Friday, January 15, 2010

Vacillation Ends, Then Returns

Starting at 9:30 AM ET, like yesterday, gold took a dive as the U.S. Dollar Index climbed to a new daily high. After both vacillated in the wake of the latest U.S. inflation report, the greenback trended up slightly and gold took a spill. The half-hour slide took the price of the metal down to US$1,126.

This same pattern, when gold's been pushed down about the same time the market opens, has occurred so frequently that some of the hardcore goldbugs are claiming manipulation. More likely, if it's goosed at all, a large speculator or group of speculators is/are taking a whack at the price and seeing what happens. The last couple of days, gold has recovered, although not so much this day.

This Wall Street Journal Online report credits the greenback's strength to pressure put on the Euro after a rumor floated around claiming that Angela Merkel is going to resign the German chancellorship. Also noted is a better-than-expected result from the New York Fed's Empire State manufacturing survey. A Marketwatch report, in addition to also attributing gold's fall to strength in the U.S. dollar, says that disinflationary fears with respect to China are (still) pushing gold down.

Update: This time 'round, gold has not fully recovered from its regularly-scheduled beat-down. The U.S. dollar climbed steadily, spiking up to 73.309 at about 11:15 AM ET, and was later in a short-term range whose center is close to 77.25. Gold lumbered back up to above $1,132 - oddly reaching that level at about the same time as the greenback spike-up - but pulled back since. As of the time of this first update, the spot price for the metal was $1,130.60

If I were a gold trader, I'd keep a close eye on the $1,125 level.

Update 2: The rest of the afternoon saw gold drfting in a trading range. The vacillation that accompanied this morning's economic data ended up returning. Although the range was on the low side - roughly bordered by $1,127 on the low end and $1,131 on the high - trading was largely directionless. $1,125 held.

The U.S. dollar index spiked up again, to a new daily high shortly before 3 PM. Gold didn't react all that much in consequence. At the end of the week, the index closed at 77.20 - a fairly mid-range end given the day's trading.

At the end of the week, gold was down more than $20 and closed near the low end of the week's range. However, it did manage to close near the high end of this afternoon's range. Whether by coincidence or design, spot gold ended the week at exactly $1,130.00.

Relativistic Thinking Does Have Its Benefits

Paco Ahlgren put a bit of thought in his article "Gold Is Safer than Treasuries as an Inflation Hedge." He points out that a rising asset price shouldn't be considered in vacuo; what matters is how it squares up with other assets (and with currency debasement.) It's a point normally deployed by gold skeptics, to show that gold's a lousy long-term investment, but Ahlgren is a gold bull who's taken it to heart too.

However, his suggested pair trade - buying gold and an ETF that's short Treasuries (TBT) - rates a warning about the latter part of the pair. A post over at Zero Hedge point out that ETFs that short Treasuries are subject to price-decay over time. If held over the long term, TBT exhibits a very definite negative carry. Longer-term holders who like Ahlgren's idea would do well to consider another option for shorting Treasuries, such as buying long-term puts on the long-bond futures contract or an outright short of an ETF that's long Treasuries. (TLT's one.) Long GLD/short TLT resembles a more normal pairs trade that uses Ahlgren's theme.

A Seeking Alpha Article Debunking John Paulson, Best Interpreted As Cautionary

That article, entitled "John Paulson's High Risk Hubris" by Felix Salmon, is one that will provide a fodder of glee for Paulson skeptics. However, it's written in a way that makes it a cautionary piece for Paulson admirers. For example, this paragraph:
What’s more, there was no guarantee that even if the housing bubble did burst, that Paulson was going to make lots of money. To be sure, he had a lovely model, put together by his colleague Paolo Pellegrini, showing that if house prices stopped rising, subprime mortgages were going to suffer enormous losses. But on the other hand, all the banks and credit-rating agencies also had models, showing that the bonds that Paulson was betting against had almost no chance of defaulting. When your model shows one thing, and everybody else’s models show something else entirely, there’s a very good chance that your model is flawed.
That depiction pretty much captures the dissolving-guts feeling that any investor feels when moving into a trend as it's starting. Consider March 9, 2009. On the one hand, Doug Kass is on CNBC saying that the march bottom represented the "buying opportunity of a lifetime." The metrics in many stocks jibe with what he said. Bargains are everywhere in the stock market.

On the other hand, Warren Buffet was saying much the same thing back in October of 2008. He looked bang-on as '08 turned into '09, but a vicious February decline - of full bear-market strength over the space of a month -meant that the man to watch became Nouriel Roubini. A value investor buying in as of March 10th could snap up a lot of bargains, 'tis true. But that was only on the basis of normalized valuations. There were lots of high-paying dividend stocks at that time. There were also more than a few would-be Meredith Whitneys warning of dividend cuts. P/Es had fallen very low. But, the number of suposedly impregnable companies reporting huge losses were disturbingly high. Normal valuations said that stocks were a screaming buy. But the headlines were filled with stories suggesting quite strongly that this time was different, that the new normal was beginning to resemble the 1930s. Stocks were huge bargains in 1931 also.

This example isn't quite the same as Paulson's situation. Salmon points out that Paulson was on the negative-carry side of the trade; a value investor is on the positive-carry side. ["Carry" means income net of costs in this context.] Actually, being on the negative-carry side - as well as being a bear when all are bullish - is even harder, except for those with a certain spine. A lonely bull can comfort him- or herself with the thought that bull markets are more common than bear markets. A lonely bear doesn't have that reassurance. An investor on the positive-carry side has time as a friend. On the negative-carry side, time's an enemy.

