El-Erian Joins MSM, Loses Fastball?

Is it a prerequisite to being a mainstream writer… dumb it down or go start your own blog elsewhere? Apologies on the wise assery to any Bloomberg, MarketWatch or Street.com writers who may read this, but Mohamed El-Erian has always seemed like a textured, critical thinker. Now it appears he knows exactly how to write the perfect mainstream media article talking about gold… it doesn’t matter if you’re bullish or bearish, just paint-by-numbers so the lowest common denominator will nod his head and want more scoops from a given outlet (in this case, Bloomberg).

Why Gold is Less of a Haven These Days

Having waited patiently for the “any-minute-now” moment, gold investors are taking comfort from the recent rise in price in response to geopolitical tensions. Yet the responsiveness of gold, as well as the overall price, appears weaker than would have been expected from historically based models — and for understandable reasons. The precious metal’s status as a haven has been eroded by the influence of unconventional monetary policy and the growth of markets for cryptocurrencies.

Anyone who’s been involved with the sector for a cycle or two knows that gold bugs should shudder in the face of “geopolitical tensions”, if that is, gold responds by going up purely on that stimulant.

Gold prices rose almost 1 percent on Tuesday morning as part of the risk aversion triggered by yet another brazen North Korean missile launch over Japan, together with uncertainty as to how the U.S. may respond. But trading below $1,330, the overall response of gold prices to the last few months of heightened geopolitical risks has been relatively muted, particularly as the 10-year Treasury bond, another traditional haven, saw its yield trade down to below 2.10 percent that same morning.

The fallout is always but always swift and decisive once the hype wears off. In yesterday’s case it took only hours as the metal reversed downward. That should be reassuring to a bullish gold bug, not frustrating.

Two immediate reasons come to mind, one related to several assets and the other more specifically to gold.

First, and as I have discussed in several Bloomberg View articles, the prolonged pursuit of unconventional measures by central banks has helped meaningfully decouple asset prices from underlying fundamentals. In such circumstances, historically based models will tend to overestimate the reaction of asset prices to heightened geopolitical tensions — including the fall in risk assets such as equities, or the rise in gold.

Second, a portion of the traditional buyer interest in gold has been diverted to the growing markets for cryptocurrencies, which are also benefiting from a general increase in demand. As such, the returns to investors there have been significantly greater, sucking in even more funds.

I agree with your first assertion, Mohamed. But again, if you’re buying gold for geopolitical risk you’re taking a media-created canard hook, line and sinker. As to the second, gold is not a currency and I don’t think the cryptos have much of anything to do with it. They, if they succeed, would be an alternative currency, not a safe haven asset.

While continuing to play a role in diversified market exposures, gold is less of a risk mitigator and asset-class diversifier, for now. Luckily for investors, the need has also been less pronounced, given that ample market liquidity has boosted returns, repressed volatility, and distorted correlations in their favor. But this is not to say that gold’s traditional role will not be re-established down the road. After all, central banks are in the later stages of reliance on unconventional monetary measures and, given this year’s spectacular price appreciation, cryptocurrencies are more vulnerable to unsettling air pockets.

You said the words “has also been…” with respect to the lack of need for a risk mitigator due to heretofore overwhelming and unconventional central bank monetary policy. “Has also been” implies the past. We are looking forward, not to the past. The past was (and still is) a bear market. You hold gold and insurance alike, against an unpredictable future.

The article then closes with a nod to looking forward, not back. But most of his risk view revolves around war or digital currencies. That’s not why you would be bullish on gold. You use gold as a risk mitigator against liquidity drainage of said unconventional monetary policies and the confidence they’ve embedded into the average participant’s mindset.

So other than that, I have no opinions about Mr. El-Erian’s Bloomberg article.