Monday, January 18, 2010

Credit Suisse Issues Bearish Report on Gold for 2010

Credit Suisse has a strong analysis of the current gold situation out. They don't mention that the falling demand is the result of a lack of Fed money printing, and they fall into the trap thinking that a downturn in the economy is bullish for gold, it's not. (This thinking came about because gold went up in price during the Great Depression, BUT it only went up because FDR put in a gold buy program. Gold goes down during a deflationary perid)

Aside from thise errors, the other supply and demand factor breakdowns by CS are sound. Not long term, but in the short term, gold is headed lower:
Our analysis of the gold market leads us to take a bearish stance with regard to the gold price in 2010. In 2009 we reasoned that the main drivers of the gold price were significantly linked to the trade weighted dollar, increased investment demand, central bank purchases and market sentiment. The increase in investment demand for gold ETFs, in our view, had an “accelerating and reinforcing effect” on market sentiment and the safe haven status of gold which resulted in upward pressure on the gold price which rose 24.6% during 2009. We do not expect the 2009 rate of investment in ETFs to continue at the same pace in 2010.

We are of the view that the gold market will likely be dominated mainly by the demand side of the equation in 2010. We believe that the likely decline in investment demand for ETFs, year on year, will play a pre-eminent role as a swing factor in our supply-and-demand balance in 2010. Jewellery, industrial and dental demand will likely strengthen marginally year on year. The secondary supply of scrap will depend on the gold price but will likely remain above 50% of mine supply. Central banks will likely become net purchasers while de-hedging will reduce significantly as the major players in this arena accelerate their 2009 de-hedging activities. Our calculations show a large oversupply of around 420 tonnes in our supply-and-demand equation for 2010.

In summary, we believe that the steam has run out of investment demand as the economic environment has and is changing to the positive. Muted investment demand coupled with a change in market sentiment and a projected large oversupply in the supply equation all point to a downward correction in the gold price from the highs reached at the end of 2009.
(Via ZeroHedge which adds the curious totally unfounded conspiracy theory that Credit Suisse has this sell report out so that CS can buy the gold from their clients.)


  1. Wenzel,

    When you say gold goes down in a deflationary period, I assume you mean in the modern, pure-fiat money era?

    This would seem to defy logic otherwise in a monetary system where gold is money or a component of money. For example, the period of US history prior to the Fed where deflation occurred throughout various periods. These would have to be periods where gold was appreciating in purchasing power ("going up") because gold was money at the time, correct?

    But if, now, gold is not money and it's not re-monetizing either (this is the part I find most debateable), then gold should go down in deflations whereas "money" as cash should go up.

  2. @Taylor

    Good question.

    As you state, during the current day, when we speak of inflation we speak of inflation in terms of the fiat currency.

    During a fiat money inflation, gold tends to eventually go up faster than the price inflation since people will tend to hedge their fiat currency that they are paid in with gold, which is not being inflated.

    Thus, during a period of stable or shrinking fiat currency,after a period of monetary and price inflation, two significant things happen:

    1. There is less demand for gold as a hedge against inflation, since there is no inflation.

    2. Since a deflation of the money supply, following monetary inflation, will also mean some will lose their jobs, those who have lost jobs may be forced to sell their gold to meet obligations.

    Notice my reference to deflation is couched in terms of the Great Depression when, again, it is a fiat inspired inflation/deflation we are discussing.

    It's a different thing than a period where gold is the currency and prices fall because productivity is climbing and the gold supply is near fixed and there is no fiat currency involved.

    Add the fiat currency that is actually causing inflation and deflation and you have a different role for gold, whereby the demand for it as an inflation hedge, declines or disappears when the fiat money inflation stops.

  3. Bob -

    Zerohedge quotes Greg Mankiw (albeit critically) and Einhorn - who, I believe is belatedly long gold (at least, that's his public stance - and god knows, he seems like to place his bets suspiciously publicly)
    following Paulson, and I am guessing many of the other big speculators.

    So, they would tend to think any price movement down is manipulated.

    I think gold is due for a correction too, but I think all the technical and fundamental movements are masked or sometimes amplified by floating these kinds of rumors.

    Anyway, I think that's what's happening there.

  4. Wenzel,

    Thanks. Do you think there are any "signs" we could look to as far as gold re-monetizing, or do you think it's impossible to predict short of a government decreeing a gold standard, for instance?

  5. @Taylor

    Well, it's impossible to predict in that I don't see anytime in the near future.

    A crack-up, that is, a total flight from the dollar could dom it.


    (bullish on gold)