Now that Paulson's moved into gold, however, he seems to have put his negative-carry days behind him. Gold's negative carry (from storage costs) is miniscule, and dividend-paying gold mining stocks have a positive carry.

Where's The Leverage?

The AMEX Gold Bugs Index [HUI] is designed to track the performance of the fifteen largest unhedged gold producers. One of the standard talking points in the goldbug world, particularly among boosters of mining shares, is that gold stocks provide leverage to the gold price itself. That's because, assuming that costs don't go up, an increase in the gold price disproprtionately benefits a mining company's bottom line. If gold goes for $1,000, and a mine company's cost is $500, then the gross profit for the mine is $500. If gold moves up to $1,100, and the mining company's costs stay at $500, then gold's gone up 10%. However, the mining company's gross profit has moved from $500 to $600 - a gain of 20%. The higher the costs, the greater the leverage - or so the story goes.

This tendency should show on a graph that divides the HUI by the gold price. In a gold bull market, the line should be rising: the HUI's own rise should outpace gold's. And yet, a weekly chart of that relationship - going back three years - shows a different picture. During those three years, gold itself has been in a bull market...

...but the leverage supposedly given by gold stocks doesn't appear to be there.

Or, it wasn't until the financial crisis. In late '07, when gold went on an upwards tear, there clearly was no leverage. There was, on the other hand, a lot of downwards leverage in June to November of '08. However, as '08 turned into '09, the leverage that kicked in on the positive side began to dissipate. Like in the last half of '07, there hasn't been any during the run-up that started last September. Since that date, gold and the HUI have merely kept pace with each other.

There are different interpretations of this phenomenon; in the goldbug world, it's claimed that the lack of HUI magnification right now means that gold stocks are undervalued. This "Number Cruncher" piece courtesy of the Globe and Mail has a different explanation: the amount of economic value added by gold companies in a similar index product, the iShares CDN Gold Sector Index ETF, has been zero:
Bundle the stocks in [the index] together and you've got a big zero from an EVA point of view. Stockpointer explains this as being a result of the trouble gold producers have had in converting high prices for gold bullion into strong profits. XGD was up about 26 per cent in the past 12 months, so let's not get too carried away in dissing the S&P/TSX global gold index tracked by this fund.

So, what's the story? Are the goldbugs who keep to the leverage line merely kidding everyone, including themselves?

Not quite. Back in the old days - by that term, I mean pre-1980s - gold was actually counter-cyclical. Before the late-1970s bubble, the best bull run gold had was in 1974. Yes, 1974: the dreadful year epitomizing postwar stock-market carnage until 2008 replaced it. Gold mining companies found the price of their product ratcheting upwards in the middle of a a time when hard times in general held down their input costs, except for the oil spike in '73. In such an economic environment, the codicil "if costs remain constant" could be treated as little more then boilerplate.

Needless to say, things have changed. In the 1980s, gold was mildly procyclical. That procyclicality led to the mining sector being gutted in the 1990 recession. Gold went back to being somewhat countercyclical in the 1990s, but that was because a gold bear market was superimposed over a roaring economy. In the '00s, gold went back to being procyclical - as was most evident in '08. There actually was positive leverage in the gold-mining sector from 2001 to 2005; at least one producers (Yamana Gold) came onstream in that period. However, the leverage disspiated as the Bush boom continued. That's because cost increases caught up with the profit boosts. One of the costs that squeezed the producers was, unsurprisingly, energy. The soar-up of oil was far more than a one-shot jump in the late '00s.

With respect to the economy, gold has become countercyclical again. With respect to the stock market - and the energy market - gold is still procyclical. A cost squeeze is the most likely reason why the leverage is dissipating again. Upside leverage may return, but the odds make for far less than a guarantee of it doing so. Speculating that it will is, in essence, speculating that mining companies will be able to contain their costs. In other words, the kind of analysis required is a lot like the kind used for regular companies. The period of specialness for gold miners, where cost trends didn't matter all that much, has passed.

Once day, the leverage trope might appear in an economics class - not as a lesson, but as a trick question.

Another Downdraft Followed By Drift

Prior to the release of U.S. CPI data, the price of gold drifted downwards. After ending the regular trading session above US$1,140, and drifting up to the $1,145 level in evening trading, gold sagged to below $1,140 a few hours before midnight ET. A slump after 11 PM ET sent gold on its downdrift, which didn't end until the price bottomed at around $1,129.70 right after 6 AM ET. Since then, gold has recovered somewhat prior to the release of the CPI data: as of 8:23 AM, spot gold was at $1,133.00.

This Wall Street Journal report points to the stronger dollar as the cause. The U.S. Dollar Index did strengthen overnight; all this morning, 77 has served as a support level aftter the Index bulled past it last night. The traders quoted in the WSJ report were neutral to mildly bearish.

A Bloomberg report fingered the greenback as the cause:

“It’s the dollar move driving prices,” said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “There’s some light bargain-hunting” when prices fall below $1,130 to $1,140 an ounce, he said.
Therein also is the results of a survey: "Twelve of 19 traders, investors and analysts surveyed by Bloomberg, or 63 percent, said the metal would rise. Five forecast lower prices and two were neutral."

