Bad economic analysis abounds. Some of it is so bad you wonder if the authors understand how any markets work, not just the topic of discussion.
For example, please consider Gold Euphoria Won’t Last With Yellen’s Rally Fading, a truly remarkable exercise because it took three Bloomberg writers to produce.
Here are some snips, followed by my comments.
After the biggest gold slump in three decades left investors heartbroken, they’re following Taylor Swift’s advice and never, ever getting back together.
Janet Yellen, the one person able to make the lovers reconcile, did her best. Prices surged the most since September the day after the Fed chair signaled last week that low interest rates are here to stay. Traders and analysts surveyed by Bloomberg News aren’t expecting the euphoria to last.
For starters, there is no euphoria in gold. Arguably, one of the best measures of sentiment on gold is articles like the one above.
Here is a look at Yellen’s “Fading Rally”.
Yellen’s Rally Fading
Supposedly it makes sense to discuss “gold’s fading rally” but not countless other “fading rallies” some of which are actually fading.
Apple’s Fading Rally
Let’s march on.
Prices will average $1,250 an ounce next quarter, about 5 percent less than now, according to the median of 15 estimates. The analysts were surveyed before and after the Fed’s June 18 outlook, and the forecast was unchanged. Even after a 28 percent plunge in 2013, the bears are emboldened by this year’s records in equity markets, and gold assets in exchange-traded products have shrunk to the smallest since 2009.
Hmm… As another measure of alleged euphoria, please note “gold assets in exchange-traded products have shrunk to the smallest since 2009“.
Also note that the median forecast is for another plunge, on top of the reported 28% plunge in 2013!
Is that euphoria or extreme pessimism?
By the way, since when are median expectations of analysts anything to believe?
“The surge in gold can’t sustain itself,” Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York, said June 20. “It was a temporary spike because of a confluence of events: Iraq and Yellen. People will be looking at other areas for excitement. Holdings are down, so people are leaving gold in search of something better.”
How Markets Work
Curiously, Selkin helps manage $3 billion but does not seem to understand how markets work.
People are not “leaving gold“.
It is in fact impossible to leave gold, or any other asset for that matter, short of dumping it in the ocean.
With any financial asset, someone always has to hold it. If I sell gold, someone else has to buy it. If I sell shares of Microsoft, someone else has to buy them. The same is true with cash. Every cent the Fed prints has to be held by someone.
Selkin does not understand the driving force for gold, the reasons to own it, and apparently how markets work in general.
American buying is slowing. Sales of American Eagle gold coins by the U.S. Mint totaled 252,500 ounces this year, 60 percent less than in the first six months of last year and the lowest for the period since 2008, data on its website show.
Hedge funds are holding a net-long position of 66,572 futures and options contracts, U.S. government data show. That’s down 52 percent since this year’s peak in March.
Mint sales are down 60% and hedge funds holding futures holdings are down 52%.
Euphoria or pessimism? You make the call.
What the Future Holds
I do not know the future price of gold, nor does anyone else.
But I do know the fundamental drivers as well as the reasons to hold gold. And neither of those has changed.
I also know truly inane economic reporting when I see it, and the Bloomberg article quoted above is a perfect example.
For further discussion, please see Plague of Gold Bears Now Say “Gold Unsafe at Any Price”; What’s the Real Long-Term Driver for Gold?
Mike “Mish” Shedlock