Saturday, January 23, 2010

Financial Sense Newshour Shows A Little Nervousness

When gold was brought up on the Financial Sense Newshour podcast this week, the permabullishness was still there but it was overlaid with some nervousness. Metals expert John Doody affirmed that gold would be up for the tenth straight year in 2010, but there was more than the usual talk about how risky and volatile gold can be. I could just be inferring, but last week's drops seem to have left the hosts a little spooked.

On that line, a Commodity Online article linked to at asks "Is gold price set for crash below $1,000?" The featured expert is Mark Robinson, a bullion analyst in Dubai. He says:
“Gold is on a bearish mood these days after the precious metal’s spectacular ascent to the record high of $1,227 per ounce in November last year. Gold price may not boom above $1,227 this year, if commodities get into a slump in 2010. A crash in gold price below $1,000 per ounce can not be ruled out,”...

According to Robinson, the main problem with gold is that “its price has been over-hyped by some bullion analysts and forecasters.” “It is funny to see so many gold predictions going around in the search engines on the Internet. Gold price is being predicted from $1,000 per ounce up to a whopping $5,000 and even $10,000 by analysts and investors ranging from Jim Rogers, Marc Faber and Nouriel Roubini to research assistants in small broking firms,” Robinson told Commodity Online.
Note the tone he takes in the second excerpted paragraph. It's not unlike the remonstrances heard during a mature bear market. How hype-blind we were, how blind...

[If you're interested, Robinson - who is a believer in gold - has three bear points which are on p. 2 of the article.]

Evidently, $1090 is a very watched number. As gold scrapes around it, and approaches the December London-fix low of $1,080, more and more gold bulls are getting skittish. Right now, sentiment isn't exactly sanguine.

This nervousness can serve as a contrary indicator. So far, anyway, there hasn't been any real capitulation in the gold marketplace itself. But it's clear that the People's Bank of China, not to mention President Obama, have succeeded in putting the fear of the bear in at least a few goldbugs. The clout of the former, particularly, might be what's engendering the anxiousness; the PBoC, through its tightening-oriented announcements, managed to derail a nice recovery that took gold above $1,160 as of January 11th. Right now, it's the proverbial 800-pound gorilla in the room.

Friday, January 22, 2010

Gold Scrapes A New Bottom, Then Pulls Up

Prompted in part by a resurgence in the U.S. Dollar Index, gold fell late this morning and bottomed at just above $1,080 around 10:15 AM ET. The mid-morning decline visited upon gold once again. The greenback rallied further, spiking up to a day's high of 78.523 right after 10:40, but gold failed to follow. The spike, as it turns out, only lasted a few minutes. Shortly afterwards, the Index sunk to the 78.2 level.

As of the time of this post, gold has not only rallied but also has reversed the mid-morning decline. Unlike yesterday, the price almost reached the level it was at just before the decline started.

If those push-downs are a test of the market's softness, then today's test has shown a resiliency that yesterday's didn't - even though the Kitco Gold Index shows that gold has dropped once the U.S. dollar fall is factored out. The rest of the day will show if $1,090 ends up holding.

Update: The U.S. Dollar index still continues to sink, although more slowly than in the 11:45 AM-12:30 PM ET timespace. Gold, which moved in contradistinction until about 12:30 PM, not only made the pre-morning-decline level but also bested it a little.

Despite the continuing slump in the greenback, though, spot gold's below $1,090 again. The moderation of the U.S. dollar's decline seems to have softened the metal up for a slump of its own. As of 1:34 PM, the Kitco Gold Index has gold down 6.50 due to selling pressure extraneous to the greenback. That's higher than it was as of 11 AM.

Update 2: The decline in the U.S. Dollar Index ended, with the greenback pulling up to above 78.3 before sinking a little. The end-of-day fall put the Index at 78.28.

As it turned out, $1090 did hold. After a slump that carried gold down to about $1087, which lasted from 12:30 to about 1:50, the price first drifted and then clambered back above $1,090. The barrier was broken at about 3:30. After which, and as prompted by the greenback slump, spot gold drifted once again to close the week at $1,091.50. At the end of the week, the Kitco Gold Index broke down the day's $1.60 drop into: a rise of $2.15 due to the falling greenback, and a loss of $3.75 due to "predominant selling." That 3.75 figure was slightly worse than the figure that prevailed as of 11 AM, but better than at 1:37 PM. For the week, though, spot gold was down about $40/oz.

A check of the reports shows that the same factors are being cited: the Obama bank-reform policy and the tightening process by the People's Bank of China. There was no new factor for the afternoon, which makes sense given gold's drift during that period.

Interestingly, the accelerating afternoon decline in the U.S. stock market averages didn't have much of an effect on gold. It did in the morning, but only duering the time when a downdraft has appeared anyway.

Inflation Angst

Brad Zigler of has confessed to his uncertainties in a Seeking Alpha article about the inflation/deflation debate. He's gotten to the point where he's internalized it.

What got him in his funk was a point long made by deflationists: the huge ballooning in the monetary base hasn't led to inflation or even much money-supply growth [except for M1, although its year-to-year growth rate has slowed down to about 6%.]'s own monetary inflation indicator has moved up at a rapid (if uneven) clip through almost all of 2009, after plummeting in the summer and fall of 2008. Yet, price inflation has not shown up.

He also notes the lack of cost-push pressure, particularly in the labor market, which has also held down price inflation. Zigler's still an inflationist, but he definitely has his doubts.

In another SA article, analyst Przemyslaw Radomski says the recent rout in gold is close to an end. This fellow called the recent decline more than two weeks ago; even if gold didn't go his way until a few days ago, he still ended up being prescient. He does, however, caution that the drop looks like it has some ways to go still.

Takeovers Increasing In The Gold-Mining Field

As has been noted in the Financial Sense Newshour podcasts for some weeks now, senior gold companies are buttressing their reserves by taking over junior exploration companies with multimillion-ounce deposits. Kishori Krishnan of Gold Investing News has written a round-up of the latest deals with this teaser of an introduction:
Gold miners are adding to their reserves. And fast. Given the strong metal prices, precious metal miners are using their cash flow from existing operations to pay for new acquisitions.

