Friday, January 29, 2010

Another Morning Drop, Afternoon Respite

After spurting up to almost $1,090 post-GDP report, gold entered into yet another morning decline. This one started just before 9 AM ET, and its first downleg lasted for more than an hour before bottoming at about $1,076. A partial but quick recovery ensued; it ended right after 10:30. Since then, gold's been largely dropping. The day's low $1,074.10 for spot gold was made just after 11 AM ET.

The GDP report did it - for the greenback. Thanks to the 5.7% 4Q number, the U.S. Dollar Index has gone on a tear. From about 8:15 to about 11, the Index has shot up from about 78.95 to 79.325. After a slight reaction, the greenback made a slightly higher new high at 79.334. At these levels, the highs are not only daily...they're also since-August.

If there is a well-funded scalper who keeps shorting gold in the morning and hoping for the resultant decline to stick, (s)he has been successful this time 'round. As of 11:23 AM ET, the Kitco Gold Index has split the $9.10 decline in gold into $4.40 due to dollar strengthening and $4.70 due to predominant selling.

Update: The decline ended right after noon, at about the same time the greenback peaked. Gold got down to $1,074, or slightly above its daily low, then hung around that level for a little while, and then started slogging back up. As of 12:54 PM ET, the Kitco Gold Index had almost all of the gold decline attributable to strength in the U.S. dollar.

The greenback's been the story of the day. Right at the time gold's decline ended, the U.S. Dollar Index peaked at 79.448. It pulled back a bit, but its 12:55 PM level of 79.39 made for a gain of 0.449. For the daily greenback, that's a big one.

As of 12:56 PM, spot gold almost made it back to $1,080. The rest of the afternoon will show if called-forth support will put it back into its old range.

Update 2: It did so, but just barely. As the greenback marked time, gold climbed up to $1,082, lingered there for a bit, drifted down and then up in a narrowing spiral pattern. That pattern was later bent.

The Kitco Gold Index had gold showing a miniscule gain due to predominant buying power, but just barely. Ten cents down, with the greenback holding steady, and it'll be even. The raw drop on the day is $6.50 as of 2:41 PM ET.

The rest of the week's trading is likely to be quiet. It's a toss-up as to whether or not $1,080 will become the floor again by the end of trading at 5:30. As of 2:44 PM, however, gold slumped to $1,078.50. The U.S. dollar woke up again.

Update 3: That wake-up proved to be temporary. The U.S. Dollar Index, after making a new since-August high at 79.482 made shortly before 3 PM ET, went back into a trading range. That high was slighly bested right after 4 PM, but the 79.5 resistance level held.

After sliding down to just above $1,076, reached right at 3 PM, gold climbed back up. By 4 PM, it was almost at $1,082. That run-up exhausted the buying power and gold came to a rest just above the $1,080 level. As of the close of this week's trading, spot gold was at $1,080.20.

Gold did end up above $1,080, but it's still an open question as to whether or not the support level is re-established - or whether there's a new channel opened between $1,075 and $1,080.

What isn't in doubt is that gold held up well despite the greenback's surge. The Kitco Gold Index credits gold with a $2.00 gain in today's trading once the U.S. dollar is factored out. $7.20 was taken off the price due to the greenback, making for gold's raw $5.20 loss on the day.

Gold was down on the week, from just above $1,090 as of Jan 22nd to today's $1,080. It's not just the end of the trading week, it's also the end of the trading month. Gold was about $1,097 as of the end of December, so the $1,080 reached today does makes for a monthly drop more than one-and-a-half times the amount of the weekly drop. Given the rocketing dollar and the surprise tightening moves by the People's Bank of China (PBoC), it could have been worse. This last week, and the week before it, was spent waiting for another shoe to drop...and to see if the $1,080 floor was broken in a serious way. There were people, normally gold bulls, who were tightened up for a run at $1,050 and seemed braced for a run to $1,000. Whether averted or postponed, that plummet never happened this week.

What's striking about the gold market this last week has been its resiliency. The much-mentioned $1,090 support level was broken on Wednesday. $1,080 replaced it. There were a few tests of $1,080 today, some going down below $1,075, but there always seemed to be called-forth demand at those lower prices. Formally, $1,080 held even when the greenback put a lot of pressure on gold. This "layered support" shows clearly that the breaking of an important support level did not engender any panic. Gold, at least for now, is in strong hands. It's hard to avoid the conclusion that gold's decline has been softened by bargain-hunting.

This Reuters report ascribes gold's fall to both the U.S. dollar leap-up and "liquidation." The liquidation referred to is funds pressured to do so by proposed bank restrictions:
Commodities [have been] under pressure since Obama proposed to restrict banks' risky trade, possibly including commodities.
The same story says that April gold futures ended this month 1.3% lower than in the end of last month.

A Globe and Mail wrap-up mentions the same liquidation pressure, as well as the strengthening greenback, as the causes of gold's decline this week. It also notes that the futures price has declined nearly 4% in the last two weeks (since the PBoC got rolling on its tightening.) Therein is a caution about the futures testing the $1,060 level:
On charts, gold futures held key support at their 100-day moving average at $1,087 per ounce, but further decline could lead to a test of the $1,060 area, seen as support where prices topped out on the way up last October, analysts said.
A break to $1,060 by the futures would mean a drop to about $1,055 for the spot price It might entail a drop to $1,050. It just might.

Happy weekend, happy end-of-month, and thanks for stopping by.

Double American Exports In Five Years? Not Very Likely

That's what a New York Times review of Obama's goal says. Although exports increased at a nice clip - faster than imports - in the fourth quarter, a lot of that increase was due to the falling U.S. dollar. The greenback resurgence didn't start until the beginning of December.

Look at what the U.S. export sector, unless currency-hedged, has to face in this quarter:

Before coming to a rest, the U.S. Dollar Index got up to 79.448 - almost 79.5 - as of about noon ET. Interday, a new candlestick has to be added to the right of the most recent one; it has to stretch up one full hatch higher. 79.5 is the highest number on the graph; it's just below the RSI part.

Any exporteers had better hope hard that the resurgence in the greenback is due to the greenback carry trade being unwound. If not, we're in the early stages of an all-out U.S. dollar bull market.

Such a bull market will be bad for gold...or should be bad for gold.

An Optimistic Gold Bull Makes The Technical Case

As based on technical analysis, this article by "NuWire Investor" makes the case for accumulating gold. The nub of the case is:
Gold is firming up a bit here at the same time the dollar is showing strength. Gold is sitting in the lower range of a multi-week consolidation pattern, which suggests gold is a buy right now. Until we bust out of this range in either direction, I will use all pullbacks in gold to add to positions.
The author is bullish on both the U.S. dollar and gold, and believes that both asset classes rising signals a new phase in the gold bull market. Particularly recommended are gold stocks: the author says that the Amex Gold Bugs Index (HUI) is undervalued with respect to gold itself, and the cost squeeze that hampered gold shares back in '07 will not be manifest itself again for a long time. The economy is in too bad shape for the squeeze to come back.

Another technician, Graham Summer, has drawn a completely different conclusion from the charts. After looking at gold's price in Euros, Yen and Swiss Francs, he concludes that the metal has double-topped in all three currencies. With respect to the yen, gold's already lower than the low established between its two tops. In the two other currencies, it's close.

