Friday, January 8, 2010

Gold Gains On The Week

The first week of January proved to be a surprisingly good one for gold: it's the first week in five in which the metal's closed with a gain. At the start of the new year, the price of gold was below US$1,100. It was easy to argue that December's drop hadn't ended. There was talk of U.S. rates being raised, and the U.S. dollar was being bolstered by them. In consequence, gold was suffering.

As the week wore on, $1,100 became a memory. Even before the spurt-up that had accompanied this morning's disappointing jobs report, gold had resumed its climb. This 30-day chart, courtesy of Kitco, shows it:

As you can see, despite gold's afternoon surge-up to near $1,140 - to $1,137.50 - today's closing price, although a day's high, was not quite a weekly high. Interday, it wasn't: gold poked its nose slightly above $1,140 two days ago.

Movement this week was good with respect to the greenback. Although the U.S. dollar index was battered down below 74.5 by the close, it was lower earlier this week. Today's low of 77.353 was higher than the weekly low of 77.087 set on Tuesday, as this graph shows:

Kitco has thoughtfully put the two together by constructing an index of gold prices that filters out the movements of the U.S. dollar. Their series shows that, if the greenback's influence is factored out [as done by the blue line], gold has made a five-week high:

I have to admit that gold's rise this afternoon surprised me. After the morning jolt-up due to the non-farm payroll data release, the price had mostly sunk back. I had assumed that it was going back to quiescence, and that the U.S. dollar's recovery was a restabilization too. As became evident in the afternoon, I was wrong on that assumption. Fooled by the graphs that were, perhaps.

Enthusiasm Curbed, Temporarily

As I write this entry, the post-jobs-report enthusiasm for gold has mostly disappeared. After bottoming at US$1,120, gold spiked up after the jobs report was released. After peaking later at close to $1,138, though, the metal gave up most of its spike gain.

The spike-down in the greenback almost completely reversed. After plummeting to 77.393, the U.S. dollar index has vaulted back up to a little below 78.

Update: When I originally posted, I thought that things had gone back to calm. That assumption was wrong. Instead of returning to pre-jobs-report levels, the U.S. Dollar Index made a new daily low after 1 PM. As I write this post, it's below 77.5.

Gold, sure enough, has gone back to the climb. After hitting the $1127 point, it meandered for a bit and then took off. As of about 1:30 PM ET, the metal had slightly bettered its earlier high; as I write this post, spot gold's eased back to $1,135.90.

More fool I. The time I thought things had gone back to calm was the same time that the greenback began to sink again.

A Peek At The Chinese Gold Market

Courtesy of Mineweb, Lawrence Williams gives a basic peek into the PRC gold market. The People's Bank has settled on a policy of buying domestically-produced gold, which not only encourages PRC gold producers but also makes PRC-bank gold buying less obvious. The central bank is crowding out private buyers to an unknown extent, which means that the world's #1 gold producer may be importing gold right now.

Mentioned in passing is a shoe that's still on the table: the IMF gold that's still up for sale. Close to 200 tons still remains unsold.

Profile Of Two Old Standards

In the goldbug world, advisors who were gold bulls in the 1970s are a cut above. James Dines, the "Original Gold Bug," is a living legend in the goldbug world. (Curiously, there's no Wikipedia entry for him.) Other pure-goldbug luminaries are Howard Ruff and Doug Casey. A living legend in his own right, Richard Russell, can be counted in the originals list even though his main focus is on U.S. stocks.

The Aden sisters are two other originals, and they've been profiled in Business Week. Back in the early '80s, when they were younger and far more inexperienced, they predicted that gold would go to $5000/oz. Since then, though, they've compiled a somewhat enviable track record.

Interestingly, they didn't give any price target to Business Week. They just said they're bullish, and will remains so as long as gold stays in its uptrend.

Another entrant into the gold-fund sector

Canada's Mackenzie Financial, following in the wake of Sprott Asset Management, has announced a new gold fund. The Gold Bullion Class fund will "invest 80 to 100 per cent of its assets in gold bullion or gold certificates. It can also invest in precious metals like silver, platinum or palladium, and stocks of companies that produce or supply precious metals."

What's interesting about this trend is that these new funds are devoted to physical gold or its equivalent. As the article states, Mackenzie already has a gold-stocks fund. The public's appetite is whetted for physical gold, but not for mining stocks. As this weekly chart of the AMEX Gold Bugs Index shows, a basket of mining stocks - meaning, producers - has not exceeded the '08 high.

What this means for gold stocks vis-a-vis gold? For a cynic, it only means one thing...