Especially Vancouver-based miners, who are now aggressively pursuing growth projects. Most have realized one thing - that the gold market does not need a weak US dollar to rise. For, the supply of gold itself has been declining for a decade now.

Reports indicate that we are at the lowest level of supply in at least 15 years. And this, for a commodity which has had a persistent growing demand.

Given the serious shortage of new gold discoveries and mines going into production, one interesting fact has emerged.

Since 2000, the gold price has risen over $600 or so, yet the actual amount of gold produced has declined almost every year since then. That’s counter-intuitive, given that when a commodity price goes up, there should be more production.

This is telling us something important....

Late last year, there was exceitement over some of the "big boys" shifting into gold. These new gold bugs, of which John Paulson is one, were held up as evidence that the gold rally is going to continue. Successful investment professionals aren't likely to to get in - to initiate positions in a big way - at the top of a bubble. If any tendency, they have a record of getting in too early.

The same reasoning can be applied to the executives of senior mining companies, although a different factor is operating here. Flush with cash and/or access to financing, but with in-house exploration coming up relatively dry, the seniors are hitting the acquisition trail not just because they need to but also because they can. This point is consistent with a mature bull market.

But, M&A activity only gets rolling when assets are for sale at a discount. The takeover trend isn't mature; it's new. There hasn't been enough time for acquirers to lose their heads yet.

Takeovers in the early stages are a form of bargain-hunting. Granted that the bargains are gold-exploration companies - not gold itself - but the trend and its recency suggests that the bull market is not over.

Investment Professional Forecasts $800 Gold

And no, his name is not Nouriel Roubini. It's Thomas Winmill, and he's a gold fund manager; his gloomy prognostication is over at Yahoo! Tech Ticker:

"Global liquidity is tightening a little bit and that's usually bad for a hard asset such as gold," says Thomas Winmill, manager of the Midas Fund. "If we see fiscal [discipline] [and] monetary discipline in the U.S., I would say we might see gold go back to its marginal cost of production, which is about $800 per ounce," nearly 30% below current levels.
He pulls back from it, though, and expresses the hope that gold will average $1,200 in the first quarter of this year. The Tech Ticker post says that he's making the point that gold is volatile, and shouldn't be plowed into by the regular person. To be fair, his bearish forecast is more of a scenario given the conditional nature of it. However, gold fund managers are expected to be bulls. Winmill has deviated from the usual line in a significant way.

One way of interpreting this unusual bearishness is as an attack of nerves. Gold's been hit hard in the last couple of weeks, surprisingly so given its rally up to the 12th of this month. The extraneous factor that pushed gold down was, of course, People's Bank of China policy responses to the blooming inflation in the PRC. Perhaps more significantly, the fall of the Euro due to the fiscal troubles of Greece shows that the greenback, not gold, still attracts the bulk of the safe-haven money. There has been some inflationary news from the U.K., but not in America. U.S. inflation has not been fashionably late, it's been a no-show so far.

These changing near-term fundamentals have indeed put their stamp on gold's chart:

The recovery earlier in this month has topped out at slightly more than half of the December decline. According to chart-watcher lore, that recovery level is consistent with a countertrend rally. The relative-strength (RSI) line, at the top of the graph, topped out only at a middling level. When gold was roaring up, the RSI would end up in oversold territory before the rallies ended. Also, the MACD indicator did not work on the bull side this time 'round. When the black line crossed above the red line on Jan. 6th, gold was at $1,140. Now, the black line's sunk below the red and gold's below $1,100. Anyone taking the bull side using that indicator would have lost money. A review of the rest of the chart shows that taking the bull side of the MACD indicator under those same conditions would have led to a large profit.

No, things don't look all that well for gold right now. The weekly chart shows a similar story with respect to the corresponding MACD indicator:

This chart gave an MACD-crossover warning three weeks ago. In retrospect, the warning was prescient.

Of course, the long-term picture still shows a long-term bull market still in place. There's cause to call the June to November run a mini-bubble which has now popped. The long-term fundamentals haven't changed. What has deviated from the bull script is their lack of manifesting themselves.

The pertinent question, though, is: are the forces that pushed gold up last year now disspiated? The greenback bear market has, and supposedly eager central bank buyers have been publicly dormant as of last month except for Russia. I note, however, that investment demand has not collapsed. The holdings of the SPDR Gold Trust have been unchanged for the last three days, and there's talk about physical demand picking up now that the price has dropped.

The low for the spot-gold fix was reached on Dec. 22nd at just above $1,080. The daily chart above shows the low touching $1,075 on that day. Most technical signs point to a continuation of the current decline, with People's Bank of China tightening and a greenback rally overhanging the market as fundamental downers. Despite those signs, and their dovetailing with known fundamental factors, there hasn't been wide-scale liquidations by gold-holders. At most, only minor liquidations have taken place.

The fate for gold in the near term will be determined by bargain-hunting, or lack of. That's the hidden fundamental on the demand side.

Overnight drift

After partially recovering from yesterday morning's decline, and drifting back down to near the bottom of that drop, gold spent the rest of the day in a trading range bordered by $1,090 on the downside and $1,100 on the upside. There was no recovery, but there was also no resumption of the drop. The early morning low was $1,089.00, reached briefly prior to 7 AM ET before the $1,090 support level reasserted itself. The Kitco Gold Index shows that gold dropped once the U.S. dollar's movement is factored out.

The greenback itself has weakened somewhat, after reaching a high yesterday at a level not seen since early last September. The U.S. Dollar Index spent last night and this morning drifting downwards, before rallying above 78.4 just before 9 AM ET.

A Globe and Mail report attributes gold's movement to the greenback's, and the recent drop to President Obama's announcement of a partial revival of Glass-Steagall:
“The dollar has been the driving force (for gold),” said Peter Fertig, a consultant with Quantitative Commodity Research.

