In Between Days:

by CC September 14, 2011 11:50 pm • Commentary

Tomorrow’s Tape: Information Overload


  • 8:30 a.m. ET: The weekly jobless claims charade happens. Economists expect claims of about 400,000. They come in a little higher than that, and the prior week’s claims are revised higher, too. Then we do the same thing a week later.
  • 8:30 a.m.: CPI for August is due. Economists think this rose a bit, adding to July’s gains. Was Wednesday’s weaker-than-expected PPI report a harbinger of tamer consumer inflation?
  • 8:30 a.m.: The Empire State manufacturing index for September is also due. Economists think it improved a bit from August’s shocking swoon.
  • 9:15 a.m.: The Fed releases data on industrial production and capacity utilization for August. Economists think production ran rose a little less than in July and that capacity use, a potential inflation driver, held steady.
  • 10:00 a.m.: The Philly Fed index for September is due. As with Empire State, economists expect a rebound from a recessionary plunge in August.


  • Research in Motion reports after the closing bell

FedSpeak/Eurozone Foolishness:

  • 4:30 a.m.: Spain sells some bonds, or tries to.
  • 8:45 a.m.: Fed Chairman Ben Bernanke speaks.
  • 10:00 a.m.: IMF head Christine Lagarde is due to speak.
  • 12:30 p.m.: Departing ECB economist Juergen Stark is due to speak.
  • 1:45 p.m.: Fed Governor Daniel Tarullo speaks.
  • 2:00 p.m.: Jean-Claude Trichet is due to speak, too. Mercy. Or Merci.



The S&P 500 has now posted a three-day rally. The index finished the day up 1.35%, which puts it up 2.98% for the week so far. Perhaps September will turn out to be a good month after all, but so far the index remains in negative territory for the month, down 2.48%.

The index is in the red year-to-date at -5.48%, which is 12.83% below the interim high set on April 29.

From an intermediate perspective, the index is 75.7% above the March 2009 closing low and 24.1% below the nominal all-time high of October 2007.


Well, given we’ve also seen a major fall in the gold lease price (irrespective of increased vaulting costs), we would say it possibly represents the month that holding gold became less desirable than holding US Treasuries.

Or, the moment that the gold market became so saturated with gold, that the yellow metal reached its effective choke price, shifting the demand curve leading to the loss of gold’s long-held title as the ultimate form of collateral (replaced by US Treasuries and other high quality government bonds instead).

Which begs the question: Why now?

The answer is possibly because US Treasury securities (and other high-quality debt) became zero-yielding, meaning these sorts of bonds began to rank pari passu with gold as a store of value.

Until the zero-hour moment, US government debt securities were only seen as preferable due to the additional risk-free returns they could generate compared to gold.  But given that gold yields were always the lowest in the market, from a risk-free perspective, gold remained viewed as the safest store of value. (The safer the security the lower the yield.)

After zero-hour, however — since both Treasuries and gold now rank pari passu in terms of yields — other qualities and factors have come into play in terms of preferences. Namely costs and risks.

For example, because gold carries a vaulting charge as well as *possible* government intervention risk (confiscation, for example) it might actually become less desirable to hold than a Treasury security. That’s despite preferences being aligned from a yield perspective.

Of course, from a central bank’s point of view, it’s hugely important that, if and when a battle of preferences does begin to impact paper-money and gold, it is paper-money that wins the day. That ultimately investors flock to Treasuries rather than gold, because the opposite could possibly undermine the US fiat-based monetary system.

If gold investors didn’t switch preferences towards Treasuries at zero-hour, the implications for the world’s key reserve currency might be catastrophic.

What it also means is that there’s currently a huge incentive for the government and central banks to make holding gold as painful, costly and problematic as possible. And, most importantly, that the cost of holding gold remains above and beyond that of holding cash (one other reason why negative interest rates, or a charge/tax on money is risky.)

Luckily in the battle of preferences, it’s Treasuries that are winning the day so far. (Not that that doesn’t create a whole new bunch of problems.)

But, as Dylan Grice at Societe Generale has noted, there is no such thing as a free lunch in the land of gold and central bank intervention.