The Gold Trade Died Long Ago
Back in September, when gold was $1,200+, Southbay Research explained why it would only fall further.
From that report:
Gold price inflation factors continue to unwind.
I’m no gold bug. I’m the last person to give guidance about gold. But you don’t have to be an expert to know that gold shot up on the backs of fiat currency expansion, massive speculation and general fear. Well, QE is over, and fiat currency is shifting to contraction. [George] Soros and others left the market.
What about household fear?
Let’s use Google Trends to get insight into the US household sentiment, starting with general interest in gold.
Google Trends: A Leading Indicator for Personal Consumption Trends
Google provides a means to analyze Google web searches. Type in a word or phrase and learn the frequency that it appeared in Google Search. Web search interest can be used as a predictor of consumer and household behavior.
In this way you can track thousands and sometimes millions of people’s interest and concerns for a particular time period and location, ion real time.
Google gold searches are a coincident indicator. Back in 2008, when gold prices began to jump, so did Google searches. Big jumps in searches accompany big moves in prices.
Peak Google interest in late 2012 corresponded to peak gold prices.
What does Google Trends tell us about gold? It says interest is very low. 2010 levels of interest. Far below $1200. Closer to < $1,100.
Refreshing the Gold and Google Trends Relationship
There have been three phases of gold prices over the last five years:
- From 2010-2012, gold bubbles. US-based Google searches on gold largely corresponded to gold prices. More interest reflected surging prices. Moderating interest reflected stalling prices.
- From 2013-2014, gold sags. Waning Google interest corresponded to drifting gold prices.
- From 2014-2015, gold falls below the 2010 floor. Rising Google interest corresponded to falling gold prices.
Gold: An Unsafe Haven
Starting late last year, Google searches on gold began to rise. Back in 2010, the metal was a safe haven and Google interest jumped. Today gold has become an unsafe haven.
Back in 2010, investors were often spectators at the gold show. Today investors have become victims, getting steamrolled by falling prices.
Gold is a dumb-money investment. Smart money got out late in 2012, while dumb money stayed in. In late 2012, George Soros bailed and sold to guys like Hank Paulson, who lost 71% of his gold fund’s value in 2013.
Why There’s No Hope for Gold
There are three key reasons why there is no hope for gold.
First: sagging institutional demand. Hedge funds stopped buying gold. Until big money comes back, gold will continue to sag.
Second: the end of easy money. Until 2003, gold prices didn’t move much. They rose on the back of Fed liquidity and easy money. That’s largely why gold surged beginning in 2007, and also why it has begun to fall. Gold prices began to fall once the Fed stopped quantitative easing.
Simple extrapolation would say gold will fall to $950-$1,000.
Third: the fear trade is gone. A few years ago it looked like the world was falling apart. Bankruptcy was raging, unemployment was at nightmare levels, and the stock markets had plunged. Pandemonium was everywhere.
Let’s turn to Google trends again. Concerns about household finances are at pre-recession levels, as reflected in Google searches on bankruptcy and unemployment.
There is nothing propping up gold prices, which means they will only drift lower. So where should we be looking? Iran.
Iran: The Next Boom
In February 2014, Southbay Research forecast the signing of the Iran deal.
Here’s an excerpt from that analysis:
Iran Is Open For Business
In a televised speech to the Iranian people two weeks ago, President Rouhani announced that he is seeking $170B to revitalize Iran’s oil infrastructure.
The real message is this: in return for the loosening of sanctions, Iran will spend $170B with Western oil companies.
And more carrots are being dangled. Like Aerospace: Boeing and General Electric just applied for permission to sell plane parts to Iran.
The Script Was Written Long Ago, Now To Act Out the Parts
A grand bargain was struck a year or two ago. The US is exiting the Middle East, and that leaves a big vacuum. With US cooperation, Iran is stepping into that vacuum. The terms of this new alliance (or understanding) remain hidden from public view for now, but in order to sell it to the public, some indications are emerging.
Money Money Money: Iran Secures Its Future
Iran is a fading power, an economic mess. It also has a miserably low birthrate of 1.3. It’s also a political mess. Effectively in a civil war a few years ago, its Supreme leader is old and rumored to be very ill (Khamenie is 74 and rumored to have cancer). Current conditions will only lead to massive upheaval on his death.
US & EU Out-Maneuver Russia
Russia’s influence rests entirely on oil sales to the EU, which flow through the Ukraine (a major reason for recent turmoil).
A counter to Russian influence would be an alternate oil pipeline that brings oil from the Middle East via Turkey. The route from Iran to the EU includes Syria and Iraq, allies of Iran.
It is in fact the Great Game all over again. Iran is leverage in the 200-year struggle between Russia and the West (formerly Great Britain, now the US).
The Cleverness Behind Deputizing Iran
With Iran in charge, the US retains control and influence over the Middle East. Shia Iran will always be on the defensive with largely Sunni Middle East. The Syrian debacle has tarnished them. They will always need a stronger ally. It certainly won’t be Russia, and co-opting Iran weakens them. They can’t remain an outsider always seeking to disrupt conditions. They have to resolve problems. Entangling them also distracts them and uses up resources.
Now To Sell the Plan
The private sector is ready, the public sector needs to be spun.
40 years of hostility is a lot to overcome.
The US public will be told that an Iran integrated into the global economy has too much to lose by being disruptive.
The Iranian public will be told that they finally have the respect they deserve and this big win shows how they beat the Great Satan.
Who Benefits
Boeing and GE, obviously. The Iranian air force is decrepit.
Big infrastructure players like Halliburton as well.
The Iran deal has always been about business.
Western governments did the math, weighed the geopolitical pros and cons, and decided that it was better economics to have Iran back as a trading partner.
In January 2014, Rouhani was at the World Economic Conference talking about Iranian investment opportunities. German and French business and diplomatic leaders have been visiting since then. The US allowed Boeing to begin selling plane parts.
Time To Divide the Spoils
Boom times will hit four areas:
- Aerospace: Iran hasn’t been legally able to buy planes for almost 40 years. Its government recently declared that it needs at least 400 planes over the next decade to meet domestic air travel demand. That’s why France was the only one of the powers to resist the deal. Not because of stated reasons that Iran was a nuclear threat, but as a bargaining chip to win Airbus contracts. You can bet that Boeing (BA) and its extensive ecosystem (Precision Castparts (PCP), for example) will pick up some of the contracts as well.
- Autos: Iran is a manufacturing country. It will position itself as the manufacturer for the Middle East. BMW is probably lining up to build a factory. (By the way, Ayatollah Khamenei controls the sole BMW distributor for Iran.) General Motors (GM) and Toyota (TM) won’t be far behind.
- Oil Infrastructure: Big investments have to be made to revitalize the Iranian oil infrastructure. OIH is an ETF that focuses on equipment and services.
- Military Defense: Fear of Iran will spark demand for military equipment amongst the neighboring countries; drones and missile systems especially. Lockheed Martin (LMT) is one clear winner, along with lots of ETFs to choose from, like ITA.
Wait until late 4Q to take up positions. For starters, the defense industry is facing a shakeout. US defense spending has slowed. United Technologies (UTX) just lowered its guidance for next year, and the stocks won’t move until contracts get signed sometime in 1Q 2016. That’s also why the stocks will pop: sudden big dollar deals after a lot of negative news.