Rate Increase Speculation Drives Gold Down

Spot gold spent most of yesterday in a trading range, between US$1,128 and $1,135. Once after-hours trading began, though, that range was broken on the downside. Last evening, gold slid down to about $1,122.50 and stayed in that range; it bottomed at $1,120 in the wee hours of the morning. Since then, a new range was established between $1,120 and $1,125. A definite slump, but still above the late December lows.

The decline was set off by speculation of the most-watched shoe to drop right now: an increase in the U.S. Fed Funds rate. The head of the Kansas City Fed, Thomas Hoenig, has been quoted as saying the Fed Funds rate should be at about 4%. A nice helpful bulletin has been sent out to American financial institutions from the Fed about managing interest-rate risk. Put together, with Hoenig acting as the bad cop, the Fed is clearly signaling the end game for zero-interest-rate policy. Given the campaign, the beginning of the end seems to have been moved up. The market has expected the hike to come in June, but March is now a possibility.

Of course, an alternate reading on the campaign is that June is still the target date. If so, then the Fed is very worried about the conditions of the banks. Central bank policy was untelegraphed in the olden days, as unanticipated changes modify behavior better. Advanced signaling is a relatively recent development. Giving almost six months' notice is unprecedented. If March passes with no rate hike, then it's a sign that the Fed still sees some sick banks under its purview.

For all I know, yesterday's campaign was a test. The Fed could have been testing the waters to see if to-the-point talk about rate hikes will cause the bank stocks to crumble, like they did in February after Commerce Secretary Geithner's announcement of a too-vague rescue plan. If they had any effect, Hoenig's words pushed the bank stocks up slightly. The interest-rate-risk circular was announced at 3 PM ET, and its release did not trigger a last-hour selloff of bank stocks. Given that lack of sell-off, the Fed may decide to move the rate hike schedule up to the spring. The greenback did react yesterday, but not by much. 78 on the U.S. dollar index was not decisively surpassed until this morning, until a certain news release hit the screens.

This Bloomberg report attributes the drop in gold to the strengthening greenback. In addition to quoting a bullish trader, it also quotes a group of dollar bulls and a near-term bear:
The dollar index yesterday rose the most since Dec. 17. The currency may climb about 15 percent this quarter, Royal Bank of Scotland analysts wrote in a report e-mailed yesterday. [That climb would push the U.S. dollar index to just below 90, slightly above its March '09 high. The analysts evidently expect a repeat of the greenback's rocket-up that took place between June and November of '08 - DMR.] Bullion might fall to $1,030 an ounce in coming months as the dollar rebounds [to an unspecified level], Philip Klapwijk, executive chairman of gold researcher, GFMS Ltd. said today in a Bloomberg TV interview.
However, most traders are bullish. "Fourteen of 20 traders, investors and analysts surveyed by Bloomberg News, or 70 percent, said bullion would gain next week. Six forecast lower prices. "

This morning's Wall Street Journal Online report starts off with a theme touched upon by the Bloomberg one: gold traders are acting cautiously ahead of U.S. non-farm payroll data. That payroll data has now been released, and has disappointed. The 85,000 job drop was well below consensus expectations of a 15,000 job rise. The unemployment rate stayed flat at 10%.

The greenback has plummeted on the news, falling from 78.188 to below 77.5. Gold has shot up: as I write this post, spot gold's at $1,136.40. Evidently, there's been a lot of behavior modification due to that jobs report.

Thursday, January 7, 2010

Marc Faber Says Gold Is Cheap Right Now

That's his message, according to BullionVault News. Not only is he bullish, he deploys some figures that make him sound hyper-bullish:
"Gold remains the best bet as a currency these days because of the fact that the yellow metal supply is extremely limited. Gold at the current price of $1110 per ounce is less expensive than when it was sold for less than $300 per ounce years back..."
For the benefit of those who might reply "hunh?", he explains:
"A company's stock could be less expensive at $100 than when it was selling for $10, because earnings growth has outpaced the appreciation of the shares and therefore its price/earnings ratio has declined. So gold could be cheaper at the current price than when it was at less than $300 because of the explosion of foreign exchange reserves in the world, zero interest rates, the huge debt overhang, and the expectation of further money printing."
Note the metric he uses: central-bank reserves. Using it implies that Faber thinks that gold is a kind of money.

I should also note that Faber's a greenback bear right now.

I got this article courtesy of Also there is this analysis by alternate-medicine guru Bill Sardi, which cites Faber's reasoning. Therein, he claims that the central banks are knocking down the price of gold along with the "banksters." The latter, he opines, are hoping to scoop up gold at a bargain - and the same may go for the former too.

However, he seems skeptical about the U.S. dollar heading into history's dustbin.

Not Quite Gold Related, But... analyst Meredith Whitney is being thrown under the Wall Street bus. According to Tech Ticker, "Wall Street's Memo to Meredith Whitney [is]: You're So 2009."

