Don Coxe: a Note for Listeners

April 15, 2013

THE COLLAPSE IN GOLD

There was no overt hint of the impending carnage as the First Quarter ended with Gold trading at $1604 an ouncedown from the high trade this year of $1695, but not suggesting that a stunning, record-breaking plunge was coming with April Showers. On Friday April 12th, we made scant mention of something happening in gold in a Conference Call devoted to the legacy of Margaret Thatcher. Thereafter, Golds dive took investors by surprise, as it fell from $1550 and briefly broke $1500 before closing at the somewhat suspicious prices of $1501. But the real drama was saved for Sunday evening, as Asian markets opened and gold resumed its swoon, falling quickly to $1440. As Europe and then North America opened for trading the plunge became a full-blown panic, reaching $1355 by mid-Monday-morning before rallying weakly. By then, media commentators were issuing a flood of explanations. Among them: oil prices had been declining for weeks and both Brent and WTI had dropped sharply in recent trading; when the commodity that has historically been the most important inflation generator starts contributing to falls in CPI, can gold be far behind? industrial metal prices had fallen sharply in response to evidence of slowing in China; on April 15th, China announced its quarterly GDP growth had not been 8% as initially estimatedjust 7.7%. grain prices had been softening in response to USDA estimates of record-breaking corn cropswith further robust numbers for soybeans and wheat.

But the most crucial rumors were about Cyprus. The mini-nation with the 61st largest holding of gold was going to have to sell its treasure to meet its pressing financial needs. That was enough to set off rumors of a concatenation of PIIGS sales of goldto cover the deficits of Portugal, Italy and maybe even Spain.

So Despite the astounding levels of fiscal deficits and the commitment to elephantiasis in the monetary bases of the USA, Britain, Japan and Switzerland, following the big expansion in the ECBs lending, the followers of Milton Friedman were not able to convince othersor even themselvesthat inflation was about to explode. Indeed, Paul Krugman ridiculed the gold bugs, pointing out that the deficits and monetary policies had not only not unleashed inflation, but were still inadequate to stimulate acceptable economic growth and would need to be boosted. He reiterated his long-standing complaint that the Obama deficits werent big enough. As for the Feds policy, he noted that the dollar is once again the strongest major currency in the world, and Ten-Year Treasury yields remain below 2%proving that the world wants Treasurys and isnt in the slightest frightened about the Fed or the fiscal deficits. Period. We have not changed our views about the huge risks in the monetary and fiscal policies that are now being practiced in so much of the industrial world. But monetary-driven inflation needs transmission mechanisms to work its way into the real economySeventies style. Government employees wages need to be rising at least as fast as inflation, and food and/or fuel prices also need to be increasing rapidly. By the time those processes begin to drive measured consumer prices higher, the ranks of gold believers will be swelled far above those who have plenty to lose from inflation. We know enough not to stand in the way of a runaway eighteen-wheeler. So we cut precious metal weightings in our asset allocation for all portfolios we advise to their lowest levels since inception (after having already cut them back when gold failed to rally earlier in the year). Gold was ready for a pause. While it regroups, the politicians and central bankers will continue to devote themselves to making it absolutely necessary. Because of our confidence in those money-printers and deficit increasers, and in the coming crisis for absurdly underfunded government employee pensions, we expect to rebuild our gold exposure. We believe that the central bankers and politicians will continue their inflationary processes, and therefore believe golds peak price will eventually be far above its previous high. Don Coxe Chairman, Coxe Advisors LLP.
Disclosures : All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services. Coxe Advisors does not offer any products or services for sale; rather, it acts as a non-discretionary investment adviser to BMO Global Asset Management Inc., a division of Bank of Montreal. An investor should consider investment objectives, risks, charges and expenses carefully before making any investment. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those described. Please refer to Coxe Advisors ADV Part 2 for additional information. Regulatory Information: Coxe Advisors is an investment adviser registered with the United States Securities and Exchange Commission. Coxe Advisors does not render personalized investment advice. The purpose of this web site is for information distribution only.