As is usual when an investment's direction is uncertain, we have cases that can be made for both sides. Given the strength in the U.S. dollar, one of them has to be wrong. Gold can't rise in a stronger currency while falling in a weaker currency.

Investment Demand is Dormant Now, But...

...a Financial Times article keeps the memory of '09 green. It's about commodity ETFs, which the author called "Exchanged-Traded Products," and gold is the star of the show. The SPDR Gold ETF (GLD) is by far the largest commodity-based ETF of them all.

The article deserves a read because it explains why futures-using ETFs often underperform the respective commodities they track. Thankfully for gold investors, GLD stores physical gold...

...although there are doubts on that point, like this fellow has. [He has his own long-established alternative to GLD.]

Today's Economy Compared To That Of...The Early 18th Century

Back in the days before I was alive, the term "eighteenth century" was used as a term of abuse. Now, as a column by Neil Reynolds reveals, it's being used as a serious comparison.

He opens up with a quote from near-permabear and deflationist Robert Prechter:
Robert Prechter, the iconoclastic Atlanta market analyst (publisher of the Elliott Wave Theorist), says the world remains in a bear market of "supercycle" degree - meaning that the world's current economic troubles will be "the deepest and longest since the 1700s." Assume for a disturbing moment that he is right. What went wrong in the 18th century? In what way are we replicating the wrong? What consequences should we anticipate?
The rest of Reynolds' column relates the well-known real-life tale of the notorious John Law. Law, of course, was the central banker who created France's first all-out economic bubble through inflating. That bubble ended in tears, and with a repudiation of then-new paper money.

How similar is today's period to that of Law's France? The author of a recent biography of Law, Janet Gleeson, like to think there's quite a bit, and Reynold gives her her speed at the end of his column:

The checklist from 1720 remains relevant: a central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive State debt to appease the populace. Was 1720 a unique calamity? Perhaps. As Ms. Gleeson says, though, these same forces have since then combined repeatedly to produce economic disasters. They appear "little altered," she says, "in 300 years."

There's a certain compelling aspect to the comparison, both to Law's France and the 18th century in general. We associate the 18th century with laissez-faire and free trade, but the fact is that both ideas were mere theory - intellectuals' creations - for most (if not all) of the century. The only exception was America, but the let-alone policy was then known as "benign neglect"...and the reasons for it were not exactly consistent with the ideals of laissez faire. Britain was solidly mercantilist, and so were other "advanced nations" of the time. Thanks to Jean de Colbert, domestic mercantilism - what we now call indicative planning or stimulus policy - was solidly ensconced in France as the 18th century opened. Of course, mercantilism as policy is solidly ensconced in the world of today.

Yes, so-called "eighteenth century ideas" were little more than ideas until the Corsican and American Revolutions. Not until the British surrender at Yorktown and the subsequent Treaty of Paris did it occur to practical people that those intellectuals' notions could actually be relevant to governing a real nation. By that time, the eighteenth century was less than twenty years away from ending. Until then, practical men thought in terms of domestic industry and national advantage like good mercantilists should. The only difference between "sevententh century thinking" and that of nowabouts was that today's uses the "resources of the nation" in place of gold in the treasury.

The shucking-off of the gold standard, and the replacement of gold by a first lein on the resources and incomes of the nation's citizens, vastly expanded the scope of government funding. So did the introduction of fiat currency, which is now the world norm. The near-universality of fiat currency these days, along with the habit of papering over instabilities with more monetary inflation, does invite a comparison to the time of John Law.

However, the more specific comparison to Law's time is a bit of a stretch. Back then, no-one knew what paper money could do. Lack of historical knowledge left a huge knowledge gap that was filled by fiat-money utopianism. That's far from true nowadays. Just as Herbert Hoover had no idea he'd be "Herbert Hoover" as of 1930, so it was that France didn't know the outcome of the Law experiment at the time it was launched. Todays' central bankers know it well.

So, I have to conclude that a new Missisippi Bubble isn't in the cards nowadays - at least, not in the developed nations. There's just too much institutional experience with fiat money. The kind of utopianism that France's fiat-money experiment engendered 'way back in 1716-20 is very unlikely today in developed nations.

Regarding the comparison of the eighteenth century to today: there is a feature that hooks our optimistic side. The Industrial Revolution didn't go auto-catalytic until the latter part of the 18th century. If today's economic world is like the early 18th century's, then there's an economic Revolution that's yet to be born. Like the Industrial Revolution itself, that new Revolution will be born in outlier land and looked down upon until it's too big to be treated with disdain. The Information Revolution invites the comparison, but there may be another that we have not yet seen - perhaps in, say, nanotechnology.

Soory to be cyncial, but it won't come from the hyped sectors. Political hype goes better with mercantilism.

Inflation Isn't Just Creeping Up In The U.S.

Despite the most recent figures being slighly lower than expected, inflation in Euroland is a positive 1%. That figure crept up from 0.9% last month, although the expectation was for 1.2%. Unlike U.S. inflation, there's no core rate; the figure is the change over the last twelve months.

It's true that Euroland inflation is benign - the spin is right on this point - but it's still positive. Of course, it's only positive because of an unusually dovish policy stance by the European Central Bank (ECB). The spin, though, is intended to influence the ECB to stay unusually dovish: high unemployment is cited as the cause for keeping inflation subdued.

Will Euroland endure stagflation in the years ahead? Given the U.S.' experience, it seems likely - but not for some time now.

Gold Marking Time

The $1,085 floor established yesterday afternoon didn't hold, being fallen through at about 7 PM ET. The drop, however, was less than 5 dollars an ounce; $1,080 held except for a brief spike downwards early this morning. Two attempts to rally above $1,085, one at 10:30 last night and the other at a little after 3 AM ET, stopped. The latter one got gold briefly as high as $1,087 before running aground. Since that point, gold's been in the $1,080-$1,085 channel.

The U.S. Dollar Index made its daily (and five-month) high of 79.155 late last Thursday, at about the same time when gold descended to its present range. That level was almost bettered at 3 AM ET, when it reached 79.116. That rise was enough to turn the then-advance in gold into a decline, which briefly got the metal's price below $1,080. Since then, the greenback fell back somewhat, ending just after 4 AM ET, and has been rising slightly since. As of 8:16 AM ET, gold has climbed slightly above its range and has been credited by the Kitco Gold Index with a $1.00/oz rise due to predominant buying.

This Bloomberg report credits the U.S. dollar's rise for gold's slump, with no other news to account for it. Two traders are quoted to that effect:

“Speculators are still liquidating gold, with no physical buying in sight,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report. “Bullion is still trading on the back of swinging currency markets.”...

“Further gains in the dollar would keep gold on the defensive,” said Toby Hassall, an analyst with CWA Global Markets Pty in Sydney. “Prices are finding support at the level of December’s lows.”
The report also mentions the results of a straw poll: 11 out of 22 traders said that gold would decline next week. That liquidation has evidently been in the futures market, as the SPDR Gold Trust's holdings were unchanged again yesterday. Platinum continues to be popular while gold's popularity is languishing.