Is Nouriel Roubini next? If gold resumes its climb, and inflation looms more and more clearly in the context of recovery, he may be. On the other hand, Peter Schiff's goin' under if gold falls decisively to three digits in U.S. funds.

It's going to be one or the other. Wall Street doesn't like permabears. Once they're no longer useful, after the (s)he-was-stunningly-right hallows fade, it's bye-bye. If Treasuries reverse their recent decline, then Roubini has his uses. If gold keeps shining, Schiff does.

Gold Slumps Back As Stock Market Cracks

Interest-rate-hike fears have pushed the Dow and S&P averages down about 0.3% as of the time of this post, and the NASDAQ down about 0.5%. Similar fears have aborted gold's rise to US$1,135/oz: as I write this post, spot gold's at $1,131.10 after bottoming just below $1,130. So far, the $1,130 floor has held.

Again, a rising greenback seems to be the proximate cause. After backing away from the 78 level, the U.S. dollar index is climbing somewhat.

Indian Gold Demand Picking Up

In December, no less. That's according to this Minyanville article, which reveals that Indian demand for December was 33.5 tonnes as compared with only 3 tonnes in November. The December decline was cited as the reason:
...[S]ince hitting a peak intraday of $1,226.56 per ounce on December 3, gold has declined by almost 9% to $1,118.88. And this corrective phase has perked up buyers again.

“I was in India in December,” Holmes tells us. “It’s packed and everybody is doing business. It’s action galore. So we see more confidence. Also, remember that the Indian government made a real statement by buying gold.”
Although Holmes is a gold bull, his on-the-scene report does square with the December figures.

Money Magazine Features Gold As Hot

What can you say about an article that begins with this picture-painting -
At Harrod's department store in London, you can pick up a South African Krugerrand or a 27-pound gold bar along with a sweater and bed linens.

- other than noting that a stumble out of Harrod's with a 27-pound bar in the briefcase makes for a Youtubeable moment?

[Come to think of the subject, it would be more entertaining - and far less expensive - to try it with a 1000 oz, or 68 1/2 pound, bar of silver. Thanks to MetricConversions for the pound figure.]

The entire opening paragraph has some data to make the point that gold is now hot. In the words of the article itself, 'Once of interest mainly to central bankers, Swiss jewelers, and folks who are convinced the Trilateral Commission runs the planet, gold is now the world's "it" investment.' However, the bulk of the article suggests that gold's in a bubble. Comparisons with residential real estate are made more than once, and the overall thrust is debunkative or sobering.

This kind of article pops up at the cusp of a bubble, not during the climax of one. As should be clear from reading it, the author thinks that five listed rationales for gold going up are impugnable; he seems to think that the current gold bull is irrational. One of the earmarks of a bubble in an asset is a sustained rise in the face of "no good reasons for it." (As the article notes, inflation hasn't taken off.) To the extent that this article is representative of cool-headed if skeptical opinion, that's the stage we're in now.

A note: one of the experts quoted therein, Mark Hulbert, has weighed in on the inflation/deflation debate. He said yesterday, as based upon reading the gold and T-bond markets, that the scales have tipped towards inflation. That call does not mean that he's a gold bull, though.

Update: Along the same line is a briefer debunkment in Daily Finance. At its heart is a 2004 paper which concluded that commodities in general don't make for a good inflation hedge, a portfolio made up entirely of commodities doesn't beat the risk-free rate, and adding commodities to a portfolio doesn't add any diversification protection. The title of the article asks, "Is Gold For Fools?"

If gold's December decline has truly reversed, expect more articles of this sort. To put it one way, Nouriel Roubini's name is still hallowed.

To put it less diffusively, more than a few people saw November's parabolic rise as a bubble in and of itself. A decisive reversal of December's decline will leave them feeling a little bit cheated...

Gold Eases Downwards After Run At $1140

Gold's run yesterday contintued until late afternoon, when the price touched US$1,140. Failing to surmount that barrier, the metal drifted in a $1,135-$1,140 range last night until the lowerew end broke at about 8:30 PM ET. Then was established a lower range, from $1130 to $1135, which is being picked at as I write this post: as of that time, spot gold's at $1,130.60 after sinking to about $1,128. Most likely, the release of better-than-expected jobs claims data is behind the pull-up, which started at about the time the data were released. As noted yesterday, the gold market has been taking a liking to better-than-expected economic data.

The culprit is the U.S. dollar, which rallied this morning after sinking yesterday afternoon. However, this five-day chart of the U.S. dollar index shows that the current top, as yet, has not bested Monday's top. It has bested yesterday's.

