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Short term uptrend in Gold broken, Correlation to USD & more
The 1-year uptrend channel (blue lines) is violated… The recent new (nominal) high did not make a new high in RSI or MACD…(negative divergence for the technically inclined & the dotted red lines on the chart) means the recent high was made on declining momentum – not a good sign.
I have drawn out the various support levels from here down and my short term (< 1 year) bias is to the downside especially for August… Demand is slow during the summer months because most jewelery manufacturers are shut down and don’t reopen till September…
Source:stockcharts.com
US Dollar & Gold Correlation
In theory, a commodity priced in USD dollars will move inversely to the value of USD e.g.- if Gold goes up in USD, then the value of USD in other currencies goes down and vice versa. Among all commodities, Gold particularly exhibits a strong negative correlation in a “normal” volatility year… during highly volatile or uncertain economic periods, this correlation deviates significantly from the norm…
Lately Gold & USD have been moving in lock-step… i.e. positively correlated as illustrated in this nice chart from Bespoke Investment Group
Source: Bespoke Investment Group
Eventually the correlation has to revert to its mean… which would mean that USD & Gold move in opposite directions. Couple weeks ago I posted a chart of the US Dollar Index positing that USD will reverse the downtrend and rally… hasn’t happened yet but I still think the USD is at a key support level and will rally from here and expect Gold to continue the downtrend…
Also, Gold has risen 21% from 1044 in Feb 2010 to its intraday high of 1265 in June 2010 without a 10% correction… of course it can go higher without correcting but the subsequent correction will be just as severe…
Lastly… Inflation
Historically, Gold is also meant to be a hedge against inflation… if you have been reading the news lately, you know well that prices are declining not rising so I believe the argument of buying Gold right now as a hedge against inflation is bogus!
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Update: Gold during Deflation via ZeroHedge
According to Casey Reseach
There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment
This chart from the above post is quite interesting:
- Source: zerohedge.com
From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically.
At the same time, the DJIA lost 73% of its value
…
The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.
What about gold itself? On April 5, 1933, President Roosevelt issued an executive order forcing delivery (i.e., confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz (you can read the original order here). And less than nine months later, he raised the gold price to $35, effectively diluting every dollar 41% overnight and swindling everyone who had turned in his gold.We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, we believe it would retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.
This is the only quasi-convincing article I have seen on owning Gold in deflation. A lot of well-respected economists (David Rosenberg, Roubini, etc) and financial bloggers (Mish) are urging investors to own gold during deflation but without an objective reasoning… Perhaps that is as noted above due to the lack of true deflation in a fiat monetary system.
A tale of two Housing Forecasts – CMHC vs CREA
Couple housing related news releases this morning… the quarterly Housing Forecast by Canada Mortgage & Housing Corp (CMHC) and a Revised Housing Activity update from Canadian Real-Estate Association (CREA)
I have summarized the house price forecasts for 2010 and 2011 in table below
| Forecast Period | Canada Mortgage & Housing Corp (CMHC) | Canadian Real-Estate Association (CREA) |
| Average MLS Resale House Price Forecast | ||
| 2008 Actual | 304986 | |
| 2009 Actual | 320362 | |
| 2010 | 345500 | 331600 |
| 2011 | 350800 | 328600 |
| Annual Percent Change Forecast | ||
| 2009 Actual | 5% | |
| 2010 | 7.80% | 3.50% |
| 2011 | 1.50% | -0.90% |
CREA President Georges Pahud…
The Bank of Canada recognizes that inflation remains well contained and that economic growth will soften, so interest rates will rise slowly and at a measured pace, which will keep home financing within reach for many homebuyers,” said Georges Pahud, CREA President
What is he drinking? Interest rates have gone up by 50bp (0.5%) on variable mortgages. Bank of Canada (BOC) has not control over fixed rates…I think BOC is responding to avert a potential US style housing bubble not to make housing more affordable…
It is obvious from data that future demand was pulled forward in anticipation of higher interest rates and introduction of HST on new homes.
CMHC maintains its balanced housing outlook for the rest of 2010 and 2011
For non-Canadian readers:
CMHC is the Equivalent of Fannie/Freddie/Ginnie i.e. buys insured mortgages from from lenders in the form of Mortgage Backed Securities.
Dodd-Frank bill comes to Canadian ABCP
How Dodd-Frank travels – all the way to Canadian ABCP
Worst case scenario for the restructured ABCP – unwinding of the Master Asset Vehicles (Montreal Accord)
via FT Alphaville » How Dodd-Frank travels – all the way to Canadian ABCP.