He said while gold and other commodities had overreacted to the Obama news: “Uncertainty about U.S. financial system regulation is a factor which might be in the market for some time, until there are concrete details.”
It also says that Indian buying will kick in should the metal's price keep falling. "'Traders mostly will look at buying below $1,070,' said one dealer with a private bank in Mumbai."

A Marketwatch report is more bearish in tone. Its feature quote is from a Hong Kong financial executive, who says that the greenback carry trade is unwinding:
"With fear returning to markets and investors' minds after they had previously bought into the recovery story, most assets have been sold off sharply, including gold, helped by interest-rate-hike fears that have encouraged those speculating with borrowed funds in carry-trade currencies -- such as the yen, [U.S. dollar] or also Swiss Franc -- to unwind their positions," said Martin Hennecke, an associate director at Tyche Group Ltd. in Hong Kong.

"This is why we advise clients to stay clear of any form of debt, including mortgages, and not to speculate in any asset class for the short term," he said.

A third report, from Bloomberg, has a hopeful headline: "Gold May Climb in London as Weaker Dollar Fuels Investor Demand." The first expert quoted mentions physical demand as an emerging cushion:
“Yesterday we had a lot of pressure on gold, and overnight we’ve seen some physical demand,” said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “The physical market thinks these prices are fantastic to buy at....
Suresh Hundia, president of the Bombay Bullion Association, is quoted therein as saying that demand will "certainly" exceed last year's depressed level.

The gold-at-a-discount indicator, tracked here on a daily basis, once again didn't come close to the 10 threshold that would indicate an oversold condition. (A reading of below 10 means that an ounce of physical gold is selling at less than the price of ten GLD shares; those shares correspond to an ounce of paper gold.) Yesterday's reading clocked in at 10.20. The last time it dipped below 10 was right on January 1st, just before the early-January rally. In that case, the discount arose because GLD turned up prior to gold itself. This indicator can be checked on a real-time basis by looking at the spot gold price and at the price of a GLD share. Dividing the first number by the second number gives the indicator's value. If it's below 10, then the threshold is reached.

As shown by the above stories, there's some uncertainty about where gold's going. In the past couple of weeks, the main driver down has been PRC tightening. As of last night, no further moves were reported, so gold hasn't been put under any more pressure. However, the rumors floating around point to an all-out rate hike by the People's Bank of China in a month or so. The 8:30 annoucement window has come and gone, and a small decline has taken the price from almost $1,095 to below $1,090 in the last half-hour. As of the time of this post, spot gold's at $1,088.80.

Thursday, January 21, 2010

Stock Market Gets Knocked Down And Gold, Temporarily, With It

The three major averages were hammered, with declines ranging from more than 1 to over 2%. What makes this downdraft tragic for the NASDAQ is that it was up close to 0.75% around 10 AM ET; as of noon ET, it was down slightly more than 1%. Ironically, the Index of Leading Indicators jumped up 1.1% for December.

Gold has joined in the decline. $1,100 was sliced through at about 10:30 AM ET in a drop that took the price all the way down to about $1,090. After a slight recovery, gold sunk to the same level before recovering more durably.

Interestingly, the U.S. Dollar Index turned downwards too. After sinking from its daily high of 78.813, it partialy recovered to a little above 78.6. A recent move pushed it higher, to 78.64, but not to its high of the day. That move ended at about 11.45 AM; since then, the greenback shot down to 78.146 before recovering half-way towards its late-morning high.

The dollar downdraft helped abate the gold decline somewhat; $1,090 held.

Update: As of 1:30 PM ET, the recovery has not only lasted but also pushed gold up above $1,100.

After its own recovery, the U.S. Dollar Index has been drifting downwards again. 79 doesn't look like it's in the cards.

Update 2: Gold ended up drifting back down below the $1,100 level but, again, $1,090 held. Regular trading ended with spot gold at $1,093.10. The greenback stopped drifting downwards, but moved back upwards a little beyond its half-way recovery level. Once above 78.45, though, the Index pulled back to below 78.4.

This Marketwatch report attributes the drop to causes that made their impact in the morning: concerns over Chinese tightening, the drop in the Euro due to continued fiscal troubles in Greece, and Obama's proposal to clamp down on big banks. A quoted authority also noted that gold's been quite responsive to the U.S. dollar as of late:
"Gold has been very responsive to the dollar of late," said Leonard Kaplan, president of Prospector Asset Management. "As the dollar rallies, gold is going to go a lot lower."
And, of course, if the dollar doesn't rally...

A Gold-And-Gold-Mining Chart Worth Pondering

It's embedded in a bullish article at Moneycontrol News Center, entitled "Gold Still On A Feverish Pitch." The chart itself, which comes courtesy of DataStream, is on page 2 of the article. It correlates the FSTE Gold Mines Index with the price of gold itself:

There's obviously a positive correlation, but what I'd like to call attention to is the convexity in the graph. (More specifically, for mathematically-minded readers, the X-axis convexity.) That convexity implies that the FTSE gold index trails gold itself when the prices are high. Also note that the recent reset, shown by the red line, makes for a downwards discontinuity. In other words, the FTSE gold index has been knocked down from its old correlation to a new one that makes it a worse performer with respect to gold itself. Despite the author's attempt to make a straight line out of the more recent data points, convexity still kicks in at prices above $1,050. There may be too few data points to establish convexity definitively, but a daily correlation should show it.

Sad to say, but it looks like gold shares are a better buy when the gold price is low. Gold tends to lead the other commodities, materials, capital goods, etc. that make for a mine's costs, but those costs seem to catch up eventually.

This weekly chart that plots the Amex Gold Bugs Index (HUI) with respect to gold over the last three years, shows its own convexity over the last six months. Given what's above, it makes a doleful kind of sense:

Also sad to say: one of the reasons given for gold to go up long-term in future - declining production because the easy gold's alrady been found - doesn't say much that's good for gold-mining stocks. I should note that both the HUI and the FTSE Index contain major producers.

Everyone's Gotta Be A Brown-Watcher

One of their ranks is now Patrick A. Heller of He ends up drawing the conterintuitive conclusion that gold and silver will rise as a result of Brown's election:
President Obama has devoted a significant amount of his time in office and political capital in trying to enact legislation for a major modification of health care. There is distinct possibility that now either nothing will come of this effort or that it will be extremely watered down.

