I had a football coach in high school who used to say, "Don't be a hoper." By that, he meant: don't hope someone else is going to make the sack or block the punt or make the tackle, you go do it. You be the one to get the job done.
Don't be a hoper.
I'm reminded of this advice in the face of a declining precious metals sector – a decline that we're on record as saying could extend lower and potentially longer than many believe. Time will tell if we're right, but in the interim, we thought it wise to offer our readership the following bit of chartography by way of caveat – for those who are considering buying in at current levels.
It's a breakdown of holdings from the various bullion ETFs that have come to market over the last seven years. The big crimson colored patch, by the way, is the SPDR Gold Trust (NYSE:GLD), which accounts for over half the equity-based ownership of bullion the world over. See here:
The chart shows an uncanny correspondence between the growth of investment buyers and bullion itself. And that's what worries.
In our opinion, the investment-buying cohort of the bullion market is the most fickle holder of the metal and will turn seller if and when his risk/reward calculus turns to favor other asset classes, like, say, equities.
In that case, we could easily see a reverse of flows from these products on a scale not unlike that shown in the chart above, but on the downside. The number of 'true believers' in the bullion market is, by our estimation, minuscule.
In fact, that trade may already be shaping up for the more savvy minded holders of GLD and other funds, who appear to be selling into the latest bout of strength (see right edge of chart).
But will it make a difference?
Depending upon whom you ask, investment bullion funds account for at least one sixth of total annual demand and potentially as much as a quarter. Any prolonged sideways move in the gold market, or any downdraft of note, would certainly entreat more selling.
We may have an opportunity to watch that eventuality unwind in the weeks ahead
Along With a Change in the Headlines
CBS Marketwatch is a mainstream financial news outlet that's not in the business of digging very deep for its copy. The heavily visited news portal could safely be characterized as run-of-the-mill, reporting on what happened yesterday and offering conventional ideas on wealth creation and preservation.
Wasn't it interesting, then, that during our daily scan of the majors earlier this week, we see the following batch of headlines issuing from that outlet:
A Gold Bull Turns Bullish on Stocks
Who Cares About the Market, Just Buy Good Stocks
Buy Emerging Markets Where You Can
International Investments at a Discount
U.S. Banks Have Little Egypt Exposure
As if everything were OK.
And is everything OK?
Nope.
Emerging markets, for instance, generally the leaders over the last decade, now look like hell. Here are the vaunted BRIC markets for the last six months:
Three out of four (all save Russia) now floating down the gutter with a piece of bread and butter
Dry Me a River
Finally, last week we put on a chart of the Baltic Dry Index, showing its freefall of late and suggesting that, as usual, the indication was for a coming slowdown in global business activity.
Many intelligent folks wrote in the talkback section that it was likelier a rise in the number of oceangoing vessels currently moored (or on their way to port) that accounted for the precipitous drop in the BDI.
We haven't lost sight of the truths of supply and demand, but we have our doubts. For one, take a look at the Dow Jones Transports for the last six months:
To begin, this Wednesday's action was calamitous. On a day of tight trading, when the Dow itself posted a gain of just 0.02% (1.81 points), the Dow Transports plunged an astounding 99 points or 2% (see far right bar, chart above). Moreover, a six month trendline was broken over two weeks ago and all the price action is now fixed below a short term moving average that's rolling over. And if that's not enough, RSI readings have been sub-waterline since the trend break – with MACD now confirming with its own plunge below that marker.
But more than that, guys. Is it really possible that the addition of new capsize ships caught the shipping business itself by surprise, such that they had to drop rates by nearly 50% in a matter of six weeks? Was everyone unaware of the coming 'glut' of new vessels? Was there no competitive pricing leading up to that 'new' supply reality? Come on.
The market's on the verge.
Don't hope.
Run!
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