A Wall Street Journal Online report attributes gold hanging around the December low to weakness in the euro, which has been reflected in U.S. dollar strength. Also mentioned as factors are continual weakness in other commodities and the stock market. The two experts quoted therein were more optimistic than the ones Bloomberg quoted:
"The precious metals have been holding well despite the whole market being massively under pressure, especially the base metals," said Eugen Weinberg, a commodity analyst at Commerzbank. "It points to a pickup in demand after a price drop."

[Gold's] lower prices are enticing buyers in China, India and the rest of Asia, analysts said. But they add that buying won't be enough to offset the absence of speculative investors and retail investors in exchange-traded funds, who have shown little appetite for gold at the moment.
There's a certain irony in the fact that rising physical demand would be seen as insufficient to boost the gold price. However, it does explain the refusal of gold to stay below $1,080 for long.

This six-month chart of the Kitco Gold Index shows a difference in the January rally with respect to the previous one:

This chart is scaled to place the Kitco Gold Index (KGI) value at exactly the same point as gold itself at the start of the chart as of the end of July. (The gold price is right-scaled; the KGI is left-scaled.) As is evident from the chart, the Index price is higher than the gold price itself at the point corresponding to yesterday. Also evident is, during the early January rally, the gold price didn't get as far above the KGI price. That relative lack of difference reflects the greenback's recent strength.

What's clear from the chart is, after November's rocketing turned into December's rout and January's indifference (all told), gold has been pushed up higher when the U.S. dollar is factored out. The rise in the KGI isn't spectacular - more than 14% - but it is there. Also of note is the fact that the KGI is slightly higher now than it was at the December bottom, even though gold itself is about the same. It isn't much comfort to someone investing in U.S. dollars, but it may be to someone investing in a foreign currency like the Euro.

The GDP numbers were released at 8:30 AM ET, and the overall number came in a much higher than expected 5.7%. Gold had initially declined as of 8:30, but that decline reversed shortly after the GDP report was disseminated. A brief spurt up to $1,090 ended at about 8:50, which was followed by an equally sharp decline. As of 9 AM, spot gold was at $1,082.30. The U.S. Dollar Index, kick-started from the 79 level, has bettered yesterday's high on the news. The slight predominant buying as measured by the KGI had turned to slight predominant selling.

Thursday, January 28, 2010

Gold Still Holding Its Own

Even though the U.S. Dollar Index hit a daily high of exactly 79 just after 10:20 AM ET, gold was still holding its own at the time. The disappointing job-claims report ended up pushing down the U.S. stock market, and the U.S. dollar has been the prime beneficiary of the downdraft. The gold price didn't initially suffered on account, though: despite the greenback making a new daily high, gold sunk to about where it was as of 6 AM. As of 11:07 AM ET, the Kitco Gold Index has gold up slightly after the strength of the U.S. dollar has been factored out.

That double bottom turned into a triple bottom, which has been broken a little on the downside; as of 11:10 AM, spot gold's at $1,084.20. Yesterday's noon hour was not kind to gold. It remains to be seen if today's will be.

Update: It didn't. Although the downturn got started later today than yesterday, it still kicked in. As of 1 PM ET, gold's has recovered slightly from its low to reach $1,078.00. But, the 12:45 low of $1,072.40 was worse than December's. Interday, gold has reached a level not seen since the beginning of November.

The greenback has had less to do with this drop than recently. It has not bettered its daily high of 79.0; the latest short-term top, made at about 12:37, only got to 78.992.

That's likely why gold mostly recovered from its most recent plummet; as of 1:30 PM ET, spot gold was up to $1,083.30. Last night's surprise drop, just before the State of the Union address, was confounded. This afternoon's looks like it will too.

It looks like the recent downward volatility in gold is the off-shoot of speculative U.S. dollar bull runs.

Update 2: Perhaps. As it turns out, the afternoon drop was confounded: gold kept sailing up above $1,085 before stopping. Then, it drifted in the lower end of the re-established $1,085-$1,090 range before sliding in to a regular-trading close of $1,085.40. The price scraped the $1,085 level for close to forty minutes from 3:55 PM, but didn't fall further. The close left gold down $1.80 on the day. According to the Kitco Gold Index, gold lost $3.35 due to the rising U.S. dollar. The Index credited gold with a $1.55 gain on the day due to predominant buying.

Speaking of the greenback, the U.S. Dollar Index remained in a trading range for most of the afternoon before rallying at 4 PM ET. That rally, though choppy, carried the Index almost all the way up to the day's high before pulling back slightly. The afternoon high of 78.982 was reached at about 5:35 PM ET. It's possible, given the recency of that high, that the dollar is resting before making another advance.

A hunch: This hunch of mine is only a guess, but I believe that gold is being pushed down by a well-financed punter (or group of punters) who are bearish on gold because they're bullish on the U.S. dollar. The adjustment mechanism moving gold down when the greenback's up is not automatic; people in the gold marketplace have to come in and move the price down when the greenback's up (and vice-versa.) From what I've seen, this process doesn't happen very smoothly.

Thus, there's a gap that can be filled by someone who wants to knock the price down when the U.S. dollar has gone up, or is likely to. Had they been right, it would have been part of the market's short-term equilibrating process - just more granular than most.

However, they're not always right (if such a group exists) unless they're very quick on the covering. To borrow Ed Steer's turn of phrase, the punters in question seem like "not-for-profit sellers" because the gold market often turns right back up. They may be fat-tail shorters who take small losses and the occasional large profit. Or, I may be wrong about them being uncomplicated gold bears. (To be strict, I may be wrong about any such group existing at all.)

Some may prefer a dark explanation involving nefariousness, but there's an alternate hypothesis to the one I presented above. It doesn't require villainous behavior, unless you see sneaky trading tactics as villainous:

Someone wanting to commit a lot of capital to the gold market is going to be worried about illiquidity if (s)he's the trader or hedge fund sort. For the trader, being with the long-term fundamentals isn't enough. The entry point has to be timed well.

If I were bullish on an asset class, had lots of capital to deploy, and had a trader's mentality, I would consider setting up a short account using a smaller ration than the long amount I planned to deploy. If the short account is run by an expert short trader with an eye to profit, but doesn't make a profit, then the asset class is unlikely to fall all that much. Going in to it will be far less risky than a big jump in the lake without testing (or even looking at) the bottom first.

Actually, I'm putting you on a little when I used the "I"s above. The above-proffered technique is merely an adaptation of Nathan Rothschilds' legendary trading maneuver when he found out about Waterloo. After reading the good news, he went down to the exchange and sold his stocks. Becasue everyone was watching him, and assumed that he was the man who would find out first (which was true), they further assumed that the news was bad when he sold. A panic ensued, during which Rothschild bought back in. Then, when the good news was announced officially, stocks soared back up and Rothschild made a killing.

The adaptation consists of trading on the opposite side of your call for a time in order to test the call. "If my call is true, then I should lose money over time if I trade on the assumption that it's false." The losses can be seen as a kind of insurance cost, a cost that (of course) only a player with a very large bankroll can assume.

I have to admit that the above chain of hypotheticals is a stretch, but I think a sharp trader would go about a long-term deployment in that way. We may be seeing that process now.