Unfortunately, a President whose legislative agenda lacks widespread public support sends a signal to the rest of the world that the U.S. economy and the value of the U.S. dollar may be on shakier ground than formerly perceived. In this circumstance, the normal response from foreign investors and trading partners would be to reduce their U.S. dollar exposure against a risk of further decline in the value.

Almost certainly, some of the funds pulled out of the U.S. dollar will result in higher demand for precious metals like gold and silver. This would likely push up their prices.

Well, that's one way of looking at it...

A Happy Medium, Perhaps

The Toronto Star isn't a media outlet that's prone to host gold bulls; at least one of their columnists is a gold skeptic. However, the online version has webbed an article that has some good things to say about gold investing - as a kind of insurance. Half of it is devoted to options that someone who'd like to invest in gold can choose.

A column, from the Australian Manly Daily, has columnist Bill Harcourt talking up gold as a way of diversifying out of bank stocks (and, by extension, regular equities.) He makes a common-sensical point that might as well be an intervention from Captain Obvious: many people are off-put from investing in gold because the hardcore goldbugs seem lunatics.

Putting some gold or gold stocks as an insurance, or diversification, tactic is actually different in kind from investing in gold for the usual reasons. With the insurance mindset comes the acceptance of even a long-term loss on the gold investment, provided that the loss is more than made up for by gains in other parts of the portfolio. You may be interested to know that the original asset-allocation model giving prominence to gold held up pretty well in the gold bear market of 1980-2001. It's called the Permanent Portfolio, and it was introduced by Harry Browne and Terry Coxon back in 1981. The model's as simple as can be: 25% in physical gold, 25% in an equity index fund, 25% in T-bonds and 25% in a safe money-market fund. Rebalancing is done annually, by selling any excess and buying any deficiency to get the percentages back to 25% on rebalance day. I should note that transaction costs and fees don't seem to have been accounted for in the results graph linked to above, so the fees would have to have been kept as close as possible to zero to duplicate those results.

A recent convert to the idea of holding some gold as portfolio insurance is value investor Jean-Marie Eveillard. He recommends no more than 10% be allocated for that purpose, believeing that percentage to be the border line between insurance and speculation.

Drop Not Over Yet

After yesterday morning's rout, gold spent the rest of the day drifting just above $1,110. Early this morning, the decline continued. After drifting up to $1,118.60 shortly after 2 AM ET, gold resumed its fall; the price got as low as $1,099.60 before turning around. However, the $1,100 support level held. After reaching that low, the price drifted upwards. As of the time of this post, spot gold's at $1,106.50.

Gold was pushed down in large part by the greenback, which continues to vault upwards. About the same time that gold hit its nadir, the U.S. Dollar Index reached 78.813. That level makes for a four-month high: the greenback hasn't been above 78.8 since early September of last year. The Kitco Gold Index shows that gold's decline was only partially the reflection of the U.S. dollar's rise, but the rising greenback is clearly the force pushing gold down.

Gold bulls may take comfort in the fact that, when the U.S. dollar index was last above 78.5 (Sept. 7th), gold was at almost exactly $1,000. Even after its recent rout, the metal's still 10% above that September greenback-parity point. Of course, a gold bear can interpret this fact in another way.

The featured analyst quoted in this Wall Street Journal Online report is cautious, sounding even near-term bearish:

"European Union debt issues and the technical breakdown in the euro look set to apply further pressure in the coming session, with gold potentially correcting back to the $1,050 area," said James Moore, an analyst at

"The scale of investment demand should continue to limit the impact of the stronger dollar with both metals set to maintain their upwards trend," TheBullionDesk's Moore said.
Another one called for a trading range between $1,100 and $1,150 in the near term.

That report, plus one from Reuters, both ascribed the drop in gold (and the rise in the greenback) to Greece-related worries in Euroland, pushing the Euro down vis-a-vis the U.S. dollar. The Reuters report also notes that the Euro fell because a Eurozone purchasing managers' survey got a result that was lower than expected. The gold experts quoted therein were more sanguine, such as this one:

"Bullion should continue trading against the U.S. currency, tracking the broader market," VTB Capital said in a note. "We see our key support holding at $1,090 in case we lose more ground."
The report also noted that the SPDR Gold Trust's holdings were unchanged yesterday, and that Indian gold sales are picking up. "'Yesterday's sales were highest in the month,' said a dealer with a state-run bank."

Despite such sanguinity, the rising greenback is going to keep putting obstacles in front of a gold resurgence. As this daily chart of the U.S. Dollar Index shows, the currency is on the move - upwards:

Admittedly, the recent drop made the earlier resurgence iffy. However, there's now a higher low and higher high on the daily chart. The MACD index at the bottom is crossing over onto the bullish side. What's relevant about that indicator is that someone following it on the bear side - selling short when the shorter-term exponential moving average (black line) crossed below the longer-term one (red line) - would be losing money right now, just before the black line rose above the red one. If that indicator is a money-loser on one side of the trade, it confirms the first-sight judgment that the other side matches the trend.

The weekly chart shows a long-term higher low:

but not a higher high as of yet. It's true that a higher-low-higher-high pattern established in late '08 was broken last year, and that the rise that began last December has been more hesitent than the one that began in July of '08. However, the recent hesitency might well indicate a solider rise.

Believe it or not, the gold-at-a-discount indicator didn't even get close to the trigger level yesterday. This indicator, which is the price of gold divided by one share of GLD, spent the day between 10.17 and 10.48. [Daily chart, courtesy also of, here.] When it falls below 10, physical gold is selling at a discount to its equivalent in GLD shares. That hasn't happened so far in this latest decline. I should note that the indicator did dip below 10 on November 26th, which did not mark a significant low; only a near-term one. That exception is the only one in the last five months. A weekly chart shows that a lower number, although occurring less frequently, is less ambiguous. The three-year low was below 9.0, reached around September 10th of 2008. This indicator is intended to be a timing aid to a regular accumulation plan, for which the decision to deploy capital has already been made. It is not intended to influece the decision to deploy new capital. Using the daily figures, the indicator sinks below 10 about once a month.