From a less immediate-term perspective, the U.S. dollar index looks as if it's established a sort-term trading range between 77.5 and 78. Trading ranges mean there's no mover on either side, that there's a temporary equilibrium.

Speaking of charts, this daily gold chart shows a shift in the MACD winds:

When the black line has crept above the red line in the MACD field at the bottom, gold has tended to go for a nice run upwards. I'm not a fan of using technical indicators in general, as many of them have been matched against buy-and-hold and found wanting. Sadly, the ones that fare well against buying and holding tend to lose this advantage when the long-term wind shifts. Example: the MACD "edge" in the above chart works because gold's in a bull market, and moves up in fits and starts. Should this long-term trend change, the MACD strategy would fall apart. Even if the fit-and-start pattern changes, the MACD technique might well underperform simple buy-and-hold because the latter will produce greater gains.

However, indicators such as that one can be used as an accessory to a buy-and-hold accumulation plan. Instead of buying more gold in a fixed timeframe, buy (and hold) when the black MACD line moves above the red line. For those who find this strategy to be of interest, I should say that I haven't backtested it.

Moving to the media reports, the Wall Street Journal Online attributes the gold slump to an unexpected jump in a key Chinese interbank lending rate. The implication is that the Bank of China is beginning to tighten. The featured commentator is bullish, but the end of the article notes that the SPDR Gold ETF saw a 5.257 metric ton drawdown of gold on Wednesday - about 0.3% of total holdings. This drop occurred in the face of yesterday's gold-price jump.

A Bloomberg report makes more of the drawdown, quoting a trader about it:
“A switch in investment activity and a slowing in the purchase of exchange-traded products suggest that the risk of liquidation has grown,” said Yingxi Yu, a commodities analyst at Barclays Capital. “An end to the dollar’s weakening trend could therefore be a major setback for gold.”

It is a bit of a change from recent weeks, when the net holdings of the ETF didn't change all that much. One possibility: some recent buyers were scalpers, in for a quick flip which they got out of yesterday.

Wednesday, January 6, 2010

Gold Bull Makes Tech Ticker, Again

'"A Huge Move": Gold Could Double in Next 5-10 Years, Miller Tabak's [Phillip] Roth Says' The fellow's calling for gold to double in the next five to ten years. He makes the point that gold is trending up in all major currencies, not just the U.S. dollar, and explains why:
"Whether the dollar goes up or down, gold is still going to be a good investment because we have virtually all the important central bankers focused on growth and not inflation," the veteran technician says. "They always say they're worried about inflation but they're not acting that way; they're acting to stimulate growth, and that's bearish for their currencies."
He's also bullish on commodities.

An Economic-Data Incongruity

Two economic-data metrics released today point to U.S. economic recovery: low planned U.S. job cuts - a two-year low, in fact - and not-bad retail numbers for December.

This kind of news has recently been bearish for gold, as it signals a near-future Fed rate hike and strength in the U.S. dollar. Not this day, however. After the first item was released, gold spurted up to over US$1,130/oz. Previously, it had been in a $1,120-$1,125 trading range short-term.

As I write this post, the uptrend's continued. After dipping below $1,130, gold's rose to $1,133.80. This uptrend has occurred in the same timeframe that hardcore goldbugs have pointed to as ruled by the gold-slammers.

A blip, or a shift in the wind? We'll see as the more economic data is released.

Two Seeking Alpha Articles On Gold, Both Bullish

And one of them is pretty wild. The soberer one, focusing on silver but also mentioning gold, points to the debt crisis and the transference of debt from private sector to public. The other, much longer piece has the same themes but laces in a few conspiracy (or cabal) theories to make the point.

In so doing, it inadvertently points to the use-value of one of the standard goldbug tropes. Back in the 1960s, the London Gold Pool did try to prevent the gold price from rising. They were charged with doing so because the Bretton Woods system still depended upon the U.S. dollar being redeemable for gold (by foreign central banks) at US$35/oz.

The conspiracy theories involving the "Crimex" [COMEX], not to mention cabals of governments and/or government-connected financial institutions holding the price down, are a carry-over from the London Gold Pool days.

Talking points with the most reach, particularly in politics, make claims that were true - or, at least, were far truer then than now.

Hope Still Springs Eternal

In the hardcore goldbug world, anyway. Jeff Nichols is forecasting gold to reach US$1,500 sometime this year, and sees the metal's price reaching at least $2000 when it reaches its cyclical high. $3000 is becoming more likely in his eyes.

His argument is the standard one, the kind of fundamental analysis used in the gold world. Expansionary monetary policy will bring back a resurgence of inflation, making gold more valuable as a wealth protector. In the case of the U.S., monetary inflation will erode the greenback's value. The U.S. economy will endure a long spell of stagflation. On the production side, the decline will continue for another five years or so.

