First, on Dec. 13, Dennis Gartman shared some gold data that I think tells an important story.
Back in the early days of the gold bull market, I remember arguing with people that, in my view, gold prices would be driven by demand for the metal as an investment, not by interest in using it for jewelry.
That was a novel thought in those days, as "analysts" used to focus only on what jewelry buyers were likely to do. In those days, that was deemed to be all one really needed to know about gold.In the wake of the tech-stock bubble bursting, I knew that, once it became clear the Federal Reserve was going to try to print money as a way out of that mess, the dollar would have problems and gold would be a beneficiary.
Of course, as the real-estate bubble inflated, leading to an even larger disaster, there was no question that even more money-printing would follow. This bolstered the case for gold. Thus, my argument was always based on investors being the drivers of the gold bull market.
As Gartman notes, "The ETFs are having their very real impact."
However, that is not quite accurate. The gold-based exchange-traded funds themselves aren't what made such an impact. It is the investment demand that has had the impact; the ETFs are merely the conduit by which much of that demand is expressed. What is really remarkable is that with investment demand at 40% of gold production, the number of gold bulls with any substantial allocation is still minute.
Perhaps by the time this bull market has run its course, investment demand will approach 100% of annual gold production, though we can never forget that nearly all the gold that has ever been produced (enough to fill just two Olympic-size swimming pools) is still in existence. So it's not just the gold that gets dug out of the ground each year that is available for sale, but potentially almost all the gold in the world. Of course, someone who has bought gold would need a reason to sell it, with some sort of financial prudence on the part of governments and central banks being the most likely catalyst. But as readers of my column (at least) should know, we are still millions of miles away from that.
Normally, I would have expected the major indexes to take a bit of a licking on that news, as Best Buy has always been deemed to be a well-run retailer and a good barometer of business (especially at this time of year).
However, the denial currently runs so deep regarding what is next for the economy and the stock market that, apparently, the bulls were able to convince themselves that somehow Best Buy's results were company-specific. Thus, businesses associated with Best Buy, which in the past would also have been sold in sympathy, were given a pass. It is quite similar to the treatment we saw when Cisco Systems reported its results Nov. 10.
I mention those two companies because they, as well as others, illustrate a consequence of government money-printing. The additional liquidity goes where it goes (usually into stocks, since the Fed's low-interest-rate policies make more conservative alternatives less attractive), psychology gets deranged and nonsense passes for knowledge.
The net effect is to increase the riskiness of stocks generically, as "normal" market reactions become suppressed, creating an unhealthy environment.
How anyone can conclude that, given the data, I don't know. But even if you agree, you can't escape the reality of higher rates. So if you really think that bond weakness is linked to the economy catching fire, and you extend that argument out, then you should be expecting even higher rates and more inflation, though the latter is certainly not on the radar of any such Pollyannas.
Back in the early days of the gold bull market, I remember arguing with people that, in my view, gold prices would be driven by demand for the metal as an investment, not by interest in using it for jewelry.
That was a novel thought in those days, as "analysts" used to focus only on what jewelry buyers were likely to do. In those days, that was deemed to be all one really needed to know about gold.In the wake of the tech-stock bubble bursting, I knew that, once it became clear the Federal Reserve was going to try to print money as a way out of that mess, the dollar would have problems and gold would be a beneficiary.
Of course, as the real-estate bubble inflated, leading to an even larger disaster, there was no question that even more money-printing would follow. This bolstered the case for gold. Thus, my argument was always based on investors being the drivers of the gold bull market.
From baubles . . .
That, in fact, has been the case. But I was still surprised to see just how potent investment demand has become. According to Gartman (the data likely originated with the World Gold Council), in 2000, investment demand accounted for approximately 2% of demand for gold, while about 80% of demand came from the market for gold jewelry.By 2005, the jewelry share had declined to about 60%, while investment demand had risen to about 20%. Nowadays, jewelry usage is about 40% and investment demand is just over 40%. (Gold also has industrial and other uses, which accounts for the remainder of demand.)As Gartman notes, "The ETFs are having their very real impact."
However, that is not quite accurate. The gold-based exchange-traded funds themselves aren't what made such an impact. It is the investment demand that has had the impact; the ETFs are merely the conduit by which much of that demand is expressed. What is really remarkable is that with investment demand at 40% of gold production, the number of gold bulls with any substantial allocation is still minute.
Perhaps by the time this bull market has run its course, investment demand will approach 100% of annual gold production, though we can never forget that nearly all the gold that has ever been produced (enough to fill just two Olympic-size swimming pools) is still in existence. So it's not just the gold that gets dug out of the ground each year that is available for sale, but potentially almost all the gold in the world. Of course, someone who has bought gold would need a reason to sell it, with some sort of financial prudence on the part of governments and central banks being the most likely catalyst. But as readers of my column (at least) should know, we are still millions of miles away from that.
It can't be bad news, so it must be good
As a lead-in to my second point, I wanted to comment a bit on Best Buy, which announced its results Dec. 14. Not only did the electronics retailer miss estimates, but it was also forced to lower guidance prospectively, as demand has not materialized the way the company had hoped. As a consequence, its stock price was smacked for 15%, although the market itself impressively fought off more rising bond interest rates to close about even (the Dow Jones Industrial Average ($INDU) closed with a 0.4% gain).Normally, I would have expected the major indexes to take a bit of a licking on that news, as Best Buy has always been deemed to be a well-run retailer and a good barometer of business (especially at this time of year).
However, the denial currently runs so deep regarding what is next for the economy and the stock market that, apparently, the bulls were able to convince themselves that somehow Best Buy's results were company-specific. Thus, businesses associated with Best Buy, which in the past would also have been sold in sympathy, were given a pass. It is quite similar to the treatment we saw when Cisco Systems reported its results Nov. 10.
I mention those two companies because they, as well as others, illustrate a consequence of government money-printing. The additional liquidity goes where it goes (usually into stocks, since the Fed's low-interest-rate policies make more conservative alternatives less attractive), psychology gets deranged and nonsense passes for knowledge.
The net effect is to increase the riskiness of stocks generically, as "normal" market reactions become suppressed, creating an unhealthy environment.
Treasury misery loves company
A variation of that same theme seems to be what has stopped the bond-market rout from being regarded as bad news. Apparently, a school of thought has "evolved" that the decline in the bond market is not about the Fed losing control of the printing press, as I have maintained, but about economic activity surging. Thus, the weakness in bonds is (supposedly) good news.How anyone can conclude that, given the data, I don't know. But even if you agree, you can't escape the reality of higher rates. So if you really think that bond weakness is linked to the economy catching fire, and you extend that argument out, then you should be expecting even higher rates and more inflation, though the latter is certainly not on the radar of any such Pollyannas.
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