The jobless claims have been released, and disappointed by showing a higher number than expected. The latest weekly figure was higher than the previous, confounding consensus expections for a drop. This datum had little effect on the price of gold, which is still drifting upwards after the test of $1,100. So far, yesterday's rout has not been repeated. Perhaps the bears are taking a nap.

Wednesday, January 20, 2010

After The Pause, The Plummet

Once the New York NYMEX opened, gold was hit hard. For about three hours, driven by qualms over People's Bank of China tightening, gold was dropping. After a brief pause, the $1,120 resistance level was sliced through right at 10 AM ET. $1,110 was dropped through with nary a pause. All of this drop has come when the U.S. dollar has climbed upwards. [As Zero Hedge notes, Greece's latest round of troubles is accentuating the rise.] As of the time of this post, the decline halted at the $1,105 level.

Frustrated goldbugs may blame manipulation, but there's a catch-up aspect to it. Before 8 AM, gold was actually up after the gains in the U.S. dollar were factored out. Now, according to the Kitco Gold Index, it isn't. Given that Chinese inflation is likely to moderate after active steps have been taken to make it so, gold really should be down ex-greenback.

Update: As it turned out, gold spent the afternoon drifting just above the $1,110 level. At the end of regular trading, it was $1,111.30. The U.S. dollar spent the rest of the day in a trading range too, above 78.3.

PRC Tightening And PRC Mercantilism

The U.S. stock market's in tatters because worries over future tightening by the People's Bank of China have amplified worries about bank earnings. The U.S. dollar has continued to shoot up today, and gold has sunk well below $1,120 - even below $1,110.

It's well known that the Chinese are turning to gold. There's been an ongoing debate about the PBoC adding gold to PRC reserves so as to diversify those reserves out of the greenback. The public has been exhorted to buy some gold. That exhortation could be to support domestic miners and producers, but the central bank and other government agencies seem to be doing a good job of it already.

The PRC is, of course, mercantilist. Mercantilism, in essence, consists of the government rejigging the market so as to secure national advantage. High PRC growth is in large part due to monetary mercantilism, which enables the central bank to create new reserves out of export earnings. New renminbi are created every time an exporter sells foreign currency to the People's Bank of China. (They have to.) This kind of policy has a sweet-deal aspect to it if the resultant money-supply expansion is channeled into more credit for export-driven industries. It's a lot like pyramiding a stock that never goes down.

However, there have been recent overheating concerns. In restraining growth, the PRC has found that gold is knocked down in consequence. There's another opening for a sweet side deal as a result. The PRC government can kill two birds with one stone: turning down the money-and-credit heat, which has to be done anyways, and knocking down the gold price to a level more acceptable for purchases. Given today's price as compared with the price before the PBoC announced the reserve-rate hike, gold's at a discount of more than $40/oz. The greater the discount, the smarter the purchase. And, as we all know, the PRC is mercantilist.

I think there'll be more announcements of monetary moderation in the coming weeks, and in the coming months we'll find that sales of gold in (and to) the PRC have gone up. Given the dovetailing of timeliness, it makes sense for the PRC government to keep tightening right now...and letting the gold market know it.

A Metric To Keep An Eye On

Gold skeptics have often pointed out that the correlation between gold and inflation is a poor one. The gold bear market of the '80s and '90s is pointed to as a time when gold went down even though inflation was positive. However, there's a related correlation that works better than raw inflation: real interest rates. When they're negative, gold tends to shoot up.

In an interview published by Seeking Alpha, Craig Stanley elaborates on this relationship:
Real interest rates are the only metric that is correlated with the gold price. If you can hold U.S. dollars via Treasury bills, notes or bonds and they are paying a positive real interest rate that is not being inflated away, then why hold gold that doesn't pay anything?

However, it is not a linear relationship. Instead, gold prices tend to significantly increase only if real rates become negative. The current bull market in gold that started in 2001 corresponds to U.S. three-month Treasury bill real rates falling below 0%....

During times of low to negative real interest rates, gold reclaims its traditional role as money, with investment demand the prime driver of the gold price.
Later, he specifies that real rates are used to identify the overall long-term trend; they're not very useful as a trading tool.

Also in the interview, he explains why some gold-mining companies haven't been able to capitalize very well on the gold price rise: their costs have risen along with the proceeds: "On average, [gold mining companies'] inputs, such as labor, steel, and diesel increased over 15% annually." Gold itself has increased about 20% annually over the course of the bull market, leaving little room to expand profits.

That cost squeeze goes a long way in explaining why the new gold bugs have moved into physical gold. Companies that can't boost free cash flow all that much when the product they're selling has vaulted up don't inspire much confidence among professional investors, particularly big ones. Physical gold has no cost-clip except for storage costs.

Although the pile into physical gold pushes back the issue, it's only a matter of time before shareholders try to chivvy gold-company managements into becoming more cost-conscious. I haven't seen any trend of this sort developing yet, but it is a potentiality.

Gold companies, especially juniors, are discovery-driven. Consequently, there's a kind of Bizarro World effect in the exploration world. Exploration juniors that sell for less than their net assets - in some case, less than their net current assets - don't attract value investors because the typical shareholder expects the cash to be spent. Dilution is usually welcomed - sometimes, cheered - because it brings more money to spend on developing a property.

Granted that gold producers aren't exploration companies, but the heart of gold mining is developing new properties. With such an ethos, there may be opportunities for cost containment. If so, we may see it amongst the mature producers.