As the U.S. inflation data came in, with a lesser-than-expected December rise of 0.1%, gold didn't react all that much at first: right after the data was released, spot gold was at $1,134.70. However, after the news was disseminated and assimilated, spot gold slumped: as of 8:41 AM ET, the metal was priced at $1,131.10. The U.S. Dollar index slumped briefly, but moved upwards to a new daily high of 77.28 before backtracking. What's interesting about the reaction is that both the greenback and gold have vaccilated after the inflation report. A half-hour after the release, spot gold was at $1,133.10; at 9:17 AM, it was $1,134.80. In retrospect, the overall trend was been slightly bullish for the U.S. dollar and slightly bearish for gold - as is consistent with the lower-than-expected raw rate of 0.1% - but inconclusive beyond the very short term.

The Physical Gold To GLD indicator, which is calculated by dividing the price of an ounce of gold by the price of one share of GLD, clocked in at 10.20 - slightly below the long-term average. It's a crude indicator, with only one signal: when it falls below 10 - when one ounce of physical spot gold sells at a discount to 10 shares of GLD, which represent one ounce - then gold's likely to move higher. As of yesterday's close, the indicator has not sunk below the 10 threshold. [A graph, courtesy of, is found here. I refrain from moving beyond the crude interpretation because this blog is not intended to give market-timing advice.]

This raw gold chart, also courtesy of, shows that the recent price has coalesced around the metal's 50-day moving average:

It also shows that gold is in a trading range, moving with little conviction on each side. Chart-watchers may see a regular head-and-shoulders pattern in early January's action, with a neckline just above $1,125. This pattern suggests that, if gold falls below $1,125, it will fall with conviction. Of course, given that a larger reverse head-and-shoulders pattern was recently busted, that smaller one can be treated with some skepticism. One interpretation: if the price falls below $1,125, then there'll be another downward stampede like the one that busted the larger pattern.

Thursday, January 14, 2010

Gold Drifts, Dips, Recovers, Then Advances Slightly

After benefitting slightly from the disappointing jobs and retail-sales reports, gold has drifted downwards again. Moving back to the $1,136-$1,139 range, after blipping up to almost $1,142 at 9 AM, proved to be a prelude to the gold price sliding down to little more than US$1,130 as of 11:20 AM ET.

Perhaps oddly, the U.S. Dollar Index has been in a holding pattern in the same timeframe. It hasn't bested 77 since the 9 o'clock dive, putting it below the days' high of 77.028 reached at about 7:30 AM ET.

Update: As it turns out, the late-morning decline was erased, and gold forded higher than the 9 AM ET high. (If some big player's trying to manipulate the market downwards, he or she must be gnashing teeth right now.) Gold bested the $1,140 level as of about 1:30 PM, and then retreated slightly to establish a trading range with $1,140 as the floor. As of the time of this post, spot gold's at $1,141.50.

The U.S. dollar index sunk, making a day's low of 76.673 at about 2 PM ET. It recovered later and is also in a trading range centered at just below 76.80. The day's low was higher than yesterday's low of 76.596.

A Quirky Chart, And What It Hints At

On a lark, I asked to produce a chart that plots gold in terms of the SDR gold trust (GLD.) It may seem prolix, if not redundant, for me to do so - much like plotting an index fund versus the index itself. Sometimes, though, these charts can be revealing. Below is a copy of the weekly, with gold's value divided by GLD's. The average to the right is close to the stated value of 10 GLD shares per ounce of gold, but its exact value does show that GLD normally sells at a slight discount. [It takes a little more than 10 GLD shares to equal the value of an ounce of gold.] Right after it is a chart, using the same timeframe, of gold itself:

As the upper chart shows, gold and GLD are usually well correlated. However, there are certain times when each is out of whack with each other. Interestingly, gold tends to get ahead of GLD when it's toppy. When gold lags, it's bottomy. It's in mid-range right now, suggesting that gold's neither toppy nor bottomy.

The daily charts show less of a correlation, and are more prone to whipsawing, but the pattern is still evident:

One rule that can be drawn from the dailies, once the GLD share price and the gold price are pulled up: when an ounce of gold is selling for less than ten shares of GLD [10 * GLD share price], then gold's getting ready for a run upwards. [This rule might be useful to accumulators looking for buy points. I refrain from any comment regarding any other use, except to note that market timing is normally beaten by buy-and-hold over the long run.]

The exact link that'll call up the Gold:GLD chart is here. Clicking the link gives the daily. The weekly can easily be called up by adjusting the drop-down menu to the left of the top "Update" button.

Update: I did a more thorough survey of it, and found that a simple first-of-the-month accumulation plan is less expensive than a plan that uses this rule as an aid. That test done, I have no practical value for it. This relationship is, therefore, intended for reader interest (if not amusement.)

Sensible Take On The Hyperinflation Question

Over at, Mac Slavo quotes goldbug Howard Katz on an important point about hyperinflation risk. Katz came up with a sensible debunking of the U.S.-as-Zimbabwe comparison beloved by some hardcore goldbugs. He points out that, if the U.S. should enter hyperinflationary collapse, the world economy would be wrecked with it. That makes a quick, Weimar- or Zimbabwe-style collapse almost impossible. The U.S. dollar is too central to the world economy, and therefore too needed for its value to run to near-zero.

Not mentioned by Katz, but part of the point, is that the U.S. authorities know very well that hyperinflation would wreck the U.S. economy and the U.S.' geopolitical standing. The fear and defiance of America in the anti-American circuit would turn into disdain and derision. To put it bluntly, America would become a world laughingstock. World leadership would inevitably pass to the country, or alliance of countries, that restored the global economy; American geopolitical power would be sunk. There's no way that the authorities would permit such an outcome. Even a Great Depression would be preferable from a power standpoint, as the U.S. would recover on its own. Moreover, most every other country would be in the same boat; the relative-power balance would likely not change that much. (If anything, creditor nations suffer more from deflationary collapses than debtor ones. The debt destruction that's part of a depression hurts the debt-owners more then the debt-owers. In the 1930s, the U.K. fared better than the U.S. - and, unlike the 1930s, the U.S. does not have a rising military superpower willing and able to elbow it off the world stage.)