Hope For The HUI

It's based on technical analysis, and on using Robert Prechter's bear calls as a contrary indicator. Adam Brochert compares the six-month chart of the Amex Gold Bugs Index (the HUI) to its July-November 2001 chart, and finds a similar pattern. Brochert also notes that Prechter was also bearish on gold in November 2001.

The HUI took off starting in December 2001, and soared in early 2002 as the gold bull market got rolling. Brochert claims, on the basis of the above similarities, that thr HUI will start rising.

Of course, for his comparison to be valid, gold itself will have to take off. There hasn't been any sign of a resurgence so far.

Keeping The Spirits Up

In a Business Week profile of his opinions on gold, Aaron Smith said that gold is still looking good on a long-term technical basis.

“This is simply a normal pullback,” Smith said in an interview in London. “Gold is still above its one-year trend line and considerably above its 150-day moving average. The long-term momentum is still there.”...

“Every time the RSI [relative-strength index] has approached the 40 level, it’s been an excellent opportunity to purchase gold,” Smith said. “Until we see the 200-day moving average breached, the uptrend is still intact.”

The article doesn't make clear what timeframe Smith is using, but this daily gold chart suggests he's referring to the daily:

There were times when the RSI has dipped below 30, but those were harrowing times for gold bulls.

Smith's comments can be interpreted in three ways: at face value; as an indication that gold is in strong hands that are staying the course; or, that there isn't the kind of skittishness or gloom that accompanies oversold levels. It's true that the gold price is below a longer-term moving average, which does indicate an intact uptrend. On the other hand, the price looks fairly vulnerable at this point. The daily MACD indicator at the bottom of the chart has turned into bearish territory...and so has the weekly, as shown by this chart:

Jobless Claim Results Push Greenback Up, Gold Down

The latest jobless-claims results were released, which dropped less than expected. This news pushed the U.S. stock market down, and the U.S. Dollar Index up. The greenback has rallied to well above the 78.8 level, indicating that the preferred destination for the safe-haven and/or bearish trade is still "King Dollar."

After rising from about $1,089 to about $1,095 in the 9-9:30 AM ET time period, gold has pulled back to below $1,090. Despite that pullback, the Kitco Gold Index still shows a gain ex-greenback.

According to this Marketwatch note, gold initially stayed up right after the number was released. So did the stock market, which didn't reverse direction until shortly after opening.

George Soros warns gold is now the 'ultimate bubble'

That's the title of a Telegraph Online report of Soros' remarks at the Davos conference:
Mr Soros, arguably the most famous hedge fund manager in history, warned that with interest rates low around the world, policymakers were risking generating new bubbles which could cause crashes in the future. In comments delivered on the fringe of the World Economic Forum, Mr Soros said: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."
He also has something to say about the current stimulus programs, warning that more will be needed to avoid a double-dip recession.

It's always useful to assume that a hedge-fund manager is talking his/her book when commenting. Based upon my reading of the above remarks, despite he using the word "bubble," I believe that Soros is long gold. [He may be preparing for a long-gold trade; see here and go to "A Hunch".] His philosophy of "reflexivity" amounts to "ride the bubble" if one exists.

Update: Nouriel Roubin said much the same thing about gold (and oil) at Davos too - although I don't think he was talking his book.

While Gold Langishes, Gold Exploration Companies Bulk Up

Gold may have disappointed in the last two months, but that has not stopped more than a few gold-mining exploration companies from raising money through private placements. After a review of the recent gold slump, and the U.S.-centered causes of it, Gold Investing News' Kishori Krishnan presents a list of gold juniors that have recently raised money through private placements. The middle part of her report encourages the gold holder to stay the course.

There's little doubt about it: the gold-exploration sector is waking up. This Seeking Alpha article, "Emerging Junior Gold Producers Had Fantastic 2009,"shows that a junior-gold index vastly outperformed senior golds. The recent private-placement flood is a consequence of that outperformance, and of takeovers of at least two juniors by senior producers looking to expand their reserves more cheaply than in-house efforts would.

Then, there's a Reuters article entitled "The end of the gold love affair? Not for long." Its gist is that gold has gone dormant because the inflationary and greenback-knocking effects of the stimuli haven't kicked in as of yet.

Attempted Break Below $1,080 Leads Nowhere

The range that gold was in has been broken to the downside, but not by much. After slumping to below $1,085 yesterday at around noon, the price stayed between $1,085 and $1,090 - with one exception, which stands out because of its time.

Shortly before 9 PM ET, just before President Obama's State of the Union Speech began, there was a sell-off that pushed spot gold down to $1,079.40. Within an hour, gold was back up above $1,085. The new support level is lower, but there is new support at it. At about the same time, the U.S. Dollar Index spiked up above 79 - to 79.069 - but quickly fell back to the 78.7 level. The downward spike in gold seems to be engendered by that upward spike in the greenback, and both were engendered by pre-speech speculation that was confounded by the real thing. Right now, the U.S. dollar is bumping against $1.40 to the euro: as this chart shows, the euro sunk below that level before rebounding. It looks like the Euro's being hit to the benefit of the greenback, in hopes that a break through $1.40 will push the Euroland currency down a lot further. This time, the attempt was disappointed. If successful later, it won't mean much good for gold (in U.S. dollars.)

The rest of the night, and early this morning, saw gold return to the $1,085-$1,100 level. A three-hour spell that saw gold slightly above $1,090 ended at about 6:45 AM ET with a slide down to just below $1,085. A futher run above $1,090 ended just before 8 AM ET. Today, the U.S. Dollar Index has been fluctuating upwards after last night's spike-up.

A Globe And Mail report attributes the recent firmness in gold to less risk aversion following Obama's speech:
“The precious metals have been struggling with dollar strength so far,” said Saxo Bank senior manager Ole Hansen.

He said the Obama speech and expectations Federal Reserve chairman Ben Bernanke will be reappointed had helped dispel some risk aversion. “These things have removed some uncertainty, and that has helped the market to stabilize,” he said.

The dollar slipped from a six-month high versus the euro after Mr. Obama laid out plans to revive the U.S. economy and allayed market worries about moves to limit bank risk-taking in his comments.
This Reuters report quotes a Japanese expert that's more bearish:

Kazuhiko Saito, a chief analyst at Tokyo's Fujitomi Co Ltd, said the investment environment for gold was beginning to look poor, particularly as an interest rate hike appeared more likely than it had at one point.

"I think gold might fall below $1,080 as sentiment is not good for the precious metal," he said.

So far, anyway, that level has not been breached except during interday. According to that same report, the SPDR Gold Trust's (GLD's) holdings still haven't changed. At least part of the "sentiment" that Saito was referring to is Indian: according to this report, gold demand in Mumbai is dropping because buyers are expecting lower prices.

The gold-to-GLD ratio closed at 10.21 and was actually above that level for most of yesterday; its interday high was 10.35, and its low was 10.17. This indicator is presented as an item of reader interest.

Just before 9 AM ET, the U.S. Dollar Index has pulled back to a trading range centered around 78.73 after reaching 78.788 shortly after 8:30. The Kitco Gold Index has pegged gold as strengthening due to predominat buying.

