Thursday, December 15, 2011

Professors Copper & Gold

What are Professors Copper and Gold saying about the outlook for 2012? Copper is the metal that is renowned for having a PhD in economics. Yesterday’s 4.7% plunge to $3.27 per pound was a bad break, though it remains above the most recent low of $3.05 on October 20. It suggests that global economic growth is weakening. That’s confirmed by the decline in the CRB raw industrials spot price index, which includes copper along with 12 other commodity prices. This index fell to a new low for the year at 514.6 yesterday, but remains above the 2010 low of 463.5 on February 8, 2010.

Gold is the metal that is renowned as a great inflation hedge. I’ve always viewed it more broadly as a hedge against out-of-control governments with reckless fiscal and monetary policies. Yesterday, the price of gold plunged 4.2% to $1,603 an ounce. It found support at its 200-day moving average. Could it be that governments are embracing fiscal and monetary discipline? That’s a stretch.

Another interpretation of the weakness in the price of gold is that governments have reached the limits of their recklessness. They have run out of effective policy options to either clean up or cover up their fiscal messes. They can’t even reflate their way out of their excessive debt burdens, though they’ve tried. European governments have formulated four Grand Plans that haven’t worked to end their financial crisis. So here comes the dreaded Endgame, including failed government bond auctions, sovereign debt defaults, the collapse of the euro and European banks, deflation, and depression. Sorry, I think that’s a stretch too.

More likely is that governments around the world won’t let the global economy roll over into a recession--which could quickly turn into a depression. They may be much more limited in using fiscal policy to boost economic growth than they were three years ago. But there is always another round of massive quantitative easing of their monetary policies. If so, then gold may very well rebound off its 200-day moving average.

If it fails to do so, it will be because the only safe asset will be deemed to be the US dollar and US Treasury bonds. Last week in Kansas City, one of our long-only accounts was especially concerned that the Endgame scenario is upon us. We discussed the best way to preserve capital in such a calamitous environment. The conclusion was to load up on the US dollar and US Treasury bonds, the scenario that seems to be working so far this week.

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