In Katz' eyes, given the predominance of the U.S., the best comparison is to ancient Rome. Hyperinfation did gut the Roman economy, but it took a couple of centuries to do so.

Gold's supposed to be an inflation hedge, but...

This article by Chris Dillow is presented for your edification. He starts off with the assumption that gold and index-linked gilts [the U.K.'s answer to TIPS] are both inflation hedges, and therefore should correlate well with each other. However, after comping them together, he found that they don't correlate all that well with each other. "The correlation has not been higher than 0.3 in the past 10 years, and has usually been around zero."

He knocks down three reasons for the lack, and then supplies three of his own reasons to explain it.

Interesting Snippet About Investment Demand

From a report on the market by Adrian Ash:
Global investors doubled their purchases to 1,820 tonnes last year, according to chief executive Philip Klapwijk – the most accurate forecaster of Gold Prices in the London Bullion Market Association's 2009 survey.

Jewelry buying, in contrast, fell by almost a quarter to 1,687 tonnes, the lowest level since 1988.

Guessing that a "large amount of money" is now looking to [b]uy [g]old as a defense against sub-zero real interest rates and the continued decline of the Dollar, Klapwijk forecast a "bumpy" road to new record prices above $1300 in 2010.
Klapwijk also noted that the overtake is worrisome, and added this cautionary note:
"The market, if you like, has become a bit like a junkie...more and more dependent on bigger and bigger fixes from the investor community."
The rest of the report covers other topics, including an optimistic take on future demand in the PRC, but that particular point is worth lingering upon. In and of itself, it doesn't suggest a bubble; from what I've been able to scry out, the bulk of that demand is from people expecting gold to rise on the fundamentals. However, that demand environment is compatible with momentum players settling in. We'll see the momentum trade really take off if the gold bull proves to be less bumpy than Klapwjik expects.

This Financial Post Online report focuses on Mr. Klapwjik''s comments, going in to a little more detail. It specifies that he's bullish overall.

Retail Sales Fall In December, Jobs Claims Rise More Than Expected

As this Yahoo! Finance report details, December retail sales fell 0.3%. Jobless claims rose more than expected - an increase of 11,000 instead of the expected 3,000.

The U.S. dollar sunk somewhat in sympathy, but not by much. After making a near-term bottom at 76.8, the U.S. Dollar Index has reversed course. As of the time of this post, it's spurted up to 76.90.

Spot gold, after blipping up while the greenback fell, has turned downwards below the $1,140 level. Evidently, after an initial reaction, the market has decided that there wasn't that much to the data.

Gold Does Overnight-Morning U-Turn

After recovering from a morning dip, gold edged up further in overnight trading. US$1,140 was broken on the upside just after 7 PM ET, which resulted in gold making the day's high of $1,147.60. After that high, the price began drifting downwards to the $1,140 level until early this morning. Shortly after 3 AM ET, the price drifted below that level, stayed stuck there, and continued drifting downwards. As of the time of this post, spot gold's climbing back up a little; it's at $1,141.30.

Two reports take a different tone regarding gold's action. Reuters' is cautionary, with this anonymous analyst quoted:

"We continue to see potential for additional near-term weakness (in gold), particularly if, as we suspect, there is a continuation of the U.S. dollar rally that began in December," said Numis Securities in a note.

"The decisive break through $1,000 an ounce could now provide a solid floor to any correction, although we would not be surprised to see some panic/stop-loss selling if this level is breached."
On the other hand, Bloomberg's, is optimistic. This quote is indicative of the bullish cast of the quoted experts:

“The dollar is still under some pressure,” Walter de Wet, a Standard Bank Ltd. analyst in London, said today by phone. “That’s supporting precious metals. We’ve seen fairly good physical demand when prices drop, and that’s a good sign.”
Normally, this difference in quoted-expert opinion doesn't show up. The financial media is event-driven, and tends to corrall experts whose forecasts gibe with how the market acted. Two reports diverging this much suggests that gold's recent action has become a bit of a mystery - not to mention the U.S. dollar's direction.

Speaking of the greenback, the U.S. Dollar Index rallied back over 77 after sliding down early this morning to about 76.7. That low is above yesterday's 3+ week low of 76.596, and the index's 8 AM level was higher than yesterday's noon high of about 77. Currently, it's fallen back somewhat to about 76.8.

This weekly chart of the U.S. Dollar Index, from, gives some perspective on the U.S. dollar question:

There's some similarity between the last seven weeks' movement and the June to mid-September period of 2008. The chief difference is in the magnitude of the snap-back. Comparatively, the last seven weeks have been much milder and the pause at the top longer. Unlike in August of '08, a few weeks' pause has not led to a resumption of the climb; instead, the greenback has pulled back. The MACD lines at the bottom of the graph still show an uptrend, but the RSI oscillator at the top shows a top-out in the mid-range. That level is more characteristic of bear market action than bull market - even though last November's bottom was higher than March '08's.

The overall picture is ambiguous. The higher-low and MACD factors suggest a primary bull trend. The recent relative-strength top suggests otherwise. So do the moving averages (the blue and red lines over the price record itself.) Both are falling, and the shorter-term 50-week moving average has crossed below the 200-week moving average.