The usual 8-8:30 downdraft in the gold price was hardly there. As of 9 AM ET, spot gold was $1,091.20, although how long it'll stay above $1,090 remains to be seen.

Wednesday, January 27, 2010

Gold On The See-Saw

Once again, there was a decline from 8 to 8:30 AM ET; today's pushed the price down to just below $1,090. It stayed at that level for about a half an hour. Then, the metal leapt up almost $10/oz before falling again to the $1,090 range. The release of the housing-sales report that shows an unexpected drop for December hit the stocks markets but didn't have much of an effect on gold, which was climbing up slowly. According to the Kitco Gold Index, as of 11:20 AM, more than two dollars of the drop from yesterday to that time today is due to predominant selling.

The U.S. Dollar Index climbed back up to 78.60 after dipping down to the 78.5 level as of 10:30. Although an earlier dip took gold up with it, which helped push the metal up to that $1,090 level, the later dip didn't. After reaching 78.6, though, the dollar dropped back to 78.55 as of 11:30 AM.

So far, it's been a day on the see-saw. This afternoon, at around 2:15 PM ET, the FOMC releases its policy statement. So far, the expectations are that there'll be little that's newsworthy from it. We'll see if the see-saw's still in place after the release.

Update: The text of the announcement did contain little that was newsworthy. More optimism about the economy was discerned from it; the Committee expects growth to be better in Q4 than in Q3. The Fed funds rate will be held where its was by a vote of 10-1. Thomas Hoenig was the lone dissenter.

The range that gold's been in did break on the low end, but not because of the Fed announcement; that break occurred earlier. On the the other hand, the U.S. Dollar Index shot up from 78.54 to just above 78.8 since the announcement's release. After dropping below $1,084 by 1 PM, gold stayed in the $1,085 range. The release of the Fed announcement had almost no effect on the metal's price.

Update 2: After that spill, things turned quiet in the gold market. The U.S. Dollar Index's upwards run earlier this afternoon, followed by one that ended a little after 3 PM ET, was a result of an attack on the Euro; that currency plummeted down below the support level of $1.40 before recovering slightly to close above it. The timing suggests that the FOMC meeting had nothing to do with it, or that some large plunger was testing the water pre- and post-meeting. Following the second test and a partial retreat, the Index ended up at just below 78.70. The day's high of 78.847, which almost bested last September's high, didn't last.

Gold, if anything, was only battered slightly by the greenback's run. After falling to $1084, a level reached at 1 PM ET, it floundered around the $1,086 level in an increasingly narrow range after 2:45 PM. At the close of regular trading, spot gold was at $1,087.20 for a drop of $9.60 on the day. The Kitco Gold Index divided that loss into $2.95 attributed to the rise in the U.S. dollar and $6.65 due to predominat selling.

This Reuters article attributes gold's fall to the greenback's rise, but also mentions option and futures expiration:
U.S. gold ended over 1 percent lower on Wednesday as the dollar hit a six-month high against the euro, and the bullion market braced for choppy option trade and contract rollover ahead of the Federal Reserve's interest rate decision....
That seems to be the reason why gold fell prior to the FOMC meeting. At the very least, it's good enough as any. At the end of it all, the $1090 support level gave way but $1,085 is still holding.

World Gold Council Says Investment, Physical Demand Pushed Up Gold In 2009

Commodity Online has a summary of its latest Gold Investment Digest report, for January of this year, which says that ETF and physical gold demand (both bulk, on the OTC market, and retail) combined to push the price up in '09. Two interesting facts of note were, gold was the best asset class in '09 on a risk-adjusted basis and the metal had the lowest volatility of any commodity monitored by the Council that year (except for the S&P GS Livestock Index.) Those commodities, with the exception of indices and oil, were all metals.

Also of note was the Council's opinion that the investment demand seems to be of a long-term nature.

A complete copy of the entire Digest is here [.pdf file], but you have to register with the World Gold Council's Website to access a copy of it.

New Gold Analyst Poll Shows Moderating Bullishness

All-but gone are the forecasts for $1,400 gold. As reported by Reuters, the median forecast for the average price this year is about $1,150. That's still up from last year's average of $1,014, but it's far less than the numbers from the days when November's parabolic rise looked unstoppable. It's also less than those from about a month ago, when December's fall-back seemed a short-term retrenchment.
The poll shows that the metal is expected to peak in the second quarter of 2010, and to hold the bulk of its gains for the remainder of the year and into 2011.

According to the median forecasts given, gold will average $1,150 in the first quarter of the year, rising to $1,200 in the second, before easing back to $1,185 in the third and $1,175 in the last three months of the year.

In 2011 prices are expected to be virtually unchanged, with the median forecast for that year coming in fractionally below this year's figure at $1,150.00 an ounce.

What a difference a month has made. There's still optimism, but the frothiness has mostly drained.

Those looking for attitudinal lags may find this snippet of interest: "Several gold market analysts were sanguine on the outlook for U.S. borrowing costs, citing the shaky nature of economic recovery...."

Signs Of Support In Indian Market

As reported by Reuters, Indian gold buying is picking up now that prices have fallen below $1,100/oz:
India gold traders continued to pick bargains on Wednesday afternoon as the yellow metal traded below the $1,100 an ounce level, but a weaker rupee weighed on sentiment, dealers said.
One dealer, with a state-run Mumbai bank, said specifically: "'I have orders lined-up in the range of $1,075-1,085.'"

The article also mentions that the weakeing rupee is cutting into that demand.

The Case For Gold Staying In Four-Digit Range

As webbed by the Telegraph Online, co-portfolio managers of the Investec Global Gold Fund explain why they believe gold won't fall below $1,000. In the words of those co-managers, Bradley George and Daniel Sacks:
In our view, a below par recovery in the face of constrained consumer spending is more likely to continue to encourage gold investment, due to expectations that fiscal and monetary stimulus is likely to continue to fuel large government deficits and pose risks to the longer-term value of the US currency....
Near the bottom of the article, they list four reasons why they think gold-mining company shares are undervalued right now:
- The high and rising gold price.
- Costs have stabilised (energy and materials costs are falling).
- Weaker producing currencies, which further widens margins.
- Relative to the gold price and to their usual valuations, gold shares appear oversold.

They're clearly talking their book.

Gold Becoming Favorite Inflation Hedge In Asia

That's according to an ING survey of 3,700 high-net-worth Asian investos outside of Japan. As Mineweb reports:
With economic growth in Asia expected to lead the world again in 2010, 45 percent of investors in the region's markets outside of Japan picked the precious metal as their most favoured tool to protect their returns from inflation, while 42 percent chose equities, according to [the] quarterly survey from ING.

In the final quarter of 2009, gold was still only the fourth-favourite choice among investors, even though the percentage of investors expecting a rise in inflation in 2010 climbed 6 percentage points to 77 percent, suggesting there is room for gold to rise....
Interestingly, given the People's Bank of China's attempt to rein inflation in, 87 percent of the Chinese investors surveyed expected inflation to increase.