Objective comparables of Housing – US vs Canada
I want to summarize conclusions from an IMF working paper on Canadian Housing:
Is the Canadian Housing Market Overvalued? A Post-Crisis Assessment
At end of Q2 2009 which coincides roughly with the bottom (April 2009) in house prices nationally, house prices in:
- Alberta & British Columbia overvalued by about 8-9%
- Saskatchwan overvalued by about 4%
- Ontario is overvalued by about 2%
- Quebec is fairly valued
Source: IMF (via Infectious Greed)
If you believe the above conclusions like I do then the current house prices are overvalued by the rise of 14.5% from the trough in April 2009 to May 2010 nationally and certainly more so in the Western provinces.
I have posted a chart of the peak to trough decline and the subsequent rise from the trough here but I will include it here for clarity.
Source: Teranet
Traditional Measures
Price-to-Income makes it possible for a consumer to purchase a house and Price-to-Rent ratio measures the possibility of purchasing the house as an investment to earn rental income… Price-to-Rent ratio is sometimes compared to the Price-to-Earnings ratio of an publicly traded stock…
The 2-charts from the paper say it all… overvalued!
Source: IMF
And lastly, some comparables and an update to my earlier post “Is Canada’s housing market about to collapse US style?“
| US – Case-Shiller 20 City | Canada – Teranet 6 City | |
| Trough-to-Current | 4.66% | 14.37% |
| Peak-to-Trough Drop | -31.82% | -8.87% |
| Trough-to-Current Duration (Yrs) | 1 | 1.08 |
| Peak-to-Trough Duration (Yrs) | 3 | 0.67 |
Source: Standard & Poors, Teranet
Yes, the scary issue is ~15% rise in a short period of 8 months!!
IMF Paper – Is the Canadian Housing Market Overvalued? A Post-Crisis Assessment (Source) (via Infectious Greed)
Performance of Commodity ETFs – worse than mutual funds?
There has been a lot of chatter about the performance of commodity based Exchanged Traded Funds (ETFs)… Commodity ETFs surged in popularity circa 2006 making commodities a de facto asset class for the retail investor who was deprived of the higher returns… ETFs allowed retail investors to easily participate in the commodities boom-bust-boom cycle of 2007-2009…
Here is a roundup of articles on commodity ETFs
ETFs Imperil Commodity Investors
The following are links to Canadian ETFs listed on the Toronto Stock Exchange
And here is a table of Commodity ETFs in Canada covering Oil, Natural Gas, Copper, Silver & Gold. The ones in bold are not leveraged, all other ETFs are leveraged…
There are plenty of ETFs that track equity indexes comprised of commodity stocks and will be a topic for another time
| Name | Ticker | Type | QMV (C$) 30-June-2010 |
| Claymore Gold Bullion ETF | CGL | Commodity | 516751697.2 |
| Claymore Natural Gas Commodity ETF | GAS | Commodity | 177625000 |
| Horizons BetaPro COMEX Silver ETF | HUZ | Commodity | 6360000 |
| Horizons BetaPro NYMEX Crude Oil Inverse ETF | HIO | Commodity | 5560050 |
| Horizons BetaPro NYMEX Long Crude Oil/Short Natural Gas Spread ETF | HON | Commodity | 7638000 |
| Horizons BetaPro NYMEX Long Natural Gas/Short Crude Oil Spread ETF | HNO | Commodity | 12361500 |
| Horizons BetaPro Winter-Term NYMEX Crude Oil ETF | HUC | Commodity | 5070000 |
| Horizons BetaPro Winter-Term NYMEX Natural Gas ETF | HUN | Commodity | 3475000 |
| Horizons BetaPro Comex Copper Bear Plus ETF | HKD | Commodity Leveraged |
5216650 |
| Horizons BetaPro Comex Copper Bull Plus ETF | HKU | Commodity Leveraged |
4805075 |
| Horizons BetaPro COMEX Gold Bullion Bear Plus ETF | HBD | Commodity Leveraged |
4595500 |
| Horizons BetaPro COMEX Gold Bullion Bull Plus ETF | HBU | Commodity Leveraged |
75926900 |
| Horizons BetaPro COMEX Silver Bear Plus ETF | HZD | Commodity Leveraged |
3024000 |
| Horizons BetaPro COMEX Silver Bull Plus ETF | HZU | Commodity Leveraged |
10230500 |
| Horizons BetaPro NYMEX Crude Oil Bear Plus ETF | HOD | Commodity Leveraged |
35130200 |
| Horizons BetaPro NYMEX Crude Oil Bull Plus ETF | HOU | Commodity Leveraged |
592141200 |
| Horizons BetaPro NYMEX Natural Gas Bear Plus ETF | HND | Commodity Leveraged |
43544800 |
| Horizons BetaPro NYMEX Natural Gas Bull Plus ETF | HNU | Commodity Leveraged |
539477400 |
Flatenning Yield Curve – Canadian Bond Yields go down
Government of Canada Yield Curve flatenned since April 2010… flatenning means the long term bond yields decrease more than short-term yields… in fact short term yields on treasuries rose in direct response to increase in Bank of Canada rate in June & July 2010.