It's ambiguities like these that are one reason that technical analysis is characterized as "voodoo." To be fair, the chart-skeptics have a point. The greenback is going to be driven by fundamentals of the future, which can trump even the neatest of chart patterns. Chart-watching is most helpful at extreme points, and we're not at one now.

Now that charts and moderation have been brought up, I might as well show you this one from Kitco. It's a 30-day chart of gold plus gold corrected for the U.S. dollar:

The raw gold price is tracked by the red line, and the Kitco-corrected price in tracked by the blue line. As you can see, the U.S dollar factor has been almost erased over the last 30 days. An odd coincidence, given that the gold market's eyes are on the U.S. dollar for direction.

Wednesday, January 13, 2010

Gold Resumes Its Decline, And Then Drifts Up

The greenback has indeed set the direction for gold. In the last hour, the U.S. Dollar Index has vaulted almost all the way back to 77. And, gold has broken its range to sink below yesterday's low. As I write this post, spot gold's rebounded slightly from its low of about US$1,119/oz reached right after 10:30 AM ET.

Where gold goes today is anybody's guess, but the morning prognosis doesn't look all that good.

Update: The U.S. dollar index did turn down after almost reaching 77, but not by that much; currently, it's recovering. Nonetheless, spot gold managed to climb up above $1,136; that level erased almost all of the mid-morning decline. As of 1:36 PM, spot gold's at $1,136.10.

Update 2: After reaching that level, gold subk a bit and then turned upwards again. For the last hour, it's been drifting; as of the time of this update, spot gold's at $1,137.10

I realize I'm drifting into iffy territory here, but yesterday's slamdown is beginning to look orchestrated. By "orchestrated," I don't mean rigged; I mean launched to hit the stops and/or to throw other players into a selling frenzy. There's been a significant lack of follow-through today. Example: A decline did start at 10 AM ET, but it was reversed before 12:30 PM ET. As of now gold's higher than it's been all day. If some punter tried the same trick twice this morning, it's backfired.

Whether the process was "enhanced," the trigger really was the People's Bank of China's attempt to moderate the inflation by bumping up the reserve-ratio requirement. Without a plausible and relevant event-trigger, any attempt to jack the market around is likely to be futile.

Two Trips Down (French) History Lane

One plank of goldbug culture is an affection for history - specifically, the history of fiat-money decline. The favourite "story" is that of the Weimar Republic in 1920-23, with the rise of Hitler being used as a warning against present debasement.

Another episode, though used less frequently, is the French Revolution. This article at casts the Terror as the result of fiat-money inflation and economy-wide price controls. As is usual with critics, the good guys are presented as Cassandras.

France also figures in another goldbug capsule history - the France of the 1960s. It's recounted at the end of a recent Daily Reckoning article as a lead-in to more current complaints from that country:
For those of you who were around… Do you remember what happened in August 1971? Yes, that’s when Richard Nixon closed the gold window, removing gold as the backing for dollars. He did that, because France’s Charles de Gaulle, called the US’s bluff that they had enough gold to back their IOU’s, and when that happened, Nixon had to shut the gold window and make the dollar a fiat currency.

Well, here we are in 2010, and another French President, Sarkozy, is making things difficult for the dollar… French President Nicolas Sarkozy urged for an end to the US dollar’s global dominance, warning that its weakness poses an “unacceptable” threat to European competitiveness.

“The monetary disorder has become unacceptable,” said Mr Sarkozy, who later this month is due to address the world economic forum in Davos. “The world is multi-polar, the monetary system must become multi-monetary,” he said in an apparent call for other currencies to be promoted over the greenback....

For Perspective

One of the unique features of the goldbug world is the continual recounting of a happy future that would (effectively) put goldbugs out of business. Should the gold standard be restored, there'd be no need for gold speculators any more. There may be spot exceptions in the case of occasional monetary diddling, but there might not be enough business (outside of gold mining) for even one permanent specialist in gold-watching. Some might conclude that there's a religious element in the goldbug worldview, because there is a similarity to religious myths that posit a golden past and a trouble-free future. However, it seems to be the effect of the goldbugs' second hat as political critic. The oft-repeated reasons why "gold is money" seems less a creed and more a talking point. One interesting consequence is that goldbugs are far less likely than other market analysts to talk their book, except when things get wild. Then, during bubble time, we read excited forecasts of hyperinflation and ruination of fiat currencies. In calmer times, the only ones forecasting hyperinflation are hardcore goldbugs who have an affection for theory.

Here's one example of the end-of-speculation trope, from Steven Saville:
The reality is that a long-term DOWNWARD trend in prices is the natural way of things in a FREE economy. In the absence of government manipulation of the money supply, prices will naturally fall over the long-term due to increasing productivity. This means that in the absence of government manipulation of the money supply there would be no need for a person to speculate in order to secure his/her financial future. A person could simply save cash, safe in the knowledge that the cash will buy at least as much in the future as it does in the present. In other words, monetary inflation forces everyone to become a speculator, an endeavour at which some will succeed and most will fail.
Once he get by the bye-and-bye part, he shows he's an inflationist. For players, the core of his analysis is a defense of the "True Money Supply" metric as an accurate gauge of money-supply growth, and a debunking of the accuracy of alternate measures.

In Retrospect, A Debriefing

A Gold Investing News report, by Kishori Krishnan, was certainly well-timed. Written when gold was still at US$1,150, it starts off with this paragraph:
Is the gold ship about to sink? Could that be the reason why some `rats appear to be deserting’ it?

