Tags: Look | Back | Future | economy

Taking a Look Back to See Into the Future

By    |   Tuesday, 27 December 2011 08:05 AM

When we look back on how various investment segments have performed this year, and more precisely between Jan. 3 and Dec. 23, we see the 30-year U.S. Treasury delivered a 16.06 percent win; gold a 13.11 percent win; OIL WTI a 9.01 percent win and the dollar a 1.01 percent win.

The Reuters/Jefferies commodity index shows a 8.09 percent loss; copper a 22.59 percent loss; platinum a 19.04 percent loss; the euro a 2.32 percent loss; the Canadian dollar a 2.7 percent loss and the S&P 500 a minimal 0.52 percent loss.

Looking deeper into the numbers, we can say these price movements foreshadow troubling times ahead.

Interestingly, since the second week of September, we also have seen gold moving about 15 percent lower from its all-time record intraday high of $1923.70 on Sept. 6 to close at $1,609 on Friday (after rising from $682.41, or about 180 percent, since Oct. 24, 2008).

Over about the same period, the euro lost about 8 percent since the last day of August while oil WTI went up about 15 percent; the dollar index is also up by about 8 percent since the first week of September and the 30-year Treasury is up 8.59 percent up in price (or lower yield) over that same time period.

So, what could the moves of the gold and dollar index prices be telling us about investors’ behavior?

What catches my attention is that once again we can see some similarities developing with the historical gold bear markets that emerged during the second halves of 1973 and more closely in 2008.

In July 1973, gold began its pullback as investors worried about the huge economical burden that the sharp rise in commodity prices and most notably the price of oil, that already had occurred, would further have on the global economy.

It became clear that investors feared another recession and therefore showed diminished interest in holding on to hard assets and rather sought refuge in cash.

It’s interesting to remember that even the start of the Yom Kippur war in October 1973 and the ensuing oil embargo practically didn’t stop the ongoing trend out of gold and into the dollar. We had to wait until the end of 1973 before seeing gold starting to recover after it had lost about 30 percent while demand for dollars remained strong until end of January 1974.

We can say that even in the midst of a serious international crisis, investors worried more about the negative economical impact that high oil prices would have and therefore, preferred instead cash like the U.S. dollar to hard assets like gold.

The pullback of the gold price in 2008 is equally illustrative of what it can tell us about investor behavior in the face of the by far darkest of all financial crises since the 1930s. In the first half of 2008, we had witnessed a series of clear warning signals going from a dramatic turnaround in wheat prices through to the underperformance of emerging and then major equity markets, up to the point that even oil prices failed to respond to the news of Iranian missile tests that started on July 9, it became clear that there were increasing signs the global economy was on its way to a sharp slowdown in the second half of 2008.

As sentiment turned in mid-July, the price of gold began moving down, losing 22 percent by the time when Lehman Brothers, which was the fourth largest investment bank in the USA (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) filed for chapter 11 bankruptcy protection on Sept. 15, 2008.

At the same time, the dollar showed a robust performance of about 20 percent up that started in July 2008 and lasted until February 2009 as the need for cheap “carry trade” funding and, generally speaking, “risk on” both receded.

So, if we take the events of 1973 and 2008 as historical references, while keeping in mind what Mark Twain said: “History never repeats itself, but it often rhymes,” then there are a couple of interesting points that can be drawn from this:

• Energy prices shocks have generally fed into worries about a deflationary drag. Long-term investors should remember when gold moved sharply lower in early 1980, that event came just after the late 1970s oil price shock when we saw, at least temporarily, a selloff in gold and a rally in the dollar.

• Gold does not necessarily provide a “safe haven” in the face of a major crisis.

And talking about the major eurozone crisis further developing, it is worth taking notice that precisely following the EU summit on Dec. 8 in Brussels, the gold price has “broken down out” of its three year old uptrends (yes, in plural!) that all began in early 2009 against and the dollar and the British pound while it is trying to perform the same performance against the Japanese yen.

Bottom line: If investors are looking for a serious hint of where the ongoing eurozone crisis is heading in the near future, then I think “This is it!”

I wouldn’t be surprised at all seeing gold prices easing further and the dollar moving higher from here on. Please remember I’m a gold believer, but there are moments of rising and falling gold prices, and a rising and falling dollar. Of course, that’s what I think and I don’t have a crystal ball.

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When we look back on how various investment segments have performed this year, and more precisely between Jan. 3 and Dec. 23, we see the 30-year U.S. Treasury delivered a 16.06 percent win; gold a 13.11 percent win; OIL WTI a 9.01 percent win and the dollar a 1.01 percent...
Tuesday, 27 December 2011 08:05 AM
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