Consequence Of Massachusetts Election

In a list of the investment consequences of the special election for Ted Kennedy's old Senate seat, Bruce Krastig has this one for the U.S. dollar and gold:
I read the election result as being dollar positive. Somewhere inside this vote last night is a call for fiscal conservatism. We are going to hear rhetoric to that effect in the coming months and we will see legislative steps that at least give lip service to the idea that we ought to tighten our belt a few notches. To the extent that I am right by calling this dollar positive, you have to also think that it is a gold negative development. For those that love the yellow metal and hate the dollar, take heart. Any positive impact to dollar will be short-lived. The inability to put a second stimulus together will show up in all of our numbers by midyear. At that point it will be more clearly understood that the US is broke and there really aren’t any viable options that don’t entail a lot of time and pain.
Although the greenback's rise last night and today was attributed to PRC tightening, the election might well have added to the rise. The greenback has pushed above 78.3 this morning, and gold dropped below $1,120 before bouncing back above.

The rest of his list deserves some thought, especially for equity investors. He also sees the Brown win as a shot over Tim Geithner's bow, as well as the Fed's. People who are hoping for a second stimulus are likely to be disappointed.

Given today's brand of populism, he's likely right about the consequences for gold and the greenback.

One For The Marc Faber Watch

Dr. Faber has consented to join the board of Sprott Inc. Now, any shareholder in the company can brag, "Dr. Doom works for me!"

He's also a director of Ivanhoe Minerals Inc.

Forbes Billionaires' Wrapup, Gold, And Double-Dip Recession

Forbes' Matthew Miller notes that the 2010 Billionaires' Predictions is still popular over at their Website, and opines on the meaning of a newfound popularity of gold in their ranks. He opines that it's fear of a double-dip recession:
So, if billionaires are still in love with gold despite it's massive run up in the past 12 months, they must be still scared of what the economy looks like in the near term.

My take on this: we're in for a double dip recession. The equity markets will likely fall at least 20% in the next six months as unemployment remains high, the dollar remains weak and consumer demand languishes....
That's his take on it, but so far the greenback hasn't followed the script. My own, necessarily outsider's, interpretation is that they anticipate a bout of stagflation. Gold has done well during this recession, despite a huge drop early on in it, but the last recession the gold did well in was 1973-75's. Subsequently, except for the present one, recessions have not been good for gold.

There could be a more quotidian reason for the favoring of gold: U.S. Treasury yields are simply too low right now to make them the best safe-haven choice. The bull market in Treasuries has lasted almost thirty years, is aging, and may be already at an end. This last recession, gold has done better than Treasuries...making for a noticeable shift in the tide.

Rising Greenback Pushes Gold Down

After making a run at $1,140 last evening, shooting slightly above that level by 8 PM ET, gold fell to about $1,134. News came out from the PRC that the People's Bank of China has told several major banks to stop lending because they've overextended themselves. The markets interpreted this move as further tightening, vaulting the U.S. Dollar Index to almost 78. As night turned into morning, gold dripped further even as the greenback held steady. The drop that started about midnight ET took gold below $1,128. A recovery rally was followed by a second dip which bottomed at $1,128 except for a brief downards spike that took gold to $1,126.30. At about the same time of the second dip, the U.S. Dollar Index rallied to reach 78.213 before pulling back somewhat.

This Bloomberg report attributes the gold drop to the rise in the greenback, as well as waning investor demand due to the new platinum and palladium ETFs:
“Gold continues to trade off the greenback,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said in an e-mail. Bullion has been “gradually decoupling” from other precious metals, with its performance against platinum group metals reflecting “weakening investor interest” in gold at the moment, he added.
The same report also notes that the SPDR Gold Trust ETF's holdings dropped slightly yesterday. A Wall Street Journal Online report quotes an analyst who also notes that it's the U.S. dollar holding the metal's price down:
"It's difficult for gold to push out of its range in dollar terms while the momentum is for a stronger dollar," said Mitsubishi analyst Tom Kendall.

Gold has been trading between $1,120 an ounce and $1,160/oz since the start of the year and may do so for "some days to come," Mr. Kendall said.

As of 8:15 AM ET, gold's decline intensified as the second rest period came to an end. The metal bottomed at $1,122.60 shortly before 8:30 AM ET. No news seems to have accounted for the drop, but before it started gold was up once the U.S. dollar rise was factored out. According to the Kitco Gold Index, gold was down on that basis as of 8:30 AM ET. As of the time of this post, spot gold's at $1,122.90. The December U.S. wholesale price numbers had a late and mild influence on the drop, as the 0.2% rise combined with the December CPI number "supported the view that inflation is not a problem."

The gold-at-a-discount indicator, calculated by dividing the price of gold by the price of a share of GLD, closed at 10.21 yesterday. During interday periods, it has not sunk below the trigger point of 10 since the beginning of this year. When gold sells at a discount to the equivalent in GLD shares (10), it's oversold and tends to rise.

According to this daily chart of gold, the metal has veered towards an equilibrium that's right around its 50-day moving average:

Chart-watching jargon aside, a move towards equilibrium is what the chart shows. In the regular world, equilibria don't last for all that long. Although the low end of the present trading range has held up, gold looks as if it's going to jolt out of equilibrium on the downside. That's consistent with the resurgence of the U.S. dollar, not to mention the credit tightening in the PRC.

Tuesday, January 19, 2010

Gold In Narrow Trading Range, Breaks Slightly To Upside

The U.S. Dollar Index mostly held above 77.5 today, and didn't fall much when below that level. After somewhat of a recovery from its early-morning slide, gold was marking time above $1,130 late morning.

The pusher-downers that normally surface mid-morning were absent. Instead, gold drifted and later rose up despite the greenback being stuck in its own trading range (although at the lower end right now.) The rise-up took the metal up above $1,138, but gold has since drifted down slightly.

Update: Not much happened subsequently. Gold's been in a tight trading range, centered at just below $1,138. At the close of regular trading spot gold hit $1,137.60. Similar calm has prevailed in the greenback market, with the U.S. Dollar Index in a tight range centered at just below 77.5.

In other words, both have found equilibriums. Real equilibriums don't last long, but gold's $1,125-$1,140 trading range - except for short-term moves - has held for almost two weeks now. It's still holding now.

Credit Suisse Goes Bearish On Gold

In a recently-released report, Credit Suisse has predicted an oversupply of gold in the year 2010 based on demand considerations. Opining that 2009's ETF demand was aberrational, the report's author expects 2010 demand to fall to more normal levels. Given the drop in jewelry demand as prices rose, and given the expectation that it'll rise marginally if prices keep falling, there should be a net oversupply of about 420 tons of gold this year. That oversupply will drive gold down to below $1,000/oz.