We are talking about hedge fund managers here, many of whom appear to be selling to exit their positions. Are they intent on capturing profits, or could their actions be prodded by other things? A stronger dollar perhaps? Or an unstable economy? Or insights on a gold price slump?
The rest of the article takes a general tone, and doesn't refer specifically to the gold drop, but the opener clearly suggests that the fear of a decline was on the author's mind. I haven't seen any corroborating evidence, but the swiftness of yesterday's decline does hint that aggressive hedge funds precipitated it.

Update: Another in-retrospect debriefing's at The Pragmatic Capitalist. The author there noted a large bear-spread in the GLD options market before the decline got rolling.

And, over at Jesse's Café Américain, a brief and refreshingly agnostic post:
1100 is key support. 1180 is key resistance.

Everything else is noise.

After Yesterday's Plummet, Quiet

Yesterday's early-afternoon drop was awful, but it was not repeated. After getting down to as low as US$1,125 yesterday, gold spent the rest of the day in a trading range between $1,125 and $1,130. The $1,125 level was tested a little after 8 PM ET, but it held. There was another test of the range early this morning, but on the upside. $1,130 held at 2 AM ET, but was bested about two hours later. The metal's been drfting in a new range since then, bordered by $1,130 on the downside and about $1,135 on the upside. As I write this post, spot gold's at $1,135.30.

This Wall Street Journal Online report quotes a trader as saying gold is following the greenback, as the metal lacks direction on its own. A Bloomberg report has a similar quote, and also ties gold's plummet to similar downdrafts in several other commodities. Another quote expresses hopefulness about the metal:

“Gold may be able to avoid being dragged down by other commodities because of its safe-haven status,” said He Ruiyan, head of research at Xiamen International Trade Futures Co. “We’re seeing some flight to safety after China’s tightening.”

The above-mentioned U.S. dollar is down. This morning's dip made for a new 3+ week low in the U.S. Dollar Index. After recovering from a much milder drop to the 77.1 level early this morning, the greenback dropped to 76.596 before recovering slightly.

Two days ago, I wrote that gold had formed a reverse head-and-shoulders pattern. (In the original post, I forgot to specify that it's a reverse formation.) That formation was breached yesterday by the decline to $1,125, as this chart shows:

The neckline level - at about $1,140 - was clearly breached yesterday. I point this out to show that chart patterns are not always reliable, and I admit that it had me going for a time.

[Anyone who needs an explanation of the head-and-shoulders pattern will find a brief one here.]

Tuesday, January 12, 2010

Gold Rebounds To Above US$1,150, Sinks Back, Gets Hammered

As I write this post, the U.S. Dollar Index has largely recovered. The slump to 76.76, a three-week low, has largely been corrected. The greenback went up to 77 and is currently hovering at that level.

Gold, on the other hand, has been hammered. After returning to the US$1,150 level late this morning, the metal drifted back down to the $1,145 level. Then, starting at aboout 12:30 PM ET, it dropped below that level, reaching about $1,136. After a half-hour respite, the decline continued until about 1:45 PM; the bottom was reached at almost exactly $1,125. After a slight rebound to $1,130, gold's been in a much lower trading range - clse to bottom-scraping. As of the time of this updated post, spot gold's at $1127.80

Oddly, the downblast occurred largely independent of the U.S. dollar's movement.

Update. A Globe and Mail Online report has this explanation for the downturn:
Gold GC-FT fell below $1,130 (U.S.) an ounce Tuesday, losing 2 per cent as the news of China's tightening monetary policy curbed economic optimism, triggering heavy technical selling.

“Gold's decline has a lot to do with China's raising reserve requirements. It was massive liquidation after prices fell below important technical levels,” said Bruce Dunn, vice-president of trading at New Jersey-based Auramet.
In other words, there was a scramble for the exits when it became clear that gold wasn't moving upwards today, but downwards. Not mentioned was the possibility that some short sellers helped the process along by a hit-the-stops maneuver.

This other report, from, explicitly notes that the U.S. dollar was not the cause of the gold plummet. It does note that several other commodities, such as oil, silver, three agricultural staples and copper, also plummeted today. Like the Globe report, this one attributes the drop to nervousness over the People's Bank of China tightening reserve requirements for Chinese banks.

Investment Demand Returning

A brief article in the South African BusinessReport Online says that gold is being re-monetized - meaning, that investment demand is overtaking jewelry demand in the gold arena. The article mentions a seventeen-year cycle for gold.

If that cycle holds up, we're more than half-way through it. Gold's been in a bull market for close to nine years now. To be frank, the politics of inflation - the risk of future inflation being bearable given the alternative of a deflationary collapse - suggest that the gold bull will continue. Paul Volcker may be a paragon of central banker rectitude, but he has a political radar. All heads of central banks do. Back in 1981, the pain of inflation was both evident and immediate. Warnings of future inflation were piggybacked on crowings about earlier vindications. It was seriously believed that the bond market was wrecked. And yes, there were lots of complaints about inflation. The "misery index," which Ronald Reagan used in the 1980 campaign, was unveiled at that time. Its misery metric was the unemployment rate plus the inflation rate.

Mistakes may still be made, but it's more characteristics of U.S. politics to assume that the monetary authorities were caught napping in '08. They won't make that kind of mistake again. The bulk of the Fed's quantitative-easing program has been the purchasing of mortgage-backed-securities. Those MBSs are all guaranteed by governmment agencies, and the U.S. government itself has pledged to make up all losses suffered by Fannie and Freddie to an unlimited amount. Obviously, one of the motives is to protect the Fed from taking losses on the MBSs it bought.