$1,100 Resistance Level Still Holding

After making a brief run at $1,100 yesterday just before noon, ET, gold fell bak a little until last night. Another run at the $1,100 resistance level was then made, which topped that price for about an hour. Gold then entered a decline that lasted until about 3:30 AM ET, and which carried the price down to $1,090.40. Then, gold ascended to the middle of the $1,090-$1,100 channel before falling again. According to the Kitco Gold Index, gold's decline has been largely due to "predominant selling."

The reason why gold went from above its channel to nearly the bottom, can be found in the daily chart of the U.S. Dollar Index. Even though a reversal of the Index's early morning gain did leave gold slightly lower all told, a greenback run up to 78.702 did mirror the slide. Interestingly, gold bottomed before the U.S Dollar Index's bull run ended. As of 8:23 AM ET, the Index was below 78.4 and yesterday's close.

A report webbed by the Daily Telegraph Online has as its header a chart of gold's purchasing power, provided by the World Gold Council:

This chart says that the purchasing power of gold only sunk significantly below its 17th-19th century norm in the 1930s and 1960s. Since the latter decade, it's always been above that norm. Right now, the purchasing power of gold is higher than it was shortly after Queen Elizabeth I ascended the throne.

The rest of the story ascribed the fall of the gold price to the rising U.S. dollar: a quote from an expert echoes Dennis Gartman:
"The dollar is stronger today, and that is keeping precious under pressure," said David Thurtell, an analyst at Citigroup. "Also, a little bit of de-risking in there too."
Also included in the report, along with a quote from two other experts, is the note that SPDR Gold Trust holdings have not changed at all in a week.

The Bloomberg daily report on gold carries much the same message. The first expert quoted therein expresses conditional hope about the upcoming Fed meeting:
“Investor interest may come back after the Fed assures the markets that they won’t raise interest rates for a considerable period of time and this reignites a decline in the dollar,” said Yu Kyung Kyu, a trader with Eugene Investment & Futures Co. in Seoul.

One interesting fact to note, also mentioned by the latter story, is the fact that the SPDR Gold Trust (GLD) holdings haven't changed at all in the past week - even though the gold price has been scraping at its month low. There hasn't been any buying through the Trust at these levels, but there hasn't been any liquidation either.

The gold:GLD ratio, as computed by a ratio chart, closed at 10.20 and managed to get as low as 10.09, the same daily low it touched on Friday. For the last few days, it's been centered around 10.15 or so; it's been pretty sedate. This ratio is presented as an item of reader interest.

Also of interest is this chart of the U.S. Dollar, also courtesy of

The greenback today came just shy of its four-month high set last Thursday. The MACD indicator on the bottom of the chart is still in bullish-interpretation mode, even if the divergence of the black line over the red line is less than the level it was at as of December 10th or so. Unlike back then, there's been no rocket-up of the Index this month.

A little less than an hour after the New York market opened, gold has fallen down to the bottom of its channel as the grenback has recovered: the U.S. dollar index has climbed above 78.5. As of the time of this post, spot gold's recovered slightly to reach $1,090.50.

Tuesday, January 26, 2010

Odd Bullishess In The Gold Ranch

Despite a home-price drop in November, as measured by the S&P/Case-Shiller Home price Index, the economic news has largely been good. Consumer confidence is up for the third straight month, and the latest results are higher than expected. The IMF has revised its 2010 global-growth estimate upwards. The stock market turned up.

Given the rationale that an economic-growth pickup is bad for gold, because it presages a Fed rate hike, the bullishness in gold is surprising. After bottoming near $1,084.50 at 9:30 AM ET, gold's marched up to about $1,100. The U.S Dollar Index hit its high of 78.632 at about this time, but its pullback did not mirror gold's rise until about 10:45 AM. According to the Kitco Gold Index, the rising dollar took a bit off the gold price. "Predominant buying" explains the rise - a real reverse from earlier this morning.

What's odd is not only the economic backdrop but also the timing. Until yesterday, it's been almost normal to expect gold to be pushed down in mid-to-late morning trading, and either recover or mark time in the afternoon. This pattern began to reverse yesterday, and nearly reached full reverse today. Had it not been for an 8-8:30 pull-down, it would be completely reversed.

Needless to say: the $1090 support level, although pierced several times these last few days, has ended up holding. $1,100, although poked at today, has not been overcome.

Update: Not as of yet. After three quick pokes at $1,100, gold has slid back a little to the $1,098 range. The U.S. Dollar Index's slide to below the 78.4 level has ended. Although it's blipped upwards from 1 to 1:30 PM, it's still established a trading range centered around the 78.4 level. As of the time of this post, spot gold's at $1,098.40.

Supply-Sider's Take On Future Inflation

That supply-sider is the "Calafia Beach Pundit," and his analysis is over at Seeking Alpha. He looks at eight inflation gauges: the real broad dollar index, the gold price, the inflation-adjusted gold price, the CRB/Reuters Spot Commodity Index, Real Fed Funds, the CPI, TIPS inflation expectations, and investment-grade credit spreads. All of the charts he uses, except for TIPS inflation expectations and credit spreads, go back to the 1970s or earlier.

The picture that results is "inflation ahead" - even though the CPI hasn't really co-operated as yet. He notes in his conclusion that the Keynesian measures, such as excess capacity and unemployment, say something different:
All of these market-based indicators of inflation fundamentals are pointing in the same direction: higher. Meanwhile, traditional indicators of inflation that the Fed focuses on, such as the degree of economic slack and the unemployment rate, are pointing to very low or even negative inflation. Who's right? No one that I know has yet come up with a foolproof method or theory for predicting inflation, but I think it is reasonable to predict that inflation will be higher than the market expects (current expectations being for inflation to average 2-2.5% over the next 5-10 years).
One impression from the gold and commodity graphs is the sea-change that occurred in the '00s. In the '90s, gold was dropping and the CRB was in a long-term range, like equities are now. In the '00s, the direction for both decisively turned to the up side.

Keeping The Faith

If there's any mainstreaming of gold, as shown by both ads and media reports, it's been on the sell side. The "Cash for Gold" companies have been advertising heavily, and stories about them are becoming semi-regular in the mainstream media. There have even been reports about complaints that those companies are underpaying and even cheating their sellers.

To put it briefly, gold selling has become mainstreamed. Gold buying hasn't.

As I've written before, and almost certainly will write again, we're at a tipping point right now. Gold isn't in an all-out bubble, but it could be if the metal's bull market gets rolling again.

As the previous entry explains, a gut-level fundamental analysis shows that gold is really overvalued right now. However, a contrarian would demur. Smart money is going into gold, some in a big way, while the so-called "dumb money" (the general public) has gone for selling gold in a big way. Even if the dog doesn't bark - if gold doesn't fall despite the new supply flooding the market - we're still on the bubble side of the tipping point.

There's still gold fever out there, although it's confined to goldbug territory. This Mineweb article, discussing the outcome of a reader straw poll, gleans this scenario for gold:
Mineweb's 2010 gold price competition has now closed and, as usual readers are overall bullish about gold's prospects in the year ahead. However the consensus also sees a fall to well below current levels occurring before the price surges again to record highs. It will be interesting to see if this scenario plays out over the year.

