credit and loans ... and fell to $6.374 trillion, barely exceeding Loans and Leases in Bank Credit alone.
Syrup for the Banks, to be 'poured' by the Fed ???
BUT, maybe it is really ... NO SYRUP FOR YOU, as we extract the following data nuggets from the Fed's weekly Monetary Supply Demand report:
Free Reserves ... down
Excess Reserves ... down
Currency in Circulation ... down
Monetary Base ... down
And, a rarity ...
Fed Bank Credit ... down
So, with deposits down, reserves down, currency down, and Fed held 'credit' being 'sold' into the market ... where is all the money coming from, to fund the increase in Bank credit ???
Oh, yeah ...
Custody Holdings ... up + $11.469 billion during the WEEK.
It's still pouring in from outside the country, from global officialdom.
Yep, the secular, thirty-plus year bull market in US Dollar 'seniorage' is perpetually hitting new all-time highs, and thus the macro-monetary dynamic evident in the US remains bullion bullish.
Then, from Thursday's Money Monitor we extrapolated ...
And last, but FAR, FAR, FAR from 'least' ... we wonder how many pundits out there too specific notice of this afternoon's 'open market operation' carried out by the US Federal Reserve !!!
Indeed, we remember twenty-years ago when 'Fed time' was THE single most important time of each and every day, during a time when the Fed was anything BUT 'transparent', and traders would MICRO analyze every move the Fed made.
Thus, with that in mind ... we shine the archaic spotlight on the 'results' of this afternoon's Fed 'open market operation' in which they:
Added Temporary Reserves via 14-Day Repurchase Agreements ...
... bought at a 'stop-out' rate of ... 5.16%, a full nine basis points BELOW the 'official' Fed Funds 'target' of 5.25%.
Moreover, the low bid submitted came in at a price to yield 5.05%.
MMMMmmmm, is the Fed telegraphing something more significant than just softened language ???
The market believes.
So too do the Goldbugs.
Indeed, note the following trio of charts we spotlighted, revealing an 'upside' reversal in the US Yield Curve, and an across-the-curve breakout in the yield-adjusted price of Gold.
Indeed, relative to the US Treasury's 10-Year Note yield, Gold sits at a NEW ALL-TIME HIGH, and is nearing an 'adjusted' price of $1500 per ounce !!!
And finally, on Friday, the Central Bank of Russia reported some eye-opening data, including figures revealing a NEW ALL-TIME HIGH in both, their domestic Monetary Base, and their holdings of official FX Reserves. Note our excerpts from the March 23rd issue of Weldon's Money Monitor:
The Central Bank of Russia released monetary data over the last twenty-four hours revealing the following dissected details:
Russian Monetary Base ... 3.105 trillion Roubles as of the week ended March-19th, marking the second highest 'total' EVER posted, and representing a single-week increase of +10 billion RUR. More importantly, this caps a six-week string of consecutive weekly increases since Feb-5th, when the Base was 3.001 trillion. Indeed, since the first week of February, the Base has risen by more than +100 billion RUR.
Russian FX Reserves ... $321.7 billion ... a NEW ALL-TIME HIGH, via a HUGE single-week expansion of +$4.4 billion. Moreover, this marks a three-week rise of more than +$10 billion, and a rise of exactly +$20 billion since Jan-12th.
Also, from the Federal Statistics Office ...
Russian Capital Investment ... RUR 283.9 billion during the month of February, marking a +17.8% rise over January's total of 238.2 billion. This also represents a rapid year-year growth rate of +19.6%.
Russia Average Monthly Wages ... rose +26.4% yr-yr in February
Russian Retail Sales ... rose + 14.4% yr-yr, a NEW bull move HIGH rate of growth, accelerating from +13.5% yr-yr in January, and up significantly from the year-ago growth rate of + 10.1% yr-yr.
Oh, and one more quick FACT extracted from the FSS report ...
Russian Housing Completions ... up + 72.0% yr-yr ... yes, seventy-two percent increase in home building, accelerating rapidly from an already robust rate of growth, pegged at + 64.5% yr-yr in January.
Hey, who said the 'Housing Boom' is dead ???
Again, we spotlight the parallel 'running' fact ... that US Custody Holdings figures are consistently surging to new highs each and every week, with the latest report revealing yet another +$11 billion expansion.
Thus, rate, credit, and risk spreads remain TIGHT, to price virtually NO risk.
The data noted above from Russia, goes hand-in-hand with the recently highlighted data from China which revealed a RECORD two-month expansion in domestic Bank Lending. Further, we have noted that relative to rising CPI, Chinese official short-rate remains virtually ZERO, on a 'real' basis.
And then, we note an eye-opening data point released this morning by the Bank of Japan, contained in their Quarterly 'Flow of Funds' report:
Household Holdings of Financial Assets ... 1,541 trillion yen ... (yes, fifteen hundred trillion yen, or more than $13 trillion, yes trillion, dollars) ... a NEW RECORD HIGH... on the back of RECORD 'flow' into Investment Trusts.
Subsequently, from Russia, China, and Japan, the THREE SINGLE LARGEST holders of USD ... the liquidity wave continues to roll and a US debt-liquidation / risk repricing / volatility expansion move ... might be avoided, yet again ... for now.
Check out recently spotlighted comments from Chinese and Japanese 'officialdom', detailed below. When we spin these comments together, knowing they come from the two single largest holders of USD Reserves, at $2 trillion combined ... they sound 'ominous', and highly reflationary:
First, from People's Bank of China Governor Zhou Xiaochuan ...
... "Many people say that foreign exchange reserves in China are large enough. We do not intend to go further and accumulate reserves."
Zhou laid out a PBOC plan to allocate NEW income 'Reserves' to a new agency which will "manage" those assets, most probably by 'investing' them into the global financial markets, with a good portion likely to flow directly into raw materials and raw material assets.
Simply, this is a bullion bullish thought process for sure.
Fundamentally, when we slice and dice the macro-monetary data from around the globe, we come up with a bullish bullion conclusion.
A technical dissection of the market reveals sound support for such a conclusion, particularly as it relates to our own 'proprietary' trend identification model known as the TIMID Power Rankings.
Details of this 'systematic' means of identifying trend strength can also be found in our book, "Gold Trading Boot Camp: Master the Basics and Become a Successful Commodities Investor."
Further, we would like to offer ALL readers of John Mauldin's 'Outside the Box" e-letter a free trial subscription to our macro-market research, available by signing up at our website, www.weldononline.com.
In conclusion, we note that ALL of the dynamics we laid out in the beginning of this 'piece' ONLY continue to INTENSIFY, each and every day.
Credit creation has gone global, and is making new all-time highs, everywhere, a situation to which global central banks are giving the old 'wink-wink'.
In conclusion we ask a question we have been perpetually asking our own readers and clients, at least since bullion bottomed in 1999 ... got gold ???
Gregory T. Weldon
Your wishing he had more gold analyst,