Gold-now $US1210/ounce

[WinstonWolfe]

I think there's a good case for it being a bear trap.....one proportional to quantitative easing, which is what created it.

Considering QE has only shifted debt, and expanded in most instances, without increasing the developed nation production capacity or decreasing asset prices, many believe the second leg down is inevitable.

I follow Barry Ritholz, whose funds went 100% to cash 2 weeks ago.....for the time being, he is doing short term trades only.

 

[urbanprospector]

here is another of those pesky charts . de'ja' vu anyone

 

[Sunfish]

It's that chart that was burnt into my brain last year. That's the trouble with having studied this stuff.

For what it worth: I have never before heard (American) stock market commentators (not silly Cramer!) saying they are out of the stock market and in cash as they have been saying the last couple of weekends. While you guys go to auctions I read the US press.

 

[whatever123]

here is another of those pesky charts . de'ja' vu anyone

If using that chart as a comparison to now it pays to know the following

The share market boom in the years preceding the 1929 crash was huge. It had risen a few hundred percent in the few years prior.
So all the crash did was wipe out most of the gains from those preceding few years.
It was a traditional but massive speculative bubble, with P/E's of around 32. They aren't as high this time (although falling earnings and who knows?).

So the great depression coincided (linked to?) with the sharemarket bubble which exacerbated any falls. Unemployment also got to 30%+

I think its great to compare the two as a reality check of how much markets "can" fall, but my belief is that the fall will not be as large this time around.

The share market also overshot on fair value by at least 20% in the 30's (I have my theories on why).
We could not rely on that happening again.

Having said that, I also think this crisis is very unique in that it has to unwind decades of overspending and excessive use of credit. So it has the potential to be bigger, but I could not imagine unemployment at 30%, because then even infallible Australia would not be immune.

I prefer looking at the 100 year Dow chart for a much better big picture.

 

[WinstonWolfe]

This is a nice piece of research from BCA......

It shows price earnings ratios for emerging markets are now at pre GFC levels........ I agree this is reasonable indication further growth in emerging markets will be fragile....

BCA raise the excellent point that PE ratios can only continue to go up if the opportunity cost of money continues to fall......and in today's near zero interest rate environment, the opportunity cost of a buck isn't likely to fall.

When you throw in China's growing inflation dilemma, and the inability of western consumers to significantly increase consumption, the case for fragile EM growth is all the stronger.

 

[Intrinsic_Value]

This is a nice piece of research from BCA......

It shows price earnings ratios for emerging markets are now at pre GFC levels........ I agree this is reasonable indication further growth in emerging markets will be fragile....

BCA raise the excellent point that PE ratios can only continue to go up if the opportunity cost of money continues to fall......and in today's near zero interest rate environment, the opportunity cost of a buck isn't likely to fall.

When you throw in China's growing inflation dilemma, and the inability of western consumers to significantly increase consumption, the case for fragile EM growth is all the stronger.

Winston i'm a bit surprised with you on this statement.
You know how PE is calculated.
What happens when the 'E' is based on bottom of the cycle earnings.

With earnings recovering, the 'E' can increase substantially therefore the PE drops with constant prices.

 

[Intrinsic_Value]

We HAVE been here numerous times before, just not to the same severity.

Each time the market recovery moves in the same basic cycle.

The first stage share prices increase rapidly, nobody at first believes the recovery which is why the share price profits are so significant in this stage.
This stage has NOW PASSED.

We are now into stage 2.
Stage two is characterised by increased company profits. However the PE ratio doesnt continue to increase as the market wants to 'see the profits'.
Share prices during this stage can either increase or decrease (depending on both the degree and quality of the profit increase).
However any price decline will not be of the same degree as the intial down turn.
Likewise any price appreciation will not be to the same degree as experienced in stage 1.

The next stage is stage 3.
Stage 3 will depend on the continued improvement in company profits.
If company profits continue to improve the grounds for the next bull run will be laid.
If company profits start to stagnate, then sharemarkets will become lethargic (spelling?).

Stage 3 will be the determinant of whether we are entering a secular bear market or a continuation of the current secular bull market that has been in existence since the early 1980's.

