Author: Tom Yorke, Oceanic Capital
Covestor models: Global Diversified Conservative, Global Diversified Moderate, Global Diversified Aggressive
Wow! For a few minutes there at the close of trading in the gold market on Feb. 29 I felt like I was witnessing a slow train wreck. How did the market get so freaked out? Like Sadie Hawkins Day, we can only hope this happens once every four years and not more. Gold futures fell as much as $100 to below $1,700 an ounce on signs that the Federal Reserve will refrain from offering more monetary stimulus to bolster the U.S. economy, according to one report. As we’ve mentioned before, the only thing we don’t like about our gold position is its occasional volatility. So let’s have a look here.
On a micro level, gold has been part of a general, slow-but-steady rally since year end. The volatility has been relatively muted over that time. At Oceanic Capital we try hard to divorce ourselves – and our portfolios – from being overly concerned about the various markets’ daily machinations. They have a tendency to force you to the sidelines when things feel heavy or difficult and then get you back involved when things feel good or “easy.” This is a formula for buying high and selling low, not a good long-term strategy. No one’s best trade or position ever felt “easy.” If it were we’d all be on the beach in Rio. However, this volatility is scary and perhaps at times breathtaking, so we need to take a step back and consider the longer-term perspective.
The recent sell off was driven by the prepared statement and comments of our Fed Chairman Ben Bernanke before Congress. The collective market interpretation was that the Quantitative Easing strategies are over, the printing presses have stopped and all has suddenly become “right” with things here in the US and globally. A bit of an exaggeration, I think, or rather wishful thinking. Once the selloff started all the traders using leverage, the so-called “late longs,” and the hot money started heading for the same exit simultaneously. Wall Street’s margin clerks were not risking their jobs (not in this economy) and, as in the tales of the Old West, were shooting first and asking questions later. If there was any question about a trader’s ability to make a cash margin call in, say, 2 hours – bang! – his position was sold. Result: more lower prices and more investors heading for the door.
So, what has really changed?
In our view, things have gotten slightly better, meaning the blazing fire (Southern Europe, US housing, etc.) may have indeed been extinguished, but the real work has just begun and, in an election year with US debt running at about 100% of GDP, we have our concerns as to how quickly this clean-up will go.
The employment situation, from the surface looks better, for sure. However, from our view the situation, as evidenced by statistics that are revised in walloping percentages month-in and month-out, is unclear at best. Our own guess is that things are worse than reported, with people dropping into an abyss and becoming permanently unemployable, over-aged, or overpriced. This situation will likely provide an overhang of sorts until the economy starts firing again.
As far as consumers go, things may be playing better in Peoria but from our small “window” in New York, they are not all that encouraging. The general populace here, those with whom we bump elbows each day, do not seem likely to take on any big new debt obligations, buy any expensive gifts or exotic sports cars, or take any distant vacations any time soon. Just keeping things going with lower bonuses, less cash, and more deferred payments, is the goal. Have you sent a kid to private school or college lately?” Very expensive. The consumer numbers do change, but suffice it to say that the “little guy” fuels a large majority of the economy’s cylinders, so there’s still a big piece of the economic “engine” that is not firing so hot.
Housing is also still a mess, albeit getting slightly better, finally after three years. But we are still a long way from “home.” The industry has always been an important driver of economic growth and it will need to “heal” completely to re-establish itself in that role. For now, it may have stopped pulling the economy down recently and will begin to stand on its own over the next 18 months, but it may be years before housing is back pulling the economy up.
And wait! It’s an election year (painfully, woefully so). Political Party A will spend all year obstructing anything that Political Party B wants to do. And in lieu of actions, we will have lots of speeches. The retirement of Maine’s moderate Republican Senator Olympia Snowe, after three terms, is a painful reminder of our political dilemma.
So back to gold.
Big picture, we believe that gold is a good investment for the long term and should have a proper balance with other assets held in our portfolios. Paper dollars, like our fiat system, have historically never lasted long, and we have seen so many devaluations – announced or otherwise – that we want to make sure we hold disaster insurance always. If that insurance can also slowly appreciate along the way, great. Things may get rocky from time to time, but we are disciplined to keep our eyes on the horizon and not the side of the boat. Gold is a portfolio keeper.