However, one demand factor he points to is a lot like the "New Era story" I fingered in the late-November Enter Stage Right article that started off this blog. In it, I said:

A full-fledged bubble, however, needs a "New Era" story to make those historical relationships look misleading. It has to explain why those old pros were fooled. The New-Era story for the 1920s U.S. stock market fell into place in 1924.... Edgar Lawrence Smith... showed that a carefully-selected basket of common stocks not only held up over the long term, but also tended to outperform a similar basket of corporate bonds. The subsequent "New Era" pronouncements, right up to 1929 and even beyond, were elaborations, extensions, and exaggerations of Smith's point. What characterizes a New Era story is its rationale for treating a historically overvalued investment as undervalued; the disjoint is ascribed to an essentially permanent sea-change, or previous veil of ignorance being lifted....

...[A]s the gold price continues to climb, a New-Era rationale is taking form.

This rationale starts off with two solid observations: gold also serves as a crisis hedge, and it tends to move in opposition to the U.S. dollar. Recent central-bank gold purchases, particularly India's, and recent Chinese complaints about the dollar are factored in. All of these put together gives a real New-Era story, which we'll hear more frequently if gold keeps rising: The U.S dollar is losing its reserve currency status, and gold will be (at least part of) its replacement.

Like any good New-Era story, it plausibly explains why an asset class is out of whack. In this case, it explains why gold is ratcheting up despite little to no inflation on the immediate horizon. It also ties in gold's rise with the U.S. dollar's drop, and recent international dissatisfaction with the U.S. government's debt and deficit levels. It's also subject to extension, should inflation reappear, and exaggeration. If gold enters into a full-blown bubble, the above New-Era story will be warped into excited proclamations of the "imminent" demise of the greenback.

As the above snippet makes clear, I use the term "bubble" and "New Era story" in a more nuanced way than is usual. Admittedly, some New Era stories come true. Someone saying, in 1910, "The American economy shall replace that of the British Empire as the largest in the world; American stocks ought to be bought to participate in that growth" would have been telling a New-Era story. Despite the wreckage of the 1930s, that story has come true.

But a lot of them don't. The "New Era of Home Ownership" in the U.S., to put it gently, hasn't quite come to pass. Nor did the "New Internet Era" as was forecast in the late '90s. It might be worthwhile to review predictions from that era to see the difference between 1998's future and our real present.

Regarding the New-Era story for gold, which I myself am skeptical about, Nichols has this to say:
The other factors which Nichols feels will help lead to the big price increases in gold over the next few years are what he describes as "a rising secular expansion of investor participation", together with continuing reserve diversification by Central Banks due to what he feels is an "irreversible erosion of the U.S. dollar as the single dominant reserve asset and denominator of much world trade."

"As a result of these secular developments, over the next decade and beyond, the long-run average price of gold (stripping away the major cyclical bull and bear market swings) will be considerably higher than past experience would suggest . . . and considerably higher than many analysts and investors would dare imagine" says Nichols.
That's pretty close to what I imagined it to be. (I should note that Nichols firmly says that gold is not in a bubble, and that gold bull market is amply justified by the fundamentals.)

The Mineweb reporter does a good job of summarizing Nichols' points of optimism in the report:
He feels gold's strength is built on solid fundamentals - fundamentals that gold bears, among them a number of eminent economists, fail to recognise. These include: Continuing expansionary U.S. monetary and fiscal policies; strong continuing Central Bank demand for gold as a reserve diversifier; continuing expansion of investor interest; a continuing decline in world gold mine production which he reckons will continue for at least another five years before high gold prices have been sufficient to stimulate new production. Finally he looks to expanding and evolving geographic markets for gold, particularly in the East where the combination of a traditional cultural interest in gold is boosted by rising incomes and wealth....
If these fundamentals play out, it's more than likely that Nichols' predictions will be upped - perhaps by him, almost certainly by others.

As a closing side point, $3,000 gold is fairly crucial for today's gold investors. The last secular gold bull market ended in 1980, when gold touched $850. The ensuing bear market pummeled gold down to $300. Someone buying gold at the 1974 high of $200 was still sitting on a profit after the '80-'82 bear market wreaked its carnage.

Using the '80-82 bear as a gauge, a post-bubble gold bear will slice two-thirds off the metal's price. If gold's ultimate top is above about $3,500, then someone buying now will still have a slight profit even at the bottom of the next bear market. If only $2000, though...

Gold Now In Holding Pattern

After an afternoon drift-down that reintroduced the price of gold to the US$1,115 level, the metal's drifted back up to the $1,120-$1,125 range it found itself in yesterday morning. As I write this post, spot gold's broken through the top of that range to reach $1,129.20.

