Numb to Risk, Oblivious to Gold

Gold investing isn't needed now money managers are cocooned from risk by zero-rate dope...

 

SO WE know the financial crisis blew in on a blizzard of cocaine, writes Adrian Ash at BullionVault.

 

But what are traders snorting today – heroin? Chloroform? Analgesics of some sort, for sure.

 

Investors are " numb to risk", reckons Swiss bank UBS analyst Dominic Schnider...too numb to buy gold, he believes. Thank zero rates and continued quantitative easing, we guess. 

 

Current central-bank policy acts as an anaesthetic, in short, and the people running everyone's money are high. How else to explain the idea that "QE tapering" so far in 2014 meant money was getting tighter, even as rates stayed at zero and the Fed cooked up another $385 billion of QE cash?

 

The bond market didn't buy it, but it did keep buying bonds...pushing longer-term government yields down further. With all that QE and zero-rate cash in their veins, bond markets are also "desensitized" says Marc Ostwald, now at ADM Investor Services in London, to Bloomberg.

 

What will the pain make them buy when their bubble bursts?

 

A friend, a general practitioner in London from the early 1960s, witnessed the arrival and growth of recreational drug use – notably cocaine and amphetamines – and especially in the gay community.

The hard-partying disco crowd crashed with the AIDS epidemic of the 1980s and '90s. In terms of broader adoption, "Fashions in the population at large generally seem to follow about 10 to 15 years behind," he wrote to me as the 2008 depression slumped into the Lehmans crash. "For some years now, bank notes have been reported as being contaminated with traces of cocaine – including in the City – after being used to snort the drug up the nostrils. I suspect that increasingly widespread cocaine usage lies at the root of the financial crisis, even though I have not personally had any dealings with cocaine users since the late '70s."

 

Too much? Journalists we introduced to him certainly thought so. Yet as QE and zero-rate cash flooded the markets, coke's role in Wall Street and City culture...if not in the crash directly...began to be noticed. Inside Job, the US documentary on the mortgage-bond bubble, cited cocaine as a factor in Wall Street's risk-seeking behavior. "Bankers use cocaine and got us into this terrible mess," agreed David Nutt, a British professor, who – effectively begging to be sacked from his job as the UK government's drug czar in 2009 – made headlines by saying ecstasy was about as dangerous as horse-riding. Nutt called cocaine the "perfect drug" for City traders, fuelling their "culture of excitement and drive and more and more and more. It is a 'more' drug."

 

Other experts have long agreed there's a link, too. Trevor Robbins, professor of cognitive neuroscience at the University of Cambridge, told Bloomberg in 2009 that dopamine – the brain's own "feel good chemical" – surges both when we roll up a banknote and snort coke or roll up a client's banknotes and throw them at high-risk investments. Professional risk-takers apparently have lower levels of dopamine receptors, so they "try to shock the brain into a boost...They're also more likely to become addicted."    

 

Here in 2014, however, risk-taking is not where it's at. Risk oblivion is the big trip, so trippy in fact that traders maybe think they can see into the future while still cocooned in the warm embrace of QE and zero rates. Perhaps they're right to shrug off Gaza, Ukraine, and Libya's new upturn in murder. "The oil market still appears unaffected by the numerous sources of geopolitical crisis," notes Commerzbank's commodities team. It calls this "complacent attitude...amazing in view of the considerable risks to supply."

 

Look at markets outside the rich West and you'll find constricted pupils peering back at you too, even where real and present pain is ongoing. Moscow's main stock indices are off, dropping over 10% as the last month of sanctions and sabre-rattling take hold. But that only puts the RTS down at 3-month lows, and it's been slipping more broadly since 2011 anyway. Likewise the Ruble currency, whipping but not breaking below its 25% downtrend of the last 3 years. Further east, "the military coup in Thailand in May," reports Business AsiaOne, "barely caused a blip in regional stock markets." The Yuan meantime looks immune to China's slow-bursting credit and real estate bubble, regaining its uptrend after edging 3.5% lower over the first-half of the year. Tokyo's stockmarket stands only just shy of January's 5-year highs – a feat which needs a whole heap of pain relief from the central bank's QE program to bear the stings of Japan's relentless and apparently incurable deflation.

 

Global equities thus stand at record highs, and junk bond issuance just hit a record high as the yields paid to investors (via their money managers) hit record lows. Volatility is retreating to new multi-year lows everywhere, most of all in the currency market. Risk doesn't count when nothing can hurt you. And as the financial crisis proved, investors tend to use gold as a form of financial insurance. So today's non-existent risks mean less perceived need for gold.

 

The best-performing tradable asset of the last decade, gold bullion had already trebled however from its 2001 lows by the time Lehman Brothers collapsed in 2008. Buying gold early pays best. But it's tough to time that against the broader view of fund and money managers. And it's their wall of money, of course, which actually moves prices up and down. 

 

No doubt the typical summer lull is also weighing on gold prices right now. But any re-pricing of risk as the QE buzz fades – or investors hit a moment of clarity when the Fed cooks up the next batch – could very quickly shake gold from its stupor as well.