The Business Insider has picked up on this report [here], but the tip of the hat has to go to Zero Hedge for timeliness. ZH also has reproduced the entire report in Scribd format.

Could it happen? Could a decline of that magnitude visit the gold market, especially given where we're at in the reflation cycle? According to the analytical report, the answer is "yes" because increasing investment demand from all sources will be offset by dis-investment from professionals who see crisis ebbing. As recovery becomes more evident, some money that has been placed in gold will shift to stocks. That's the nub of the Credit Suisse case for oversupply pushing down the gold price. Overall net demand for gold will grow at a lesser (more normal) rate because stocks are now a more competitive alternative.

I don't believe that gold will fall that far myself, but the analyst does have a good point about the recovery trade. During this current bull market, gold's been hammered down a few times: in '03, '06 and '08. [10-year-chart here.] In the first two cases, those pullbacks have been followed by trading ranges that have lasted more or less a year. The only exception to the rule was '08, where a downdraft was followed by two worse ones several months later. After the spring pullback, gold turned in two lower lows in September and November of that year.

But, that was during a year of financial crisis that sent the U.S. dollar soaring and deflationary expectations soaring too. Recovery won't re-create the same panic; only another financial crisis will.

Granted that yesterday's chart patterns show the effect of yesterday's fundamentals, and don't speak to today's or tomorrow's, but they also show how the market behaves. So far, there hasn't been a low that's undercut Dec. 22nd's. And, recovery does not pack a deflationary punch that would send investors scrambling for the U.S. dollar as a safe haven. The greenback may be pushed up by recovery, but there's no solid reason why it should.

From a long-term standpoint, my skepticism about Credit Suisse's bearishness does seems to be little more than a quibble. I should add that the analyst sees the gold price marking time in the next few years at about the $1,000 level.

Update: Also somewhat bearish is geologist and gold-stock market-letter writer Michael S. “Mickey” Fulp:
[S]upply and demand fundamentals do not support the current price. And we’re in a deflationary environment. There is no rampant inflation on the horizon right now. It can be argued that when the quantitative easing is over and the US raises interest rates that we will once again be in an inflationary environment but that doesn’t mean that gold is going to the moon. Gold generally retains its purchasing power and that’s about it.

Top-Tem List Of Gold Stocks From Gold Fund Manager

These stocks are all listed on the Toronto Stock Exchange, but some are cross-listed. The list comes from Kevin MacLean, portfolio manager of the C$347.1-million Sentry Select Precious Metals Growth Fund. According to this Globe and Mail report,
Mr. MacLean invests in companies that have what he calls a “high wealth-creation yield. These are companies that are adding to their reserves and resources at very meaningful rates relative to the size of the company, and have a high cash-flow yield.” He shies away from miners during the construction phase because of concerns about things going wrong – from permit delays to cost overruns.
The companies are:
  1. Semafo Inc. SMF-T
  2. Red Back Mining Inc. RBI-T
  3. Golden Star Resources Ltd. GSC-T; GSS-AMEX
  4. Alamos Gold AGI-T
  5. Yamana Gold Inc. YRI-T; AUY-NYSE
  6. Jaguar Mining JAG-T; JAG-NYSE [This one's been hammered today.]
  7. Allied Nevada Gold ANV-T
  8. Iamgold Corp. IMG-T; IAG-NYSE
  9. Aurizon Mines ARZ-T; AZK-AMEX
  10. Osisko Mining OSK-T

Anyone interested in any of these companies can look further into them. Boilerplate it may be, but doing the due diligence is a still a necessity before taking a plunge.

I should add that the Globe article itself has links to GlobeInvestor data on these companies.

U.K. Inflation Release Leads To Paradoxical Drop

Before the release of the December U.K. inflation data, which saw the one-year inflation rate vault up to 2.9% on a one-year basis, gold was climbing. During yesterday's truncated trading, gold had zeroed in on a narrowing trading range to close at $1,132.70. Once resuming after 6 PM ET, spot gold climbed; it reached $1,141.50 shortly after 2 AM ET. Then the price of the metal began to fall, sliding all the way down to about $1,128.50 before partially recovering.

Gold plummeted some time after the People's Bank of China made it reserve-increase announcement; that fall made sense, given what it implied for future inflation in the PRC. This time, however, gold ratcheted downwards after the U.K.'s Office of National Statistics announced that U.K. inflation "accelerated at a record pace in December, surprising economists and putting inflation concerns back on the Bank of England's radar." Seeing gold pushed downwards because of unexpectedly high inflation ain't supposed to be the way the world works.

The paradox is explained by the U.S. dollar jumping on the news. From a day's low of 76.934, the U.S. Dollar Index vaulted up to 77.63 before pulling back somewhat. According to Kitco's Gold Index, also featured on the company's home page, gold was still up $6.60/oz as of 8:31 AM ET once the rise in the greenback was factored out.

That result makes gold's fall make more sense, but it doesn't erase these data contained in the same Marketwatch story about U.K. inflation: "The British pound spiked higher on the [December inflation number] then subsequently trimmed gains. The pound changed hands in recent action at $1.6372 versus the dollar. The euro fell 0.7% versus sterling to 87.38 pence."

So, as the first day of regular trading this week opens: U.K. inflation numbers hit the roof; the pound jumped up in consequence; the U.S. dollar leapt up too; gold fell. Had much-anticipated rate increases not been in the hat to pull out, I would have to wonder if the forex markets were being somewhat irrational today.

Since GLD didn't trade yesterday, the gold-at-a-discount indicator is effectively unchanged from Friday's number. The indicator only works when both products trade at the same time. To remind everyone, Friday's number was 10.20 GLD shares per ounce of gold. Once that number sinks below 10, it's likely that gold itself is due for a run-up. That's because physical gold seelling at a discount to paper gold indicates an oversold condition in the metal.