The U.S. dollar index is up from yesterday's levels, reaching 78 as of 4 AM ET. This U.S. dollar index chart shows the greenback drifting downwards, with 78 being near the high end of the channel now:

Of interest is the fact that the two MACD lines at the bottom of the graph have crossed. In recent history, the black line has sunk below the red line when the U.S. dollar has been dropping. As the chart indicates, the greenback index has been drifting downwards after its run-up last month. However, the absolute levels of both are much higher since the drift-down started, than at any other time in the chart's time period. The same consideration applies to the relative-strength index, shown at the top of the chart. I myself have little expertise in chart reading; to my dabbler's eyes, though, that chart looks pretty good for the greenback. We're unlikely to see fresh lows for the U.S. dollar anytime soon, the kind that would bring back another parabolic rise for gold. I should add that an optimistic take on the greenback is consistent with a recovery of the U.S. economy, and a rise in the Fed Funds rate sooner rather than later. Market speculation has centered around June for the first rate hike, although there's been little regarding the amount of any hike.

Despite that risk of a hobble, gold is holding up well. As this Wall Street Journal Online report says, investment demand is holding the metal's price up - and the greenback wasn't the factor cited. "Gains in other commodities also sharpened investors' appetite for gold, analysts said." The reflation trade, to put it simply.

When the level of investment demand isn't much dampened by a price plummet, the asset in question is said to be in "strong hands." As has been oft-noted of late, investment gold is acting like it's in strong hands. There hasn't been the wholesale exits from the metal that are associated with the short-term skittish. Strong hands tend to buy, not sell, during and after a price plummet.

This Bloomberg report makes the tie explicit: "Gold rose in London as last month’s decline, the biggest in more than a year, spurred demand." Both stories warn, however, that gold's likely to go through a rough patch should a rate hike and/or greenback jump occur. As of now, the business-media reports are balanced between bulls and bears (of whatever breed.)

Tuesday, January 5, 2010

Earning Synthetic Interest With Gold

In a Seeking Alpha article, Brad Zigler points out a way to earn a return with gold. The trouble is, it requires enough gold to write a futures contract on it. [400 oz. for a standard one.] Simply sell the gold forward, with a locked-in price thanks to the futures contract, and deliver it when the futures contract is due. If the price differential between spot and the relevant futures price is greater than storage costs over the life of the contract, then you've gotten a return for holding the gold.

Of course, it requires 400 oz. to play, unless a 100-oz mini-futures contract is used.

Decline May Not Be Over

That's the point made by Przemyslaw Radomski, after studying recent chart patterns that resemble current action. The chart he uses is for the SPDR Gold Trust, a good match for gold itself. He concludes that, after a substantial drop, which pushes gold decisively into oversold territory, a relief rally ensues. However, the decline re-emerges and pushes gold down even more. That's been the pattern of the last three drops before the current one. He concludes that, although those precedents do not provide a sure guide to what gold's going to do now, there is a real risk that the gold price will drop below the December low of about US$1,085 once the current rally ends.

It's something to think about. Two of the three precedents he uses are post-financial-crisis; they're from last year. The first precedent took place in August and September of '08, when the stock market plunged after Lehman failed. The second one took place in March and April, when the stock market exploded upwards. The third took place in June and July, when other assets driven by inflation (most particularly, crude oil) slumped; so did the stock market. Each occurred in the backdrop of different market conditions, but two of the three accompanied a drop in the stock market.

One more note: in the latter two, the gold price didn't bottom out all that much lower from the initial drop's bottom. I think Radomski knows it, as he makes clear that long-term investors should keep their eye on the long-term ball.

PRC Now Biggest Gold Buyer

From the China Business Services blog: the PRC central bank is now the biggest gold buyer of them all. The entry also mentions that the PRC is on track to becoming the world's biggest exporter, surpassing Germany.

Viet Nam Net mentions that gold-trading volume has dropped dramatically after it was announced by the Vietnam government that gold trading venues will be shut down at the end of March. With respect to formal channels, gold traders are being compliant. This story from Vietnam Business Finance News says that there's some physical gold buying still taking place, but also speculates that the money normally put into gold will go into real estate or equities.

Gold Rising Yet Again

The current rise is tepid compared to yesterday's run-up, but gold's still gaining. As I write this post, spot gold's at US$1,121.60.

Yesterday's jump was only partially caused by a U.S. dollar drop, and today's more modest rise took place despite a partial immediate-term recovery in the greenback. A Wall Street Journal Online article attributes yesterday's and today's gains to these factors: "The dollar's weak start to the year, fresh fund buying and a pickup in physical demand are driving gold's recovery since it fell to a one-and-a-half month low on Dec. 22, analysts said." It does, however, contain a cautionary quote to the effect that recovery is bound to benefit the greenback, which should push gold back down.