The only exception to the above was the 1930's.
So we have numerous adhesion to the rule and one exception.
I know which way i would place my 'bets'.

 

[urbanprospector]

intrinsic we have had a huge run up just like 1930s

this chart puts things into perspective as to where i think is better place to put money than stocks

 

[hobo-jo]

The only exception to the above was the 1930's.
So we have numerous adhesion to the rule and one exception.
I know which way i would place my 'bets'.

Given we are in the worst crisis since the 1930s and given that the problems (debts) now exceed those of 1930 then I know where I would place my bets.

 

[Value Emperor]

If using that chart as a comparison to now it pays to know the following

The share market boom in the years preceding the 1929 crash was huge. It had risen a few hundred percent in the few years prior.
So all the crash did was wipe out most of the gains from those preceding few years.
It was a traditional but massive speculative bubble, with P/E's of around 32. They aren't as high this time (although falling earnings and who knows?).

So the great depression coincided (linked to?) with the sharemarket bubble which exacerbated any falls. Unemployment also got to 30%+

I think its great to compare the two as a reality check of how much markets "can" fall, but my belief is that the fall will not be as large this time around.

The share market also overshot on fair value by at least 20% in the 30's (I have my theories on why).
We could not rely on that happening again.

Having said that, I also think this crisis is very unique in that it has to unwind decades of overspending and excessive use of credit. So it has the potential to be bigger, but I could not imagine unemployment at 30%, because then even infallible Australia would not be immune.

I prefer looking at the 100 year Dow chart for a much better big picture.

Thats what I do like about the Dow vs gold chart. It shows in the last 100 years that whenever the ratio got too far our of proportion, it always came back to earth. I'm not sure there was any indicator that would have allowed anyone to predict when the major declines finally occured, especially the one in the 60's. I could see anyone bearish would have been stopped out of a lot of short trading positions before the final large drop.

It would be interesting to gauge the sentiment during the sixties to see what investors moods were like. Do any internet forums go that far back?

 

[WinstonWolfe]

IV, yes the stages do run out like that, and one could argue we've been in stage 2 since Oct09.

And yes, in Stage 2, the market wants to see earnings, but 'real' inflation adjusted earnings sensitive to domestic and export market consumption growth potential...

- China, a low 'official' 2.8%cpi, but they are reluctant to genuinely reduce lending via higher rates because loan defaults would soar, and most believe their gdp growth is credit fueled....ergo, lending continues to exceed expectations, which the markets are appropriately discounting, to the extent the SSE is officially a bear market (>20% drop in the last 5 weeks).

- India 14.86%cpi (retail, not dodgey official wholesale rate). Cash rate 3.75%. Another case for credit dependent gdp growth, otherwise inflation wouldn't be stratospheric.

- You are right that this year's trailing PEs are effected by last year's lows earnings....but last year was buffered by global quant easing which is winding down, and historically low rates, which now have upwards pressure.

My view is global consumption growth is now highly sensitive to credit growth. And with inflationary pressure on low rates across the globe, there's little room for credit growth in DMs, ergo EMs.

I've just committed my money to MSCI EM (LHS) and MSCI World not beating 2010 highs anytime soon.

 

[Aaron Sice]

P/E ratios are skewed when the E drops thanks to "misaligned external factors" like no more credit.

think about that for a second.

 

[WinstonWolfe]

P/E ratios are skewed when the E drops thanks to "misaligned external factors" like no more credit.

think about that for a second.

My money is on P accompanying E, downwards.

 

[Intrinsic_Value]

P/E ratios are skewed when the E drops thanks to "misaligned external factors" like no more credit.

think about that for a second.

Yes its definately a risk.
Not so much no credit, but that credit growth will be contrained. And credit growth has been a fundamental driver of global sales for several years running up to the GFC.

I mentioned this in my strategic outlook 2008, and continue to hold this as a risk in my strategic outlook 2010.

Its the major reason why i question the continuation of the global secular bull market.

 

[Intrinsic_Value]

IV, yes the stages do run out like that, and one could argue we've been in stage 2 since Oct09.

