Tuesday, February 5, 2013

The Credit Suisse report in detail


So I've browsed through the Credit Suisse's "Gold: The Beginning of the End of an Era"; and, as it turns out, my previous nastiness towards Credit Suisse was unfounded, because the actual childishness was the oversimplified presentation given in the Business Insider article.

Basically, Joe Wiesenthal is an idiot boy-child whose job is to harvest clicks for cash, and serious analysts should stop feeding him stories til his testicles descend. If CS has a problem with my previous nasty opinion of them, they should stop using The Thinking Man's ZeroHedge for promo.

Credit Suisse do actually base their arguments in supply and demand; but it seems they're referring more to a paper supply-demand. Now, how much does paper influence the gold price? And does the physical supply issue not provide any underpinning? Big questions, worthy of answering, someone do that sometime.

Still, while it's appreciated to see intelligent arguments for a top in gold, and they don't argue for anything worse than a slow drift downwards, I have some big problems with this CS report.

I'll just give you a bunch of bullet points cos I gots me better things to do tonight:

1) I really don't see how you'll drive Indians, for example, out of gold. CS doesn't even mention India. They're 25% of demand right now, and should be creating wealth into the future; why is this not important? And the Indians who own gold don't give a damn what happens outside India: they care about India. White sahib needs to gain some fucking perspective.

2) Credit Suisse argues some gold demand comes from a "fear trade"; I think John Kaiser's take is better, that gold competes against the US dollar (et al) when there is uncertainty about global hegemony. Again, unless you argue globalization is about to end, I don't really see any way to argue for the end of this trend - except maybe by suggesting something nasty happening with China that drives the world back into Cold-War-style major power blocs that at least reinforce US dominance within their bloc. But that would probably be fearwise bullish for gold too, no?

3) I still see zero correlation between US housing demand and gold demand. I'm sorry, I don't see it. They think it's important but fail to explain why. This section looks like filler.

4) I still see zero correlation between US inflation and gold demand (as they do too later on). As an aside, I agree with them that there won't be an explosion of inflation any time soon, and from now on will be ignoring any opinion source who screams "wharrgarbl inflation".

5) Now, they do mention China - but say that gold demand there will be reduced by more competition from equities and bonds. I'm sorry, but I think the Chinese financial and investment system has to be drastically reformed, and show better stability and reliability, before gold's competitors can establish a high enough trust level to lure much money out of gold. I think China needs at least a generation of utter stability to do this, and I'm worried that they won't do it. And also, remember that they need not just to sap demand from gold; they have to sap enough demand to swamp out year-over-year Chinese wealth creation.

6) "Some gold bulls argue that a renewed focus on capex discipline and cost control by major gold miners should result in slower growth in mine supply. Perhaps, but [...] we do not believe mine supply has much impact on price over the short to medium term." WHAT?!? You'll just completely ignore the supply side of the argument?

7) Probably because they're cheese-eating surrender-monkey Europeans, Credit Suisse calls Draghi's "whatever it takes" statement the top in gold. Basically, the "fear trade" ends at that point. And this is where their report is illustrative of a greater problem: that time coincided with the world teetering back into recession, and that coincides with collapse in EM demand. This is problematic because they're not presenting data that proves fear buys gold; I have data that proves India and China buy gold. It's also problematic because it shows they think their quaint little backwater has an influence over the gold price.

Broadly speaking, while their report is much more thought-out than the Business Insider article made it out to be, it still seems to suffer from:

- rhetoric without supporting data;
- trends based on weak datasets;
- conflating paper and gold;
- arguing for reversion to the mean, which assumes there is such a thing as a mean in this case;
- ignorance of any correlation between EM wealth creation and new gold demand;
- too much importance placed on EU/US effects on gold, which really don't exist outside of the Central Banking world's increasing drive towards asset diversification;
- over-concentration on speculation as a price determinant of gold, when really 50% is India-China asset class demand and another large chunk is central bank diversification demand;
- basically, demonstrating ignorance of long-term trends in demographics, globalization and supply depletion, which drives CS to make 1960s arguments against the gold price.

I'm no gold bull, I'm agnostic; but this writeup doesn't make me any more bearish.

Maybe I'll read thru it again and post a further yammer.

But not tomorrow cos I gotta pick up my new glasses, and a large amount of booze.

Keep stacking physical, goldbug warriors!

UPDATE: further and more wonkish comment on the CS writeup is available here.

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