Another report, from Bloomberg, quotes an analyst who takes a contrary view about recovery: "Rising optimism that global economic growth will gain more momentum in 2010 is pushing up stock and commodity markets, reviving demand for alternative investments at the expense of the dollar. Gold will be the “place to be” for investments in 2010, Peter McGuire, managing director at CWA Global Markets Pty in Sydney, said in an interview today."

Monday, January 4, 2010

A Successful Coin Auction, And A Difference Between Canada And America

A very rare Canadian 1936 dot penny was auctioned off for more than $400,000 last Sunday, and the accompanying story illustrates a difference between Canada and the U.S. The most expensive U.S. coin is the 1933 $20 gold coin, which was yanked when President Roosevelt ended the gold standard domestically by ordering U.S. citizens to turn in their gold on pain of jail. The most expensive Canadian coin is the 1911 silver dollar, which was supposed to be the first Canadian silver dollar issue. The Canadian government didn't go through with it, and we Canadians didn't have a silver dollar until 1935.

A real difference. Some may be surprised to learn that Canada did not have a central bank until 1935. Nor, I add with a touch of patriotic pride, did Canada have a bank-run crisis in the early 1930s. There is such a thing as self-regulation, often administered by the words "shame on you!", even if it's about as rare as those two coins nowadays.

Seeking Alpha Contributor Forecasts "Stealth Inflation"

More specifically, Bo Peng is forecasting commodity-driven inflation. His analysis is based upon commodities being the plausible candidate for a new bubble, as well as a skeptical evaluation of interest-rate jack-ups in reducing inflation.

Another contributor, Daryl Montgomery, focuses on the fact that, during deflation, it's not only short-term government yields that shrink to near-zero. Long-term rates do too. With respect to U.S. rates, short terms have followed the deflationary script...but long-term rates have not. He concludes that current long-term U.S. (and U.K.) rates are anticipating a revival in inflation.

Myself, I've been using the term "reflation." Although not originally meant as such, it's a useful portmanteau word: "recovery inflation." That kind won't balloon into full-blown inflation because it's associated with central back recession-fighting, which ends when recovery's in place. Given the recent recession, that's where we are in the business cycle right now. I believe that serious inflation will take some time to kick in.

Mixed Signals

Two Marketwatch pieces, both by market advisors, each have opposite conclusions about gold. The first, by Thomas Kee, advises people to shy away from gold. His reasons: U.S. dollar stabilization, and the end of the greenback carry trade. The rest of his piece says that the U.S. stock market will also go down in '10.

On the other side is Michael Kahn. He isn't a greenback bear, but believes that the recent shake-out in gold has come to an end. In his view, the technical picture of gold suggests that the November excesses have been corrected. His capstone point is that a bullish greenback consensus has formed, which makes him wonder if the U.S. dollar's rally is over.

Differences of opinion can be found elsewhere, too. This GoldAlert piece rallies the usual money-centered talking points to make the case that gold will march upwards this year. On the other hand, this Gold Investing News article says that gold is likely to keep correcting. [I got the latter piece courtesy of Resource Investing News.]

Put them together, and you may end up with a debate (or arguments.) Gold bulls can take comfort from the fact that last November's bullish consensus has evaporated.

More Optimism For Metals

The Wall Street Journal has webbed an optimistic year-end report for the metals, which says the '09 rallies should continue: "Metals Have the Mettle to Rally On." It makes the sometimes-unnoticed point that '09 was a bonanza year primarily for the industrial metals. Gold did rally in the 25% range, but copper shot up 139%. Even aluminum's rise handily beat gold's.

This pattern is characteristic of reflation more than straight inflation. The industrial metals benefitted twofold, from inflation and recovery. I should add that the industrial metals [fain that I call them the "industrials"] shot up from extraordinarily depressed levels, which gold didn't reach. Copper, to take a single example, was down about two-thirds from its '08 highs. It has yet to regain those highs, and won't until it climbs above US$4/pound.

The reason why gold "stole the limelight" from all of them was that gold made record highs in '09. The others didn't.

To put it not-so-delicately, a more-than-double on copper could only have been captured by someone buying in when that precipitous decline turned into a holding pattern. It took a fair bit of courage to go into the gold market at that time, even though gold's drop was a pale shadow of copper's...

Gold Starts Off New Year With Gains

The start of 2010 trading has not been kind to the U.S. dollar, which has pushed up both oil and gold. As I write this post, spot gold's at US$1,117.00.