And yes, in Stage 2, the market wants to see earnings, but 'real' inflation adjusted earnings sensitive to domestic and export market consumption growth potential...

- China, a low 'official' 2.8%cpi, but they are reluctant to genuinely reduce lending via higher rates because loan defaults would soar, and most believe their gdp growth is credit fueled....ergo, lending continues to exceed expectations, which the markets are appropriately discounting, to the extent the SSE is officially a bear market (>20% drop in the last 5 weeks).

- India 14.86%cpi (retail, not dodgey official wholesale rate). Cash rate 3.75%. Another case for credit dependent gdp growth, otherwise inflation wouldn't be stratospheric.

- You are right that this year's trailing PEs are effected by last year's lows earnings....but last year was buffered by global quant easing which is winding down, and historically low rates, which now have upwards pressure.

My view is global consumption growth is now highly sensitive to credit growth. And with inflationary pressure on low rates across the globe, there's little room for credit growth in DMs, ergo EMs.

I've just committed my money to MSCI EM (LHS) and MSCI World not beating 2010 highs anytime soon.


QUOTE]

Yes all very valid reasons to be careful.
The only point i would add is that companies are organic. They adjust to changing circumstances. By this adjustment takes time.
Thats why the earnings for 2008/09 cannot be properly relied upon.

 

[Aaron Sice]

My money is on P accompanying E, downwards.

well, that's a self fulfilling prophecy, isn't it?

i mean, E drops, not so attractive to buy, so the P drops to match market. previously dropped E now looks good, people buy, P goes up, drags E with it.

 

[steveadl]

Ok I’ve got some questions for the gold bugs around.

I assume that the gold price has been running hard since 07 (ish) due to the global financial turmoil and peoples desire for a secure place to put their money?

If this is the case, does that mean gold is in for a correction once the world is happier again with the direction we’re heading? Ie. once people are convinced Europe can sort out it’s problems, that the US can actually start to right itself and have increased demand etc?

At what point do you make that call (either personally, or in your opinion the market) that the world is a safe place again and you can put your money back into other forms of investment?

Sorry if these are basic questions. Just trying to get my head around it as gold is an asset I’ve never really looked at before as it has no income stream etc and to me seems like speculation and risk hedging (good or otherwise – not judging) as opposed to a long term asset to hold forever.

 

[Aaron Sice]

no it was really undervalued when it touched under $800. honestly, undervalued.

i'd say it's still a fair price. gold's a good indicator of what's to come, above $1200 is still exxy but it signals a few more rate rises.

much like the 200DMA RBA chart in bull trends.

 

[Value Emperor]

Ok I’ve got some questions for the gold bugs around.

I assume that the gold price has been running hard since 07 (ish) due to the global financial turmoil and peoples desire for a secure place to put their money?

If this is the case, does that mean gold is in for a correction once the world is happier again with the direction we’re heading? Ie. once people are convinced Europe can sort out it’s problems, that the US can actually start to right itself and have increased demand etc?

At what point do you make that call (either personally, or in your opinion the market) that the world is a safe place again and you can put your money back into other forms of investment?

Sorry if these are basic questions. Just trying to get my head around it as gold is an asset I’ve never really looked at before as it has no income stream etc and to me seems like speculation and risk hedging (good or otherwise – not judging) as opposed to a long term asset to hold forever.

Gold only seems exxy when its measured in various fiat currencies which are losing value.

Gold when measured against other metals or other real assets shows a different story.
Gold as measured against Australian house prices over the last 50 years suggests its either quite cheap, or houses are too expensive!

The world may become happier with the direction, but there appears to be no escape for fiat currencies. Even those in power don't seem to know how they will reduce the multi trillion dollar US debt other than inflating it away. Until they can, gold will rise.

We can certainly expect rallies and dips. I would not be surprised to see a 10% fall in the gold price if the markets would settle temporarily. I'm not predicting it though.

 

[Aaron Sice]

Gold only seems exxy when its measured in various fiat currencies which are losing value.

uh huh.....so....um, how else do we measure it's value in real world terms?

if the value of RE is opinion and the value of currency is again, opinion, then it leads to the value of gold is just...opinion?