The average ‘low' price for gold seen by readers this year is a slightly depressing $996, suggesting that the $1,000 level may be breached on the downside - but perhaps only briefly. Reading between the lines with one's own interpretation of reader expectations it looks like this low point is expected sooner rather than later in the year, and with the current surge in the dollar price levels may well be vulnerable in the short term....
By the end of this year the straw-poll consensus number for year-end is well over $1,400. Given where gold is now, and how it's acted so far this year, that number's somewhere between "very optimistic" and "LSD-influenced."

What if that consensus ends up being right, though? What happens if gold does put in another >25% gain for 2010?

I have a modest prediction. The cash-for-gold companies are already courting investigations. If gold skyrockets, it'll be much easier to cast them as "cheaters" and "crooks." One side consequence will be new laws, and even indictments on the basis of old laws rigorously (or creatively) applied.

Gold Makes One Of Four Assets Classes In Fortune Bubble List

Fortune magazine has webbed a list of four asset classes which the author of it considers to be in bubbles. The entire list makes for a real grab bag. Two on it are financial assets: U.S. stocks and U.S. Treasury bonds. The other two are commodities: gold and oil. Some may wonder if the list is self-contradictory, but the liquidity sloshing around explains how T-bonds and gold could both be considered in bubble territory right now; excess liquidity is fungible. Suffice it to say that both being in bubbles implies that bulls in each market expect different inflation outcomes.

The author, Shawn Tully, uses historical norms for each: in the case of gold and oil, he points to high prices calling forth a lot of additional supply. Here's what he has to say about gold:
Investors are rushing to gold, because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar with a commodity that, they claim, has a fixed supply.

Since early 2009, the price has jumped to $1,100 an ounce from $875, triple its average price between 1990 and 2004. Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.

The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, "cash-for-gold" stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.

When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.
There it is - a real mirror of any excited goldbug who's calling for $2,000-$2,500/oz within two years.

As I pointed out in the Enter Stage Right article that's "Entry Zero" of this blog, bubbles get rolling when historical measures imply that an asset is overvalued but subsequent price action mimics undervaluation. The explanatory gap is filled by a New Era story that explains the mysterious rise in terms of a fundamental value-shift to the asset's benefit. As the bubble progresses, the New Era story spreads and grows in the telling, to the point where it becomes an all-out New Era delusion.

Thanks to the popping of the August-November parabolic rise, gold's still on the cusp of an all-out bubble. The price movement of the metal doesn't defy sanity as of yet, although it briefly seemed to as of November last year. Remember the report about third-quarter world demand for gold falling 34%, which the gold market ignored back then?

Tully's argument is fundamentalist in nature, and is more gut-level than the deflationists' warnings. It applies even if inflation stays at today's mild but positive levels. Furthermore, it makes economic sense: when new supply is called forth by high prices, prices fall. That's the way markets work.

Given the supply increase he points to, his argument will be confounded even if gold stays where it is. The supply ramp-up will have been met by a corresponding ramp-up in demand, most likely investment demand. If gold stays flat this year, as I suspect it will, then we'll be watching an incubating bubble. The off-to-the-races moment will be amplified when the general public shifts from being net suppliers to net demanders, when the "Cash for Gold" companies' revenues slump while bullion sellers' soar.

Should the gold bull market turn into a bear market, the likes of Mr. Tully will say that the gold bubble has popped. Myself, I would say that an incipient bubble never got off the ground. Gold as an investment has not been mainstreamed enough for it to have engendered all-out bubble fever; nor has there been the general euphoric bliss that characterizes a full-scale bubble. In fact, the mainstreaming process hasn't proceeded all that far, and it can be argued that the process is in its early stages.

It's still cusp time...

Looking At A New Ratio Chart: Gold In Terms Of The U.S. Dollar Index

The Kitco Gold Index has performed a useful service in factoring out U.S. dollar changes from other influences on the gold price. Since only one influence is factored out, what's left is a catchall category called either "predominant buying" or "predominant selling."

A similar proxy comes from dividing the gold price by the U.S. Dollar Index. That ratio shows what one ounce of gold would cost if it were possible to buy it in U.S. dollar index units in a transaction-cost-free and perfectly arbitraged market. The daily chart, which like the others below are courtesy of, shows a almost perfect similarity to spot gold itself:

However, the longer-term chart of both shows at least two noticeable differences:

Note that the gold price was higher in February of '09 than it was in July of '08. The ratio of gold to the Index, though, was lower. This non-correspondence shows that gold went up more than would be expected given the greenback's rise in that period. On the other hand, the gold-USD Index ratio rose significantly from February to June of last year, while the gold price fell slightly in that timeframe. That difference shows that the U.S. dollar's fall in that period outpaced gold's rise.

For the last six months, as shown by the first pair of charts, the gold price in regular U.S. dollars has been moving in virtual lockstep with the price in terms of U.S. Dollar Index units. So, it's no wonder why it's now held as given that the greenback's driving gold.

The difference in the longer-term chart clearly shows gold demand as a safe-haven asset. That demand shows most clearly in the waning days of the Bush Administration. Since the February stock-market rout, that demand has at least partially dissipated. The rout marked the high point of crisis demand: as of the mid-to-late March peak, gold was down with respect to February's peak; but, the gold-to-USD-index ratio peaked at about the same level.

Sorry to say it, but there's been no obvious evidence of any safe-haven demand subsequently. It evidently takes an all-out credit crisis plus emergency inflationary measures being hurriedly slapped together - both factors have to be present - before safe-haven demand kicks in mightily.

PRC Tightening Worries Hit Gold Again

It wasn't just the gold price that was hit by looming bank-lending restrictions, either: both the Hang Seng and Shanghai indices were down about 2% last night. As for gold, a run-up that started last evening, and took the price up to about $1,102, was aborted just after 8 PM ET. The price fell back to about $1,096 by about midnight. The slump resumed at that time, and continued until $1090 was reached before 5 AM ET. Then, the metal drifted in a tight trading range, broken briefly on the downside, which lasted until 7 AM ET when the price dropped to its daily low of $1,087.80. The $1090 support level held then: another test of it, right after 8 AM ET, saw the metal bounce down to about $1,088.50. A slight recovery to the $1090 level didn't last, though; the metal was pushed down to $1,085.40 as of 8:30 AM.

As in the recent past, PRC woes benefitted the greenback. After hitting a weekly low of 78.083 yesterday evening, the U.S. Dollar Index rallied strongly last night. The rally continued early this morning, though less steeply, until a pull-back hit which lasted from 3 to 4:30 AM ET. The rally then resumed, pushing the Index to 78.553 as of about 7:20 AM. The rising dollar did its part to pull gold down, but the Kitco Gold Index attributed the drop as of 8:30 mostly to "predominant selling." At the same time, the Index recovered to above 78.5.

A Reuters report attributes the fall to the PRC's bank-lending restriction push: "China's central bank told banks that need to raise reserve ratios to implement the change on Tuesday, banking sources said." Since this isn't new news, the market's reaction last night and today suggests that the ratio-increase announcement wasn't fully assimilated by the markets at the time. Also in the report is a note about the lack of safe-haven demand for gold right now:

Gold might typically be expected to benefit at times of rising risk aversion as investors buy the metal as a haven, as happened a year ago while the financial crisis raged.