There's only one reason why the Fed would have dove into the MBS market: to keep mortgage rates lower than they otherwise would have been. One of the talking points in the credit-doomster crowd has been the resetting of option ARMs, which is expected to peak next year. The Fed's intervention in the mortgage market signals quite clearly that they themselves know about it, and are holding down rates so as to minimize the damage of those resets.

There is one counterargument to inflationists that so far has been telling: the Fed is sterilizing its interventions so as to not create serious inflation down the road. The ballooning in the monetary base has not been reflected in the money supply itself; M2 growth has been modest, even if M1 growth hasn't. Recently, the Fed has announced a program to let banks lend excess reserves to the Fed itself in a term-deposit scheme. They doing so signals that more quantitative easing is coming, because they now have a mechanism to explicitly "sterilize" any further bank-reserve ballooning. So far, the sterilization has been implicit; now, it won't be. Thus, at least in theory, they can buy more securities without it causing inflation.

Will the deflation-fighting end nicely? Likely, no. The underlying odds not only say that the monetary authorities take decisive action once they finally wake up, but also says that they'll overreact. That bodes well for inflationism down the road, even if the implicit sterilization of the reserves expansion has not boded well for them so far. As noted above, inflation is low on the U.S.-economy problem list right now.

Bullish Talk From PRC Investment Official...About The Greenback

According to a report in the Economic Times Online, an investment strategist at the China Invesment Corp. (which controls $300 billion in assets) thinks the U.S. dollar has bottomed:
The comments by Peng Junming, who works in the asset allocation and strategic research department at sovereign wealth fund China Investment Corp, triggered a rally in the dollar. "I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further," he told an academic forum.

"The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades."
He had this to say about gold and the push in the PRC to own it:
Peng was explicit in his view on gold: "China should have the right attitude about investing in gold. There is no urgent need for China to increase gold buying for now, because prices are high." He defended US Treasury investments, arguing they had offset losses in stocks and helped swell currency reserves in 2007 and 2008.
It does sound like the fellow's defending an earlier recommendation to stick with U.S. Treasury securities, but his voice carries weight in the PRC investment community. The fund itself has done well recently by investing in PRC banks, which are being restrained somewhat by a just-announced reserve-ratio increase. There was no indication in the story that the China Investment Corp. has any significant investments in gold or the gold sector.

Moving to the other side, an explicitly bullish call on gold notes that U.S.-PRC tensions could push the metal's price up:
China's testing of a missile interceptor is expected to further strain relations with the US and comes at a time of increasing monetary and trade tension with the U.S. having imposed a tariffs on Chinese and on Chinese steel products last week. Increasing threats to global free trade may lead to a safe haven bid for gold.
Although hedged with the word "could," the writer of it does believe that gold will reach $1,200 by the end of this month. However, there was no hint that the November high will be bested in that timeframe.

Gold 4 Loans

We've all heard of the "dollars for gold" companies that have sprung up, encouraging people to sell their gold to refiners. In India, a similar trend has developed - except it centers around using gold as collateral for loans.

The lenders are pawnbrokers, but pawning gold is now being called a "gold loan" in part to erase the stingma of taking the family gold to the pawnbroker. This Washington Post story has the details: "In India, gold loans gain popularity as precious metal's prices soar."

After Marking Time, Gold Slumps

As it turned out, the US$1,150 level held until the evening, being nibbled away at in after-hours trading. Although that level was breached twice last night, gold rebounded above $1,150 until a little after 6AM ET, at which it fell to a 1,146-1,148 range that's now been eroded on the downside. As I write this post, spot gold's at $1,145.10.

A Wall Street Journal Online report contains comments that are mostly bullish, riding on Sunday night's spurt-up. Today's drop was attributed to profit-taking, with the People's Bank of China's tightening action barely mentioned, and the earlier gain was attributed to recent weakness in the U.S. dollar. However, one quoted authority isn't ready to give up on the greenback just yet:

A period of dollar consolidation, though, could lead to range bound trading as gold faces significant resistances above current prices, said VTB Capital analyst Andrey Kryuchenkov in a daily report.

"In the shorter term, upside resistance is likely to hold at $1,170 at the start of the week, especially if we see consolidation on the dollar index."

Another report, from Reuters through MSN Money, attributes the recent weakness to action from the PRC's People's Bank of China. The central bank raised reserves requirements by 0.5% effective January 18th, which means that banks will not be able to lend as much on the reserves they have. Credit creation will slow, which will dampen money creation and inflation. The less inflation in the PRC, the less reason to hold hard assets.

How much that move will affect gold prices, all told, is unclear. The economy of the PRC is almost unique these days because it's overheating. There's no chance of serious tightening in the other major economies, with the possible exception of Israel and Australia. The drive to own gold in China is not meant as a hedge against inflation in the PRC; it's intended to hedge against further declines in the U.S. dollar.

Speaking of the greenback, the U.S. dollar index is also in a trading range after dropping last Friday and the beginning of this week. So far today, it's centered around 77.05. This daily chart of the greenback, which goes up to yesterday's close, shows yesterday's price breakdown as sticking out like the proverbial sore thumb:

I note that both techical indicators, graphed above and below the price chart itself, have worked. The relative-strength indicator fleshed out a top, and the MACD cross has foreshadowed a significant drop in the greenback. For a while, the MACD indicator - found at the bottom - didn't work; the cross had accompanied a trading range in the greenback. Had a trader sold the U.S. dollar index short in response to the cross-over, there wouldn't have been any profit to speak of (barring good timing) until yesterday. That lack of movement indicated a bull trend in the greenback. After yesterday, however, there's more reason for ambiguity.

