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There is a cult that gloats about gold. There are people who rub it in when it is going down precisely because of the cult following. Sort of like Apple and Android fans.
To me, people appear to be missing a bigger picture story of commodity markets in general over the last couple of years. All commodity prices are determined by two factors, the supply and demand from the actual use of the commodity and the speculative storage or manipulation of supply by producers and in recent years also by financial institutions (JPM has been the biggest player here). Gold has also enjoyed hoarding by Governments and central banks. Different commodities vary in the ratios of use demand to speculative/storage demand.
It appears to me that, for whatever reasons, the speculative trades in commodities as a whole has been unwinding over the last year or two across the spectrum with the extent of drop in value determined by that ratio. Gold with the smallest ratio (the author is wrong about Gold being totally useless, women across the globe would disagree) suffering the most.
As to why this may be the case, no idea. Just a strong suspicion it has to do with increasing scrutiny of banks and their proprietary trading portfolios. Also possibly due to probes on price fixing in commodities markets. Commodities may be getting repriced closer to their actual supply and demand.
Reply to @cman: I agree with your observations and analysis. A small addition: gold is also heavily used in electronic and scientific circuit boards and assemblies, because of its immunity to oxidization and excellent current-carrying ability.
Reply to @cman: "It appears to me that, for whatever reasons, the speculative trades in commodities as a whole has been unwinding over the last year or two across the spectrum with the extent of drop in value determined by that ratio." "As to why this may be the case, no idea."
may be, just may be, this has something to do with changing inflation expectations? have you seen TIPS performance recently or yoy inflation data? that is why commodities (and some other 'real' asset classes) have been underperforming.
another item for gold. it is negative carry. you actually pay to store it and it provides neither interest nor dividend. when interest rates are at zero, the opportunity cost of holding gold is close to zero. when there is an indication that interest rates can rise, holding unyielding asset classes instead will have a very real cost.
Reply to @Old_Joe: thanks so much OJ! i am around, less than before of course, but still drop by occasionally. best to you and yours this holiday season!
Reply to @fundalarm: You are absolutely correct in tying gold prices to inflation expectations.
Your explanation of negative carry applies to large scale investment stockpiling with liquidity requirements. This happened to Gold via funds that started to store gold to create a liquid trading instrument on top leading to a huge speculative bubble despite the fact that inflation has been non-existent for a long time. It is quite possible that unrealized inflation expectations are behind this bubble bursting, but I think there is more to this than that because of what has been happening to commodities in general.
Your inflation thesis is not true in general for commodities whose prices are driven by supply and demand in their primary use. They may seem correlated with inflation because increasing economic activity that increases demand and inflation are often correlated. But we have had roaring commodity bull markets with very low inflation in the Greenspan Goldilocks era.
The commodity market performance last three years looks like we are in a deflationary period! But we are not. Perhaps disinflation at most. At the same time, there was a significant build up of speculative trading preceding it where, for example, contango was real enough to make JPM rent a tanker to hold heating oil as insurance to future contracts they were writing. Commodities futures markets are short term and liquid markets, so things like negative carry etc don't apply there unlike physical hoarding of gold.
It is still possible that low inflation expectation was also behind the deflation of this speculative bubble of commodities and continued weakness but to me that explanation is not as compelling as the case for gold.
This is why I suspect some major players have just exited many of these commodity markets for other reasons removing the speculative component of the pricing.
It is also happening at the same time banks are being investigated for their role in commodity pricing and slef-imposed re-exam of proprietary trading to prevent excessive risk overhang. Hence my suspicion of the reason for this commodity deflation anomaly. Circumstantial, for sure.
There is a practical implication to which explanation might be true. Inflation expectation explanation would suggest a reversion to mean of the commodities suggesting rotating to them even if we continued with disinflation. Repricing by removing speculative flows might mean continued status quo in commodities for a while until there are clear signs of economic growth globally. Make your bets accordingly!
...prices are determined by two factors, the supply and demand from the actual use ... and the speculative ... manipulation of supply by producers and in recent years also by financial institutions.
