Summer Goldrums29 May 2014
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I. Market Update
II. Gold Scenarios
III. Gold 101
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Summer Goldrums
HiddenLevers
MARKET UPDATE
Market Update
EU Deflation = QE Reborn
World Cuprising
EM regime changes
US-China Tensions
sources: HiddenLevers, Marketwatch, New Yorker, Wikipedia, Reuters
Macro Snapshot
Endless bull? VIX + UI claims at 2007 levels, and 10Y diverging southward
SUMMER GOLDRUMS – SCENARIOS
HiddenLevers
Review: Gold Crash Scenario – Aug 2011
Solid analogyGold 2011-13Oil 2008-09
gold miners distinction
was key
start of HL risk parity
ethos
Gold Crash Amidst Uptrend100% priced in
Aug 2011
Dec 2013
-33%
Slide from Aug 2011 War Room
sources: HiddenLevers
Ugly: Gold signals Deflation
caveatgovt price controls
MDD700usd/ounce
fiat currency1930s
analogiesinvalid
USDpurchasing
power rising
1929-41
CPI
Gold Standard
sources: HiddenLevers, MarketWatch, USAGold.com
Several precedents on- 40-50% MDD
Bad: Gold 1k drift
don’t confuse bounce for long term investment
Fed sees no inflation risk,
continuing taper
MDD1000usd/ounce
-40% dropfits into usual
MDD paradigm
technical support
at 1k
$1000/ounce
Good: Gold Rebound
Bounce off technical
support at 1k
QE ending priced in, so is gold bottom
Safe-harbor during EM chaos
Russia, Ukrazy escalation
India/China demand surprise
sources: HiddenLevers, Forbes, WSJ, John Holt
Scenario: Summer Goldrums
GoodGold
Rebound
BadGold 1k Drift
UglyGold Signals
Deflation
Rising inflation could drive gold prices back up – if a source of inflation can be found.
Typical gold decline is 40-50% from peak, 1900 -> 1000 in this cycle. This could occur while S&P continues its steady climb.
A deeper gold crash could be a harbinger of deflation, which is negative for both equities and gold.
HiddenLevers
SUMMER GOLDRUMS – GOLD 101
Gold 101 – Overview
Gold trading below long term oil-gold ratio, as it did for most of ‘00s
Median Ratio = 15
Silver follows gold –precious metals moving together
Gold demand down 3 years straight
sources: HiddenLevers, World Gold Council
Gold 101 – Interest rates + Inflation
source: HiddenLevers, Reuters
Gold price returns follow
inflation…
And by extension rates as well.
Gold 101 – Historical Comparisons
source: Bloomberg, HiddenLevers, Principes de Science Economique
Gold Era Max Rise MDD
Jan 1973 – Dec 1974 +197% -
Dec 1974 – Aug 1976 - -44%
Aug 1976 – Jan 1980 +551% -
Jan 1980 – Jun 1982 - -48%
Mar 1985 – Dec 1987 +70% -
Dec 1987 – Apr 2001 - -47%
Apr 2001 – Sep 2011 +637% -
Sep 2011 – present - -35%
• Real commonality between events driving gold: Inflation
• Gold has experienced numerous bull/bear cycles, with typical Max Drawdown over 40% before new cycle begins
• Gold 10y standard deviation almost 20%, greater than S&P 500
Gold 101 – Recap
worldwide demand down3 years running
typical Gold drawdown = - 40-50%
volatility: Gold > S&P 500inflation = key driver of Gold
HiddenLevers
SUMMER GOLDRUMS – MACRO PICTURE
Macro Picture – India
source: HiddenLevers, WSJ, CNN
Post 2014 election• BJP govt relaxing import laws• Investors selling, prices weaker• Shortage of gold over• Jewelers not buying for long-term
2013• Rupee tanks• Stocks rally to record• US recovery boon to software + exporters• State-run Gold importers only• Gold performance = -28%
Rupee strong, diverging
Macro Picture – China
source: HiddenLevers, Economic Times, Shanghai Daily
Yuan USD fix over
2013 ---> 2014• Jewelry demand up 9%• Investor demand down 17% 2013
China CPI vs Gold
Macro Picture – Bitcoin + Other Alternatives
History
Gold: 5000y
BTC: 4y
source: Coin Market Cap, Only Gold
02000
40006000
8000
Bitcoin
Gold
Market Cap in Billions of USD
Market Caps
Gold: 6500 B
BTC: 7.3 B
Crypto-currencyMarket
7.8 B
Similaritiesdivisible, durable, known/limited supply, transferrable.
Macro Picture – Global Deflation Risk
sources: HiddenLevers, Economist
technology automation
commodities sinking
first world baby bust decreasing birth rate
sluggish GDP growth
If you believe inflation will return, buy Gold.(we don’t)
China + Goldjewelry, not investment
global deflation = quicksand
India no longer worships gold
Macro Picture – Recap
Bitcoin – the new girl in school
HiddenLevers Use Cases
scenarioEnd of QE
scenarioGlobal Deflation
scenarioGold Crash
Summer Goldrums
Data CenterCommodities
Data CenterCurrencies
• Annuities Support (Fixed / Variable / Equity Indexed)
• Advisor Fees Support
• Index Correlations
• Options Support – Call Writing
Integrations:
BlackDiamond
WealthAccess
Product Update