The greenback is a long way from resuming its bearish trend, and (as noted above) it's currently stabilized. However, those expecting a repeat of the U.S. dollar's surge-ups in June and December of '08 aren't going to get it.

Monday, January 11, 2010

Gold Eases Up A Little After Besting $1160

The final spike came at about 9 AM ET. Since then, spot gold's drifted back down; at the time of this post, it's meandered to $1,153.30.

It'll be interesting to see what transpires should gold reach $1150...

Update: It did so just after 1 PM ET, and has been drifting at or just above that level up to the time of this update. The U.S. dollar index has been in a holding pattern at about 77; the two have been moving somewhat independently in the immediate term. That's because neither has moved much today.

An Unanticipated Consequence Of Those "Cash For Gold" Companies

As reported by the Cambridge (U.K.) News, burglars broke into a woman's home and stole only the gold items. Other valuable pieces of jewelry, and a credit card, were left behind.

Counterpoint To The China-Bubble Hypothesis

Dian L. Chu has written a rebuttal to those who think that a spurt in lending for PRC real estate is symptomatic of a bubble economy. Although she concedes that real estate in China is very expensive, she points out that the sector is less inportant in the PRC than in the United States.

She also says that real estate and gold are the two most favored hard assets for Chinese savers. If the real-estate boom is eased or clamped down upon, gold should benefit because it's a substitute for the former.

James Bullard Says Jobs Data Changes Nothing

He may have only been trying to talk up the greenback, but St. Louis Federal Reserve Bank President James Bullard said that the latest jobs report doesn't change any plans to hike the Fed Funds rate:
[He] told reporters after a speech at the Global Interdependence Center the December jobs report showing 85,000 jobs were shed and unemployment steady at 10 percent would not change the Fed's policy.

"It was different from expectations but not far enough to really change assessments of policy," said Bullard, who votes on the U.S. central bank's policy-setting Federal Open Market Committee (FOMC) this year.

"I do think we'll see positive job growth in the first part of 2010," Bullard said.
Whatever the intentions of the FOMC, he's stated his own. He also believes that inflation won't resume in a serious way until two to four years after the Fed exits from its quantitative-easing program, which should be the main Fed worry right now.

As of now, perhaps surprisingly, Bullard's an inflation dove.

Two Commodity Online Articles About Foreign Demand For Gold

The first one, about Middle East demand, is unabashedly optimistic: "Gold demand to rise in Middle East in 2010: WGC." The World Gold Council cited therein is planning to launch a new line of gold jewelry in the region.

The second one discusses PRC purchases of gold, and brings in a blooming trade skirmish between that country and the United States. Noting that an all-out trade war is unlikely, because both countries would be hurt too much, the article concludes with the opinion that PRC retaliation will be more indirect. Stepping up gold purchases is an available option, as it lessens the PRC's tie to the greenback and hurts the U.S. a little by driving the greenback price down. Jeff Nielson makes the case for this occurrence in this Seeking Alpha article, which is referenced by the Commodity Online one. He himself says that the PRC could hurt the U.S. a lot by pushing the greenback down.

A Resumption Of The Tide, Perhaps

The important US$1,150 barrier was broken to the upside last night; gold has held above that price all morning. As I write this post, spot gold's at $1,160.00 even.

Reports from both Wall Street Journal Online and Bloomberg attribute the rise to two factors: a dropping U.S. dollar, due to the disappointing jobs report, and better-than-expected Chinese exports. The latter factor also lit a fire under the price of industrial metals like copper.

This gold-price charts, courtesy of, shows the price of gold up to Friday:

The pattern shown by the rightmost side of the graph, corresponding to most recent prices, is a standard one in technical analysis: a "head and shoulders" pattern. The dip in the second week of December is one shoulder of the pattern. After an abortive rise, the head was traced out by the late-December-to-beginning-of-January double-dip plummet to well below $1100. The action of the last few days forms the other shoulder. In such a formation, the price corresponding to the "neckline" is important. Should the investment rise above the neckline price, so goes the theory, it's in for a bull run. This so-called head and shoulders pattern is really a busted downtrend.

As the price action from last night to today shows, that neckline - in this case, at about $1,140 - has been broken. A chart of the U.S. dollar index shows that its recent range has been broken on the downside. It's currently hovering around 77 after dipping below that level.

What does all this mean? That the much-feared resumption of the U.S. dollar bull has been put on hold, and perhaps derailed. Gold has benefitted accordingly. Also, the greenback market has already been pricing in a smooth and orderly rate hike within six months. When that plan has seemingly been disrupted, the greenback has sold off.

Sunday, January 10, 2010

Thumbnail Financial Sense Newshour Wrapup

The first 2010 episode of the Financial Sense Newshour podcast had little to do with gold; instead, forecasts for the U.S. stock market and economy were focused upon. One guest, Jeff Christian of the CPM Group, opined that gold will end up at about US$1,150 at the end of this year. He didn't think that gold would enter a trading range; instead, he thought that gold would make a run up to $1,450 and then slump back down.

One forecaster with an uncanny 2009 track record was focused upon: Byron Wein. His 2010 predictions are here. Although he didn't make any prediction regarding gold, he did forecast that Fed Fund rate will go to 2% and that 10-year T-bonds would reach 5.5%. He also predicted that the U.S. dollar would rise vis-a-vis the yen and euro.

If his uncanniness continues, then 2010 will not be great for gold. Rising interest rates and a rising dollar will put a crimp on any sustained gold rally, unless it rallies in other currencies too.

Speaking of rallies: as I write this post, spot gold's shot up well above $1,150. Whether sustainable or not, the rally looks solid.