Events, dear boy, events

Thus goes the reply from Harold Macmillan, the 1960s Prime Minister of the UK, when asked by a journalist, what represents the greatest challenge to a statesman? Macmillan knew what he was talking about. His premierships were rocked by ‘events’ that appeared seemingly from nowhere: the Cuban missile crisis, the loss of the British Empire in Africa, and the aftermath of the Suez crisis. His efforts to bring normality and prosperity to swinging sixties post-war Britain were frequently derailed by much-feared ‘events’ outside of his control.

2011 has perhaps been the most eventful-est year since 1989. The Arab Spring, civil war in Libya, Syria not far behind, Iran burned down the British Embassy, Pakistan got more unstable by the day, Norway suffered its worst post-war tragedy; the Euro nearly melted down, the US lost its triple A rating (and France will follow any day soon), Greece went bust, Ireland and Portugal hang on for dear life, the Swiss pinned their currency to chocolate or some-such, the Occupy movement gathered force; the earthquake and tsunami in Japan, Fukushima, the Thai floods; Gaddafi got slotted in Sirte, Kim Jung-Il shuffled off this mortal coil, Mubarak went to jail, Gbagbo and Mladic sit in the Hague, and UBL got Seal-clubbed; ETA declared peace, Gilad Shalit got swopped for a thousand Palestinian prisoners, the Iraq war ended (apparently), South Sudan was born; seven billion now share the planet, Will and Kate got hitched.

Only the last two were genuinely predictable, and only the last was not a game-changer in its own right. These events (by no means all negative), served as constant challenges to what we thought we understood about our world, our powers of prediction, and – if we’re honest – our vulnerability as souls floating in a stream of events and their consequences, all of which rest outside of our direct control.

When it comes to the price of silver and gold, most of the PM blogs have chosen to focus on Technical Analysis and macro-economics. Very sensible too: the 144-day moving average for gold, for example, worked brilliantly for three years and I personally was able to profit from that. And the basic thesis that an increase in the money supply (such as through QE) should be good for gold (and bad for savers) makes sense. But we ignore the events at our peril. Gold is – and has always been – an emotionally traded commodity. As a child, before I even knew what a commodity was, I still remarked on the fact that every time the BBC covered some crisis or disaster or other that they mentioned at the end, “and gold was up $X”. The link between events and fear and gold is a strong one, and it has entered our collective consciousness as an axiom.

This year has shaken that feeling, however. The correlation worked well at the start: gold appeared to pop with every new development in Egypt and Libya. The loss of the US’ triple A rating (which I’m treating as an ‘event’ rather than a macroeconomic driver, as clearly the house-keeping figures are exactly the same whether S&P say they’re worth AAA or ZZZ; it was the event of the announcement – the confirmation of lack of sentiment if you prefer – that mattered) sent gold sky-high.

But then there was a really big event. A massive one. Not a split-second event like the Seal’s bullet entering UBL’s brain, or an ‘event’ contained over a finite but defined period of time such as the Libyan conflict. No, this event started as a far more fuzzy entity, which only gradually came into focus as the year progressed. It wasn’t thrilling – no historian in 2111 will mention it (although a few economists might). But it was the goldbugs’ worst nightmare. Bit by bit, price tick by price tick, we grew to learn that the 'event – fear – gold' axiom might actually not be axiomatic at all. When things were bad, the investor chaps bought gold. But when things were very bad, they rushed into the dollar. Good old ‘Agatha Pigstie’ (© a turd).

Now that’s just not cricket! War in the Middle East, gold goes up – fine. The Euro attempts to pull its guts out through its own arsehole – gold gets shredded, again and again and again. This really started in spades when the Swiss Franc devalued. One safe haven committed suicide, and another (gold) was side-lined. The last rites for gold were read by the usual collection of dingbats. And we all – be honest – began to doubt. ‘It’s unfair’, they wailed. The events aren’t ‘working’ anymore. The dollar’s crap, but still those sheeple (© another turd) have faith in it. This was then compounded by gold finally crashing through its 144-MDA, and then the 200-MDA for good measure. The TA had failed; the macroeconomics had failed; and the events had failed. Night, night, gold.

But I beg to differ. Last week, something very interesting happened. A rumour went around that Iran had closed the Straits of Hormuz, and both oil and gold popped instantly on the news. Not the dollar. Gold and oil. Once it was clear that this was a non-story, the gains were quickly reversed, but that’s not the point. What we saw was the first glimmer that events – or at least, a certain kind of event – still had the power to prove the old axiom right. That old trading reflex was still there – dramatically so, in fact.

The recent dramatic moves in gold (and silver) have surely washed out all the speculative money. The quick buck chasers, the hot cash, the naive small investor. We’re back, more or less, on the trend lines. And gold is ready to get back to playing its events-driven role once again. All we need now are a few likely-looking events in 2012 and the TA could magically 'restore' itself, just as it did after 2008.

And this is the point of this probably infuriatingly long and dry introduction to a new Screwtapes feature, which will aim to examine world affairs, provide (hopefully) some insight into them, and try to add some value to our existing (and excellent) work by GM and his Technical Analysis, Warren and his data mining, Louis and his broad vision, and Brian and his confirmation-bias checks. This work will not be PM-centric (but will certainly include them). My trading interests and instincts are broader, and I'm becoming increasingly fascinated by the 'smart money' part of the bubble curve, i.e. identifying the dogs of today that will become the stallions of tomorrow.

Regardless, I submit that 2012 will be a year of events like we have not seen in generations, and it is important for a site like this to have a handle on such matters. I hope that you will find it of some use.


Pamplona said...

Fantastic post and looking forward to the ones that will follow

GM Jenkins said...

A bracing read, JdA. I'm not quite sure what the act of "attempting to pull one's guts through one's arsehole" means, but I'm pretty sure it describes me this morning.

I had only been vaguely aware of your observation that gold's safe haven component disappeared just as the imminent demise of the euro became a topic of constant mainstream attention -- even in euro terms! The more I think about this, the more curious it seems.

Brian O'Flanagan said...

Excellent post, JdA.

"The recent dramatic moves in gold (and silver) have surely washed out all the speculative money."

Agree completely. The year of Wynter Benton, Harvey Organ and silver "Kaisers" is ending and good riddance. Now that the hot money is gone and the misinformation entrepreneurs discredited, we gold and silver bugs can go back to discussing the basics of without spending so much time with nonsense.

The financial system continues to weaken and fail those that have been trusting it (i.e. MFG customers) miserably. I am sure It is only going to get worse in 2012. Whether its above the 200-day or below, physical gold and silver remain one of the safest assets in the investment universe.

But like you indicated, things need to be put in perspective and there are other investment alternatives and issues to discuss. I'm looking forward to that.

GM Jenkins said...

The year of Wynter Benton, Harvey Organ and silver "Kaisers" is ending and good riddance.

LOL, well said.

Or maybe the silver keisers are just sold out and awaiting a new shipment ;)