Full Court Press
Not a day passes without the financial media denouncing gold as an investment option and hailing the bureaucrats heading the world’s monopolist monetary central planning agencies as superheroes. It began prior to gold’s recent breakdown, with widely cited bearish reports on gold published by Credit Suisse and Goldman Sachs, among others. Never mind that most of their arguments were easily unmasked as spurious. It should be no wonder though: gold’s rise was the most conspicuous evidence of faith in central banking being slowly but surely undermined. The banking cartel relies on the fiat money system remaining intact; the legal privilege of fractional reserve banking provides it with what is an essentially fraudulent profit center unparalleled by any other in the world (fraudulent in terms of traditional legal principles, but not in terms of the current law of course). Not surprisingly, ever since the completely unrestrained fiat money system became operational in the early 1970s, the financial sector’s share of corporate profits has inexorably risen and finally eclipsed all other sectors of the economy.
The share of financial profits of total corporate profits – a direct result of the fractional reserve banking privilege and the central bank monopoly on money (via Ed Yardeni) – click to enlarge.
In other words, the banks have to protect a major franchise. It is a good bet that if gold had continued to rise in the face of money printing being accelerated all over the world, the inevitable loss of faith in central banks would have happened sooner rather than later. That it will eventually happen is unavoidable – the modern monetary system was fated to self-destruct the moment it was conceived. This is so because central planning and price controls cannot work in the long run, even though central banks are socialistic institutions adrift in a capitalist sea, so to speak. They can to some extent observe prices in the market, but the problem is that the market price most relevant to them – namely the ratio of future against present goods as expressed in interest rates on the credit markets – is not independent of their actions. There is therefore nothing that can tell them whether their administered interest rates are too high or too low. It is a system that is condemned to fail at some point (unfortunately with grave consequences for the economy at large).
The fact that a great many people ostensibly believe in its viability is not proof that it is viable; most of those who are most vocal about retaining the central bank money monopoly are directly profiting from its existence after all. That the commercial banks only want to protect a source of large profits and an invaluable backstop in case their speculations go wrong is clear, but the same is true of most academics in the economics profession. The great bulk of them derives its income from the State, and the central bank is at the forefront of supporting the livelihood of its apologists.
Among commercial banks, Credit Suisse has been a leader in the recent rhetorical onslaught against gold, and has just published a follow-up, duly repeated by Bloomberg under the non-too-subtle title: ‘Gold Seen Crushed’.
“Gold, down 17 percent since January, is poised to lose 20 percent in a year as inflation fails to accelerate and with the worst risks to the global economy waning, Credit Suisse Group AG said.
Gold will trade at $1,100 an ounce in a year and below $1,000 in five years, according to Ric Deverell, head of commodities research at the bank. Lower prices are unlikely to lure more central-bank buying, said Deverell, who worked at the Reserve Bank of Australia for 10 years before joining Credit Suisse in 2010.
“Gold is going to get crushed,” Deverell told reporters in London today. “The need to buy gold for wealth preservation fell down and the probability of inflation on a one- to three-year horizon is significantly diminished.”
Investors are losing faith in the world’s traditional store of value even as central banks continue to print money on an unprecedented scale. Bullion slumped into the bear market last month after a 12-year bull market that saw prices rise as much as sevenfold. Gold is a “wounded bull,” Credit Suisse said in a Jan. 3 report.
Color us unsurprised that the main author of the report is an ex-central banker. As regards inflation, below is a chart we have recently shown, US money TMS-2. The good people at Credit Suisse neglect to mention in their report that official ‘CPI inflation’ has rarely risen beyond the central bank’s ‘target’ of 2% during the entire gold bull market to date. It was completely irrelevant to the gold market thus far, so why should the outlook for the government’s ‘inflation’ data suddenly become relevant now? Monetary inflation has been higher over the past five, 10 and 15 years than at any time since the end of WW2 in a comparable period – and it continues to accelerate.
It is therefore erroneous to claim that ‘the probability of inflation on a one to three year horizon is diminished’ – the exact opposite is the case. As noted above, Credit Suisse’s argumentation has been spurious in its first bearish gold report already and it continues to be so. It seems more likely that a concerted public relations campaign against gold is underway, while parallel to that, a pro-central banking campaign is in full swing. We’re not really big fans of conspiracy theories, but in this case, everything points to this being the case; it is just as transparent as the pro-war campaign prior to the Iraq war was.
Success! Gold Now Seen as ‘Worst Performing Asset’ by Investors
The gold market is of course complying so far, as the clients of the banks issuing bearish reports are bailing from their gold positions. Skeptical voiceslike Elliott Capital Management’s Paul Singer have been drowned out by the incessant barrage of propaganda. Gold continues to decline in the near term and its chart has begun to look rather ominous.
As Credit Suisse incidentally also reported, its campaign has been crowned with success: not only has the gold price declined sharply, gold has now become the ‘most hated asset class’ with the ‘worst outlook among commodities’ according to a recent CS survey among institutional investors:
“Gold has the worst 12-month outlook among commodities and will trade below $1,400 an ounce in a year, according to an investor poll by Credit Suisse Group AG.
Sixty percent of respondents named bullion as having the worst outlook, 18 percent picked copper and 16 percent selected corn, the bank said in an e-mailed report today. Fifty-one percent predicted gold will fall under $1,400 in 12 months, it said. The bank polled 185 investors including hedge funds, pension funds and family offices on May 15 in London.
“Bearishness for gold was a very clear consensus,” said Kamal Naqvi, the head of commodities sales for Europe, Middle East and Africa at Credit Suisse. “It’s not about just not buying gold, it’s about shorting it,” or wagering on a drop.
Gold slumped into a bear market last month as investors lost faith in the metal as a store of value. Bullion is down 17 percent this year, compared with the 2.9 percent drop for the Standard & Poor’s GSCI gauge of raw materials.
Fifty-three percent of investors expect commodity prices to stay near current levels, Credit Suisse said. Most were underweight raw materials or had zero exposure, while they expected to be overweight or neutral in 12 months, the bank said. Investors named relative value trades, fundamentally based directional trades and volatility as the best ways to extract value from commodities.”
The general bearishness on commodities jibes with what we have seen in the recent Merrill Lynch fund manager survey. The bearishness on gold is in keeping with what we have seen in the Barron’s ‘Big Money’ survey and other polls. Apparently though the people who write the gold reports at Credit Suisse are oblivious to the contrarian implications of their own survey.
As we have recently pointed out, just before Japan’s stock market embarked on a 75% rally in the space of a few months, fund managers absolutely hated Japan (they love it now!). As we wrote in our October 30 review of the Barron’s Big Money poll:
“However, what we really love is that they hate Japanese stocks even more! As it were, we are busy writing an article on Japan that will be entitled ‘Reconsidering Japan‘ and should be published sometime this week. There are quite a few reasons to believe that Japanese stocks will finally do the unexpected and come back to life.”
At the time, a full 76% of the ‘big money’ fund managers surveyed declared themselves bearish on Japan. Currently, 69% of the managers surveyed in the most recent Barron’s poll are bearish on gold. One must of course admit that from a technical perspective gold currently looks weak. That is undeniably the case and there could therefore be more near to medium term downside. However, the most important fundamental data as well as the sentiment backdrop clearly remain bullish. In fact, the skepticism of investors regarding commodities in general and gold in particular in the face of the biggest money printing orgy of the modern age is what we would call an ‘extreme long term bullish dichotomy’. It seems highly likely to us that a year from now or maybe even earlier, the conversation will have profoundly changed.
Charts by: Ed Yardeni, BarCharts, St. Louis Fed