Flatenning of yield curve is a sign of weak economic outlook and tame inflation. The economic outlook in Canada has deteriorated since April 2010… Last week’s release of Canadian economic indicators – wholesale sales, retail sales & consumer price index – were less than forecast
Source: Bank of Canada
Flatenning yield curve has the effect of reducing medium to long-term borrowing costs for business and households… E.g. – The 5-year fixed mortgage rate is priced relative to the 5-year Government of Canada bond yields which are currently at 2.4%… Usually the spread is about 120-150bps… which would mean the 5-year fixed mortgage rate should be about 2.4+1.5 = 3.9%… the best posted rate is about 4.25% … so if you are negotiating a mortgage be sure to use this and other research from here & here
FICO Score is not the best predictor
Credit Score Is the Tyrant in Lending
…a person’s credit score has become the only thing that matters anymore to the banks and other institutions that underwrite mortgages
I bet it is not just mortgages but any credit product including loans, helocs and credit cards.
The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores, according to Dave Zitting, the chief executive of Primary Residential Mortgage, a leading mortgage lender
…
‘But what I find incredible is that we have imbued credit scores with these magical predictive powers — and yet the companies coming up with the scores can’t even get the borrower’s address and employer right. It would be funny if it didn’t matter so much.
fascinating stuff…
Any mortgage lenders in Canada care to comment on the story here? All Canadian banks use the same two credit rating agencies – Equifax & Transunion – apparently in addition to their own credit scoring systems.
via NYTimes
If You Really Think Bernanke Will Run Out Of Bullets, You Need To Wake Up#comments
Has the market forgotten the alphabet soup of programs created by the Fed led by this Chairman 18-24 months ago? The Europeans have not forgot them, they are the foundation for the ECB’s 2010 playbook. Here in the U.S., almost all of the emergency measures have been wound down. Some worked, some did not work. The point is the only thing that limits the Federal Reserve’s options is Ben Bernanke’s imagination.
Really though, what are the options?
- Reduce the interest rate of 0.25% on excess reserves hoping that commercial banks will start lending captial
- Jawboning… not really sure how that would work – point an AK47 to the bank CEOs
- Buy treasuries and bonds to target interest rates further into the curve i.e. fix interest rates for terms longer than 3 months…
- Buy more assets junk a la ABS, MBS, CDOs, etc
The Federal reserve might be doing a great job at increasing the supply of credit BUT how would it stimulate consumer and business demand for credit? Clearly low interest rates are not enough!
via If You Really Think Bernanke Will Run Out Of Bullets, You Need To Wake Up#comments.
ETFs were born out of trading wine securities
… surprised? I was too… go read the history of how ETFs were started and some of the benefits, disadvantages and how the giant commodity ETFs create a risk free arbitrage profit (read cash cow)for professional futures traders…
Do sovereign debt ratios matter?
I have been trying to find an objective and easy to understand answer to this question and this is truly impressive… I’m always impressed with the truly analytical economic analysis by Michael Pettis and make it required weekly reading…
however, I have to admit that even with my slightly above average financial knowledge I have to read the article more than once to totally grasp the detailed concepts… and even more times to remember them!
So… to remember these concepts (& avoid spending 20 mins over a 5-page article) I’m going to summarize some of Michael’s articles, starting with the most recent one…
“Do soverign debt ratios matter?”
I think I can make [statement] with some confidence is that there is no threshold debt level that indicates a country is in trouble. Many things matter when evaluating a country’s creditworthiness
These are the risk factors that affect a country’s ability to service its debts
- Of course debt levels – perhaps measured as total debt to GDP or external debt to exports
- The structure of the balance sheet matters[inverted or hedged], and this may be much more important than the actual level of debt (foreign currency debt, short-term borrowings – Mexican peso crisis 1994, Asian Currency Crisis 1997, Iceland 2010)
- The economy’s underlying volatility matters (think commodity dependent economies – Saudi Arabia, Canada, Australia, Iran, Nigeria, Russia, etc)
- The structure of the investor base matters (contagion due to highly leveraged investments)
- The composition of the investor base also matters (political cost of default, assets cannot be liquidated to pay debt even if assets are more than liabilities – Argentina 2002, Russia 1998)
The article is doesn’t name the likely countries to default but the recent Euro crisis has been primarily focused on the PIIGS nations (and their banks)