I've always viewed low commodity prices as a catalyst for growth...good for the consumer and an advantage to those companies that add value to their products, beyond the pass through. But, as you point out, if demand is true, the broad declines we've seen the past few years should reverse.
Since we have gotten away from just a gold conversation I'd like to chime by saying Natural Gas has experienced a price retracement a bit earlier than most commodities. Here's how this presently over abundant resource has repriced itself over the last 5 years using UNG which hold options on futures contracts of NG...
"same great BTU flame with half the carbon afterburn of oil or coal"
If over this same 5 years an investor selected GASFX or FSCHX, 2 funds that benefit from low NG costs, the comparative performance would look like this:
Nice article and conversation. Yeah, there are a lot of folks that take delight in hammering the gold bugs, but geez, they bring a lot of this on themselves - they can be very shrill - as can be their detractors. Whenever folks get shrill, I normally head for the exit.
That gold has no value is a silly statement. It has the value that people give and that's OK. However, the demand function for gold is so varied and disjoint that it makes it very hard to attempt to pigeonhole. There is the industrial usages that will never go away. You want an electrical connection that will not corrode - gold. Jewelry usage was mentioned, but look at India where it's the cultural version of social security for the women. And this is not designer bling, it's 18-24k and almost entirely bullionesque. You've got the survivalists and doomsday preppers. And none of this mentions the central banks and gov'ts around the world.
I'm sure that many around here would label me a gold bug, but I never really owned any before 2002 or so. I only started buying when gold and silver broke out and headed north. Pure momentum investing play. I was fortunate to have collected coins long enough to be able to see the break out early - that's all.
During the run, we talked about how natural resource/commodity bull runs normally lasted 10-15 years due to the nature of the supply. It's not like starting the 3rd shift or building a new plant. You have to prospect, discover, permit, mine, refine, market, etc. It takes time to bring additional supply on line. Well . . . it's been 11 since the onset.
No doubt there was a large tulip mania element to the excessive speculation and most of that frothy money is now gone. Good riddance.
I still firmly believe that precious metals have a place in everyone's wealth allocation. However, it's in the 5% area. More than that is speculation. I cut way back when the mo slowed but kept my core holding. I add to that incrementally each year with annual type purchases but that's almost a DCA tactic. With the recent downturn I actually did add a little more - bought some hockey pucks (ATB 5 oz. silver rounds) and added some miners - PAAS and SIL. Note that I'm buying silver and not gold.
Reply to @bee: Just a comment that UNG was not a good proxy for NG prices. It got wasted by contango. All commodities went down in the 2008-2009 meltdown. NG recovered in 2010 to head down again 2011-2012 like other commodities.
Reply to @cman: Sounds like a bad dance move...I "can't tango" either. I wasted my my romantic chances the last time I tried these steps. Thanks for the heads up...any thought on a better chart choice?
Comments
To me, people appear to be missing a bigger picture story of commodity markets in general over the last couple of years. All commodity prices are determined by two factors, the supply and demand from the actual use of the commodity and the speculative storage or manipulation of supply by producers and in recent years also by financial institutions (JPM has been the biggest player here). Gold has also enjoyed hoarding by Governments and central banks. Different commodities vary in the ratios of use demand to speculative/storage demand.
It appears to me that, for whatever reasons, the speculative trades in commodities as a whole has been unwinding over the last year or two across the spectrum with the extent of drop in value determined by that ratio. Gold with the smallest ratio (the author is wrong about Gold being totally useless, women across the globe would disagree) suffering the most.
As to why this may be the case, no idea. Just a strong suspicion it has to do with increasing scrutiny of banks and their proprietary trading portfolios. Also possibly due to probes on price fixing in commodities markets. Commodities may be getting repriced closer to their actual supply and demand.
anyone buying more gold?
still have ~ 4% commodities in privte accnt
may be, just may be, this has something to do with changing inflation expectations?
another item for gold. it is negative carry. you actually pay to store it and it provides neither interest nor dividend. when interest rates are at zero, the opportunity cost of holding gold is close to zero. when there is an indication that interest rates can rise, holding unyielding asset classes instead will have a very real cost.
best, fa
Regards- OJ
Your explanation of negative carry applies to large scale investment stockpiling with liquidity requirements. This happened to Gold via funds that started to store gold to create a liquid trading instrument on top leading to a huge speculative bubble despite the fact that inflation has been non-existent for a long time. It is quite possible that unrealized inflation expectations are behind this bubble bursting, but I think there is more to this than that because of what has been happening to commodities in general.
