It was, once again, a fast and furious discussion on "Fast Money" on Friday night, as I discussed the possible impact of the Egyptian situation on the oil/gold markets and on other risk assets.I continued to make the case for lower gold prices. Friend/buddy/pal Sir Dennis Gartman started by stating (in a tape of his appearance on the "Fast Money Halftime Report") that he thought gold had made an important low on Thursday night at $1,311 an ounce. I disagreed, saying that the current turmoil does not change my negative view of gold, and I suggested that gold should be sold/shorted into Friday's rally. (It has already lost three quarters of Friday's gain last night/this morning.) I expressed the view that gold remains an "anxiety trade" that is deeply sentiment-driven. The commodity has dropped by $100 an ounce since I presented numerous fundamental and psychological reasons for the negative surprise case that would display uncharacteristic volatility in the year ahead, perhaps dropping to as low as $1,050 an ounce and closing out 2011 under $1,200 an ounce. From my perch, gold's rally on Friday was a classic event-driven but one-time oversold rally. I said that the consensus (especially on CNBC) is that the Egyptian chaos would put a floor under the price of gold but I am less certain. And I would sell/short into the rally in gold. There might be numerous reasons to sell equities and buy gold, but, in my humble opinion, Egypt is not one of them. Egypt's riots and political unrest will not derail the overwhelming and consensus view of bulls on stocks and their notion of a moderate worldwide economic expansion. Moreover, Egypt is a small economic power, with a GDP of only about $200 billion, one-seventieth the size of the U.S. and less than 4% of world GDP. Aggregate U.S. exports to Egypt are a pittance ($6.5 billion). Most important, large international oil inventories and the ability to reroute oil around the Suez Canal (with a modest 10- to 15-day delay) should constrain oil prices even if the violence escalates.
There are multiple outcomes of a transition of power in Egypt, many of which could be favorable for equities and unfavorable for gold. (We could even see a positive outcome for equities, almost all of which is favorable to risk assets and, again, bad for gold.) The worst outcome is an overthrow of the government by the extremist religious zealots. I assign this a low probability. A higher probability would be that the protestors are completely repelled by Mubarek. The most likely outcome could be some concessions and a freeing up of elections, a plus for risk assets. Finally, the most positive outcome would be a complete ElBaradei-led democratic takeover of the country, looking like it has an increased probability over the weekend. Tim Seymour emphasized that emerging markets problems have been in place for several weeks and outflows have accelerated. In the short run, Tim agreed that gold is emotional, but he emphasized that, in the intermediate term, with the rate of inflation accelerating and central banks buying, he favored the commodity. I concluded by voicing that the concept of screwflation of the middle class (which clearly undermines the foundation of domestic economic growth) is clearly becoming an international phenomenon. Indirectly, food inflation is the source of many riots around the world and is a byproduct and unintended consequence of the U.S. policy of easy money. Finally, I said, in theory, the situation in Egypt and other powder kegs could result in a continued disintermediation of investment funds out of emerging markets and into the U.S. stock market, serving to make domestic equities the "best house in a bad neighborhood" -- a positive for stocks. I wrote this opening missive last night. At that point, S&P 500 futures were down by over 8 points, and DJIA futures were 80 points lower. I tweeted and emailed Jim "El Capitan" Cramer that I would use last evening's weakness for a long-side trade in stocks and to sell/short gold. Since then, futures have fully recovered and are slightly positive, gold has reversed back down by $15 an ounce, safe-haven Treasury yields are flat, and oil prices are modestly lower, as Egypt has had little impact on the world's equity markets. I was hopeful that futures would continue their descent of last night, but they didn't. Should equities resume their drop into the Egyptian uncertainty during the upcoming week, I expect to use the decline as an opportunity to make a trade from the long side. Let's go to the tape of Friday night's "Fast Money" show.