The theme for 2014 is consensus. There is an overwhelming consensus of analysts looking for the same things in the year ahead. We look at four crowded trades and cast a verdict on whether the groupthink will be proven right or wrong.
#2: Gold will continue to decline
There will always be someone screaming to ‘buy gold’ so it’s impossible to get a consensus to sell but this is as close as it’s been in years, if not decades. The gold bugs have been humbled by a +25% loss this year and very few people are picking the bottom.
The problem is that the gold bull market over the past decade has been built on four factors:
1) Inflation
The belief: Runaway inflation was/is going to devalue everything except for hard assets and gold is the ultimate monetary instrument.
What happened: There is no inflation in the developed world because globailization is an incredible long-term deflationary event. If anything, lower prices remain a higher risk than inflation.
2) Deficits
The belief: Governments were on the way to insolvency. Creditors were nearing the point where they would no longer lend money to governments and that would create a death-spiral of insolvency.
What happened: Deficits are improving almost everywhere. Outside of the PIIGS, deficits never resulted in any significant bond market sell offs.
3) Tail risks
The belief: The post-crisis world was so filled with political and economic risks that some type of unforeseen disaster was virtually inevitable. From war, to social upheaval — in a volatile world anything is possible.
What happened: Looking back over the past 5 years, it’s remarkable how stable the world has been. Even in devastated countries like Greece and Portugal, violence has been minimal. No one could have seen that coming but it points to more stability in the years ahead.
4) Money printing
The belief: Central bank money printing along with currency wars would devalue all paper money.
What happened: They printed and printed and printed. The Japanese are still printing but the Fed has finally taken steps toward shutting down the printing presses. Whatever boost gold got from QE, it’s in the rearview mirror.
I look at those four factors as the four legs of the gold table and they’ve been cut out. The gold bulls will need to rebuild a framework for buying in the year ahead but not before prices decline further.
The first thing to watch is production. As prices fall, mines will close and that will put a floor under the gold market because of falling supply. There is talk that $1080 is a tipping point for many projects and I don’t expect to see a sustainable bounce until many headlines about shutdowns hit.
We’ll have #1 tomorrow.