Your inflation thesis is not true in general for commodities whose prices are driven by supply and demand in their primary use. They may seem correlated with inflation because increasing economic activity that increases demand and inflation are often correlated. But we have had roaring commodity bull markets with very low inflation in the Greenspan Goldilocks era.
The commodity market performance last three years looks like we are in a deflationary period! But we are not. Perhaps disinflation at most. At the same time, there was a significant build up of speculative trading preceding it where, for example, contango was real enough to make JPM rent a tanker to hold heating oil as insurance to future contracts they were writing. Commodities futures markets are short term and liquid markets, so things like negative carry etc don't apply there unlike physical hoarding of gold.
It is still possible that low inflation expectation was also behind the deflation of this speculative bubble of commodities and continued weakness but to me that explanation is not as compelling as the case for gold.
This is why I suspect some major players have just exited many of these commodity markets for other reasons removing the speculative component of the pricing.
It is also happening at the same time banks are being investigated for their role in commodity pricing and slef-imposed re-exam of proprietary trading to prevent excessive risk overhang. Hence my suspicion of the reason for this commodity deflation anomaly. Circumstantial, for sure.
There is a practical implication to which explanation might be true. Inflation expectation explanation would suggest a reversion to mean of the commodities suggesting rotating to them even if we continued with disinflation. Repricing by removing speculative flows might mean continued status quo in commodities for a while until there are clear signs of economic growth globally. Make your bets accordingly!
I've always viewed low commodity prices as a catalyst for growth...good for the consumer and an advantage to those companies that add value to their products, beyond the pass through. But, as you point out, if demand is true, the broad declines we've seen the past few years should reverse.
"same great BTU flame with half the carbon afterburn of oil or coal"
If over this same 5 years an investor selected GASFX or FSCHX, 2 funds that benefit from low NG costs, the comparative performance would look like this:
Nice article and conversation. Yeah, there are a lot of folks that take delight in hammering the gold bugs, but geez, they bring a lot of this on themselves - they can be very shrill - as can be their detractors. Whenever folks get shrill, I normally head for the exit.
That gold has no value is a silly statement. It has the value that people give and that's OK. However, the demand function for gold is so varied and disjoint that it makes it very hard to attempt to pigeonhole. There is the industrial usages that will never go away. You want an electrical connection that will not corrode - gold. Jewelry usage was mentioned, but look at India where it's the cultural version of social security for the women. And this is not designer bling, it's 18-24k and almost entirely bullionesque. You've got the survivalists and doomsday preppers. And none of this mentions the central banks and gov'ts around the world.
I'm sure that many around here would label me a gold bug, but I never really owned any before 2002 or so. I only started buying when gold and silver broke out and headed north. Pure momentum investing play. I was fortunate to have collected coins long enough to be able to see the break out early - that's all.
During the run, we talked about how natural resource/commodity bull runs normally lasted 10-15 years due to the nature of the supply. It's not like starting the 3rd shift or building a new plant. You have to prospect, discover, permit, mine, refine, market, etc. It takes time to bring additional supply on line. Well . . . it's been 11 since the onset.
No doubt there was a large tulip mania element to the excessive speculation and most of that frothy money is now gone. Good riddance.
I still firmly believe that precious metals have a place in everyone's wealth allocation. However, it's in the 5% area. More than that is speculation. I cut way back when the mo slowed but kept my core holding. I add to that incrementally each year with annual type purchases but that's almost a DCA tactic. With the recent downturn I actually did add a little more - bought some hockey pucks (ATB 5 oz. silver rounds) and added some miners - PAAS and SIL. Note that I'm buying silver and not gold.
peace,
rono
EIA.gov annual natural gas prices table
UNG wasn't able to track the prices at all.