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John Mauldin Things That Make You Go Hmmm - July 15, 2013

July 16, 2013 | About:
Canadian Value

Canadian Value

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Things That Make You Go Hmmm...

A few weeks ago, I put a chart with which I am acutely familiar up on my Bloomberg. It is a chart I have studied every single day for over a decade, so by now I know pretty much every dip, every rally, and every sideways channel that makes up this particular pattern.

I remember where I was when the big moves took place, and I recall with great clarity my varying degrees of comprehension and incredulity over every meaningful change in direction.

I have lived every Golden Cross and died every Death Cross, cheered every bottoming pattern, and despaired each time the chart patterns signaled a breakdown in an upward trend; but above all, I have continued to remorselessly reassess my view of the investment case for this particular instrument, looking for signs — not evident in the charts — that would suggest it had run its course.

As I stared at the chart again, almost absentmindedly, I put two vertical lines on it, one representing August 17, 2011, and one that marked January 14, 2013; and suddenly, a concept that had been gnawing away at me for a while crystallized in my mind as those two lines pulled in a whole bunch of known knowns, known unknowns, and even a couple of unknown unknowns. It was a truly Rumsfeldian moment.

By now, there is no doubt a distinct three-way split amongst those who have made it all the way to the third paragraph of this week's TTMYGH. There are some new readers who are wondering what asset the chart reflected, as well as many who are already rolling their eyes and muttering to themselves "Really? Gold? AGAIN?" — and finally there are the overwhelming majority who have already scrolled to the "...and finally" page, chuckled at the cartoon, and moved on to more edifying fare.

Yes, it's one of those weeks when I must ask your indulgence while I ramble on about a subject close to my heart that has recently been a source of great frustration. And yes, it's gold — particularly, the bizarre price action of the last six months, which has run counter to most logical assumptions, given the various macro factors bringing influence to bear on the yellow metal.

Cyprus should have been a hugely positive tailwind for gold. But it wasn't. The ongoing money printing should have provided support for gold. But it hasn't. The talk of tapering should have had a minor but noticeable effect on gold, given its healthy recent correction. But it didn't. Sustained data suggesting a voracious appetite for the physical metal not only in Asia but in Western countries, too, should have led to a bounce on the COMEX. But it hasn't.

The whole thing is as baffling as Kim Kardashian's fame.

But let's get back to that chart and those two lines — here it is and there they are:



Source Bloomberg

You're going to hear about this chart a few more times before we're done today, so take a good long look at it.

The first vertical line, labeled August 17, 2011, marks the day that Hugo Chavez, then president of Venezuela, demanded the repatriation of the 99 tons of gold (worth $13 billion at the time) that was being held at the Bank of England on behalf of his country. That was roughly half the gold held overseas by Venezuela and about 27% of its total holdings, which amounted to 365 tons:

(Bloomberg): "We've held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home," Chavez said today on state television. "It's a healthy decision."

Chavez, who has said he wants to eliminate the "dictatorship" of the U.S. dollar, has called on Venezuela's central bank to diversify its $28.7 billion in reserves away from U.S. institutions. Some cash reserves, which total $6.3 billion, will be shifted into currencies from emerging markets including China, Russia, Brazil and India, central bank President Nelson Merentes said today at a news conference.

Earlier today Chavez said he plans to take control of the country's gold industry to halt illegal mining and boost reserves.

The government is preparing a decree to stop illegal miners exploiting deposits of gold and coltan, an ore containing tantalum, used in mobile phones and video-game consoles, he said....

Venezuela's 365.8 metric tons of gold reserves makes it the 15th-largest holder of the precious metal in the world, according to an August report from the World Gold Council. Venezuela's gold holdings accounted for about 61 percent of the nation's international reserves, according to the report.

The Bloomberg article concluded with the following paragraph:

Gold futures for December delivery rose $8.80, or 0.5 percent, to $1,793.80 an ounce on the Comex in New York. Prices touched a record $1,817.60 on Aug. 11.

If we now take a look at a close-up chart of the gold price around the time of Chavez's announcement, something very interesting emerges.



Source: Bloomberg

As you can see, the immediate reaction to the commencement of the global game of central bank musical chairs was perfectly understandable and completely explicable: the price soared (to a new all-time high, no less). After all, that's what generally happens when somebody says "I want a large amount of a reasonably scarce commodity and I want it now" — or at least that's what generally happens if said commodity needs to be bought in the open marketplace.

As you can see, the immediate reaction to the commencement of the global game of central bank musical chairs was perfectly understandable and completely explicable: the price soared (to a new all-time high, no less). After all, that's what generally happens when somebody says "I want a large amount of a reasonably scarce commodity and I want it now" — or at least that's what generally happens if said commodity needs to be bought in the open marketplace.

Except...

In this case, essentially all that happened was that a stocky man in one country asked if a group of no doubt bespectacled men wearing white coats in another country would kindly return to him something they had been looking after for the last 19 years.

That something had been fully segregated and held in custody on the off chance that the stocky man might want to sell some of it to raise cash — or just for safekeeping, in case he were to be visited in the night by a random group of tall, thin men with a collective penchant for berets, facial hair, and cigarillos who seemed largely disinclined toward him.

And so, after the initial reaction that took gold to its new all-time high and through the $1900 barrier, the price began to fall. Fast.

Continue reading here.

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Canadian Value
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