As this blog entry goes to post, the U.S. Dollar Index has pulled back to a little below 77.5 and gold has pulled back up to end up nearly unchanged relative to yesterday's regular-trading close. As of the time of the posting, spot gold's at $1,132.30. So, it becomes easier to interpret the above spill as aberrational.

Monday, January 18, 2010

Back To Drifting

After a directionless Friday afternoon, gold's risen slightly overnight. A trading range between a little above $1,136 and a little above $1,133 held from 2 AM ET to about 8:45 AM ET. As of the time of this post, a brief break on the downside has not ended the range; spot gold's at $1,134.20.

This Bloomberg report attributes the earlier rise to a fall in the U.S. dollar, and to safe-haven demand caused by Greece's budgetary woes. The U.S. Dollar Index had been drifting down from 2 to 6 AM ET, but is now drifting up. Since today is Martin Luther King Jr. day, trading in both the greenback and gold will be truncated; only electronic trading will take place.

The gold-at-a-discount indicator, which is the price of gold divided by the price of a share of GLD, closed last Friday at 10.20. Since the exchanges are closed today, this indicator will not change on the GLD side today. The level to watch for is below 10; at that point, gold itself is trading at a discount to GLD shares. The last time this happened was at the beginning of this month. When gold is trading at a discount to GLD, it's a sign that gold has become oversold. A chart of the ratio, courtesy of, can be found here.

This chart of the U.S. Dollar Index shows Friday's recovery from the index's slide earlier last week:

The weekly chart shows that, even with Friday's rebound, last week was still a down week for the greenback:

The weekly chart for gold shows somewhat of a mirror to the greenback weekly chart - with the eye-catching exception of last week, where weakness in the U.S. dollar was not mirrored by strength in gold:

As noted in earlier stories last week, gold was dragged down by the report that the People's Bank of China is trying to rein in inflation. Any recent Greece-related safe-haven demand either isn't evident or has been swamped by the PB of C bear trade.

In tune with gold's recent lack of strength is this Gold Investing News report by Kishori Krishnan saying, "Gold Price May Test Support Levels."

Happy Martin Luther King, Jr. Day

Since the U.S. markets are closed for the day, today's installment of this blog is going to be truncated. Thanks for reading it, and enjoy the holiday.

Gold Mines And Costs

A Mineweb article by Barry Sergeant goes through the universe of major gold producers and points out that they haven't been doing all that well compared to gold when prices fell. This disappointment is in contrast to tepid rises in the long term when gold was up. In the middle of the article, he attributes the underperformance to rising costs:
Benefits from the longer term increase in the dollar gold price have been whittled away by rising capital expenditure costs, at existing operations (stay-in-business capital expenditure), and at new mines, where build decisions have sometimes been based on mineral economic feasibility studies that no longer look so robust. Costs have a nasty habit of rising, and then not receding to previous levels, and then rising again.

I made a similar point earlier in "Where's The Leverage?", but my hunch on the source of the cost pressure was wrong. As Segeant said, ballooning capital costs are to blame.

There's Still Optimism, Long-Term

Despite gold's tepid performance recently, optimism for the longer term is still out there. For example, this Mineweb report opines that gold's been held back because some investment demand's been siphoned off by the new platinum and palladium ETFs. The author, David Levinson, is still a bull long-term:
Once again there is talk that gold is forming a bubble at these levels. Like I've stated many times, I heard this when gold went from $250 to $500. I heard it again when gold moved to $700 and then to $900. And, once it traded above $1000 I heard many analysts state that gold had peaked. As far as I am concerned, the fundamentals driving the yellow metal are all still intact, and this market has a long way still to go.

Even if the dollar stages a comeback in the short-term, with US national debt approaching USD12 trillion, interest rates at around zero, unemployment at 10%, how is the dollar going to reverse its downward spiral? As the rating agencies continue to downgrade countries in the Eurozone we may see some pressure on the Euro which may in the short-tem boost the dollar, but ultimately, the continual problems facing these fiat currencies will push the gold price to new levels....

One important fact in this article is 2009 gold production. Despite production declining during the last decade, as noted in this interview with a managing director of the World Gold Council, 2009's went up. The same Mineweb report pegs '09 gold production as 2,553 tons, an increase of 144 from 2008's 2,409 tons. Levinson's argument is based on monetary debasement, not declinign production, so his bull case is demand-centred.

Sunday, January 17, 2010

Thumbnail Financial Sense Newshour Wrapup

On this week's Financial Sense Newshour podcast, the focus was on the economy. The hosts believe that the U.S. economy is in recovery mode, and will continue to be so unless the U.S. government does [in their words] "something stupid." By "stupid," they mean tax hikes.

There was no forecast on gold this week. The one most relevant to gold was a 2010 forecast on long-term U.S. Treasury interest rates: they're going up.

Should long rates go up, and short rates not go up, the yield curve will steepen even more. A steep yield curve is a kind of subsidy to the banks, which are still prone to mismatching maturities [borrowing short and lending long in order to capture the yield-curve differential]. Long rates might go higher as deflation fears keep melting, or if the bond vigilantes wake up and act on the huge deficits already in place. It's even possible that longs will incorporate a significant inflation premium.

To be honest, I don't know what the effect on gold will be. Common sense says that gold will go up, but we're not living in normal times right now.

If T-bond rates go up too much, there's a good chance that the Fed will shift back to quantitative easing. As long as Alt-A resets are hanging over the mortgage market, the entire system needs low mortgage rates. There are some reports that say the Alt-A and option-ARM resets will be far less damaging than feared, because the bulk of the vulnerable ones will have already become non-performing, but the monetary authorities seem unlikely to take that risk. Another quantitative-easing program will further balloon the Fed's balance sheet and probably balloon bank reserves.

Nevertheless, both have been bloated for more than a year now and the money supply hasn't exploded. The only measure with any froth is M1, and even its growth is cooling down.

Unless the U.S. dollar tumbles, I don't see how gold will ramp upwards as a result.

Of course, if both long and short rates go up, the latter because of Fed hikes, then the greenback will likely benefit. This scenario won't be good for gold.