A Wall Street Journal report ascribes gold's gain to the greenback, and to short-term support at the $1,100 level. In other words, as the price dipped below $1,100, buyers came in. Another report, from Fox Business News, says that the greenback was pushed down by a Ben Bernanke speech in which he said that inadequate or inappropriate regulations - not monetary policy, in and of itself - is responsible for asset bubbles.

Speaking of the greenback, this Stockcharts daily chart for the U.S. Dollar Index shows that its recent run has definitely stalled. The chart below is a daily one, and does not include this morning's drop to the 77.4-77.6 level:

This pattern does not look like the '08 shoot-up, which took place from lower levels than the '09 low. The greenback may continue rallying from these levels, but present chart action does not portend a runaway bull move. Interestingly, the relative-strength indicator at the top of the chart worked this time 'round. The greenback has stalled after crossing the oversold line.

Sunday, January 3, 2010

Attempt At A Forecast

I can't claim to have any expertise in the field. This attempt to forecast what gold will do this coming year will be based on little more than a reading of long-term charts and my own sense of where the U.S. and other economies are headed this year.

First of all, gold is still in a bull market. The credit crunch, and the resultant demand for greenback and U.S. Treasury securities, hit gold hard in mid-2008. That low, however, was close to the 2006 high. There has been no long-term trend of lower highs and lower lows in gold. Last year, after the credit crunch had passed, gold soared to a new all-time high. The US$1,000/oz barrier that had stymied since March 2008 was broken in September '09.

The only scenario that would turn the gold bull into a bear would be a zero-inflation economy long-term. Too many central banks have bent too far for too long for this outcome to be plausible. Now that deflation (if it was that) has turned back into inflation, the price of getting the economy out of the credit crunch is going to be felt - and that price is inflation. I believe there's a simple political calculus at work: inflation can be reversed, as was done in the early 1980s. Although a high-inflation low-growth economy does bring widespread discontent, it's much less unpalatable than the alternative: a deflationary debt implosion. If there's a choice between over-reflating and risking the badge of infamy, there'll be over-reflation. That's what we're beginning to see now.

It's important to remember that the market constraints against overinflating have eroded. The "bond vigilantes" are gone. Rather than being seen as "certificates of guaranteed confiscation," Treasuries are widely seen as a safe haven. Too many bondholders don't mind locking in at a negative real rate, and they're lulled by a near-thirty-year bull market in bonds. The bond vigilantes arose in the 1970s, and flexed their muscles in the 1980s. At the time they arose, U.S. Treasuries has been in a bear market since 1949. Bond market conditions today are profoundly different.

A similar calculus applies to the much-storied foreign holders of U.S. Treasuries, particularly the PRC government. The present moves in to gold, both by the PRC government and the Chinese public, are likely diversification moves combined with the hope that the renminbi can be built up to be a world-class currency in its own right. The renminbi is still tied to the U.S. dollar; as an export nation, the PRC tends to benefit when its currency falls. U.S. dollar devaluation devalues the renminbi along with it, helping PRC exports. I'm not claiming that the PRC monetary officals will be pussycats with respect to U.S. inflation and greenback devaluation, but I am claiming that some of their priorities are in line with U.S. devaluation through inflation. A similar calculus applies to the second-largest foreign holder of U.S. Treasuries, the government of Japan.

For these reasons, I conclude that there are no imposing market barriers to over-reflation. However, it'll take some time to work through the system. Excited gold bulls think the over-reflation, and the long-term effect of the U.S. Treasury debt ballon, will be discounted in the gold price right now. I don't think they will. In my opinion, gold has little reason to move upwards until the inflationary effects kick in.

The following two charts are of 5-year and 10-year gold, as of the day of this post:

I don't think the gold price will sink like it did the last time, because a new credit crunch is quite unlikely. However, there are similarities between the current pullback and the one in the spring of '06. Gold got ahead of itself back then, and took more than a year to surpass the '06 high of about $720. What got gold rolling to newer highs in '07 was the pick-up in inflation, but the early '06 market overdiscounted it - went too far, too fast for the time.

We're in a similar situation now. The emerging-economy central-bank purchases were too vaunted, and it was forgotten that those purchases only make sense when done prudently. $1,050-$1,100 was prudent in retrospect. Buying at $1,200 would not have been.

There's no real reason for gold to go down, as explained above, but there's no real reason for gold to go up right now. There would have to be a real inflation and/or devaluation shock to get gold shooting up. I don't see either on the near-term horizon. If anything, the greenback's chart indicates a reversal of last year's plummet.

Thus, I'm predicting that gold will spend 2010 in a trading range, between $1,050 and $1,200. Any sustained move above $1,200 will be prefaced by a few tests of that level.