However, if risk aversion is rising but still manageable, the benefits to the dollar -- strength in which weighs on gold -- generally puts gold prices under pressure.

"(Gold's) risk-averse qualities were hardly noticeable during the latest sell-off in equities, with bullion trading against the dollar as anything else in your average commodity basket," said VTB Capital analyst Andrey Kryuchenkov in a note
Neither he nor they say it outright, but "still manageable" dovetails with "consistent with lower inflation/greenback upvaulation in the foreseeable future." I know there are goldbugs who insist that gold does well in deflation, but the only records we have of real and sustained deflation are from the days of the gold standard. It's just as easy to argue that a gold rise was discounting a future devaluation back in those days. The only fiat-money data we have are from disinflationary periods, during which gold has typically suffered.

A Bloomberg report carries this quote from Dennis Gartman:
“Given the pressure put upon the commodity markets generally by a strong dollar, it shall be hard for gold to hold itself erect,” Dennis Gartman, a Suffolk, Virginia-based economist and hedge-fund manager, told clients in his Gartman Letter today. Some investors may sell the metal because “capital can be raised to meet demands in other markets from gold,” he said.
That factor - a liquidation trade to free up funds to cover other losses - is one that hasn't been mentioned of late. Given that gold rallied strongly last year, and was pushed down hard in the '08 crisis but not in March of '09, it could be argued that it was pushed down much more strongly by a much larger liquidation trade back in the summer and fall of '08.

The spot gold to GLD ratio - what I've been calling "the gold at a discount indicator," even though I did not find it useful for personal-finance purposes - closed at 10.22 yesterday. In other words, at market's close, the price of an ounce of gold itself was 10.22 times the price of one share of GLD. That close put physical gold at a slightly higher premium to a GLD share than on Friday. This ratio, to remind, is presented as an item of reader interest. Yesterday, there was no veering towards an extreme one way or the other.

As of 9:04 AM ET, the greenback rally has resumed, pushing the Index to a daily high of. 78.575. Gold's decline has not. The 8:30 AM drop was only slightly recovered from, and the price turned back down to the $1,085 level fifteen minutes later. As of the time of this post, however, spot gold is slightly above that level at $1,086.40.

Monday, January 25, 2010

Morning Gold Pouncers Largely Absent Today

Gold was carried down about $10 earlier this morning, but more than half of that movement took place before the usual pummel time of 8 AM ET. After 8, the price moved down only another $5/oz.

After moving in a somewhat downish range for an hour, gold turned up at 10 AM ET as the U.S. Dollar Index turned down. The greenback then established a trading range, and gold almost got back up to $1,100, but that resistance level wasn't breached. As of the time of this post, the range is still holding as the U.S. dollar is climbing back up. The Kitco Gold Index has gold up $3.20 as of 11:17 AM once the influence of the greenback is factored out.

For the first time in some time, it's been a quiet market price-wise. Gold hasn't really been going upward, but the widespread fears of a solid move downward have not been realized. I'd be surprised if gold gets below $1,090 today.

Update: As it turns out, gold didn't do much of anything in the afternoon. The same trading range, an tightening one, held since it was established at around 8 AM ET today. The $1,090 support level held, and so did the $1,100 resistance.

The U.S. Dollar Index remained in a range too today, bordered by 78.18 and 78.23, except for a brief dip that carried it down to 78.144 at about 3:30 PM. The same range was re-established after 4 PM and held until 5:30.

All in all, an unexciting day. Regular trading ended with nary a blip in the last hour: as of the close, spot gold was at $1,097.10 for a gain of $5.60. The Kitco Gold Index attributed $0.95 of this gain to a slight fall in the greenback and $4.65 to "predominant buying."


For many, these following data will make for a "where was I?" moment. Nine years ago today, on January 25th, 2001, gold was at $264.90 for its London PM fix. Today's PM fix was $1,095.25. In the last nine years, gold was up by 313.5%.

If that wasn't enough to trip on the Regret-O-meter, this stat might: On January 25th, 2001, the Amex Gold Bugs Index (HUI) closed at 47.59. Today, it closed at 398.04. Nine-year gain: 736.4%.

Note that the Gold Bugs Index is not a stock, it's a basket of fifteen stocks whose members change over time. In order to capture close to that gain, the component stocks would have had to have been held in a tax-sheltered account with minimal transaction costs.

What I found interesting is the fact that the HUI does show leverage over the last nine years, even though said leverage has been notoriously absent more recently.

A Bear Threshold From A Gold Bull

Over at Seeking Alpha, contributor "Gold Price Today" points out that gold held up fairly well as compared with the stock market last Friday. Instead of going into a tumble 'til the end of trading, gold bottomed in the morning and held its support level of $1,090. He (or she) hints that the buy end of the greenback carry trade is mainly higher-yielding risk assets, not gold.

The money quote's near the end of the piece:
The price would have to drop below $1000 and stay there for the long term picture to turn bearish. In this case we’d look to see if India, China and other central banks would look to add to their reserves.

Therein is an important point. I know next to nothing about how PRC monetary officials tick, but I wouldn't be surprised if there's been a private goal set to buy reserve gold at a beat-India price. For the record, the central bank of India bought the 200 tons of IMF gold at about $1,050.

Home Sales Data Hit The Market

The release of the December home-sales data revealed that sales dropped more than expected - a whopping 16.7 percent. The gold market, after gold descended to $1,092 in a two-steps-down-one-step up pattern, rose on the news.

Interestingly - but only in the very short term - gold and the U.S. dollar moved in tandem. At about the time gold slumped to $1,092, the U.S. Dollar Index bottomed at 78.183. The announcement pushed the greenback up to about 78.3. Since then, the Index has sunk back to the 78.2 level.

This tandency, I should say, is only presented as a curiosity. It's the gold-market equivalent of a man-bites-dog event, if not a silly-season story. At any rate, the fluctuations in both today have been and the usual inverse correlation has reasserted itself.

A Contrary Opinion On The Gold/Interest Rate Relationship

It's from Seeking Alpha contributor Bruce Pile. Given the obvious inverse relationship between the U.S. dollar and the gold price, and given that currencies tend to be strengthened by rate hikes, it's no wonder why an impending Fed rate hike has gotten gold investors spooked.

However, that's only one of two possible reactions:
"Oh my, they're going to defend the dollar, I'd better sell my gold" or "Oh my, there's an inflation threat, I'd better buy some gold". Most of the commentary I've been seeing tends to be of the first type - if they start to defend the dollar, gold will go down.
In the 1970s, as Pile points out, investors acted in accordance with option #2. The overhanging question is, will they go for door #2 this time 'round?

Not mentioned is a real game-changer, one that would signal the arrival of an all-out bubble climax in gold. In 1979, gold shot up while the U.S. dollar was rising too. Since the inverse relationship between the greenback and gold is so intuitively obvious, this decoupling made for a real Bullish Derangement Syndrome until the gold bubble popped in early 1980.

Right now, no one's even suggesting it as a possibility.

John Tamny Suggests Gold As Proxy For Inflation

John Tamny, the editor of, has suggested using gold as a proxy for inflation after debunking two conventional definitions of the phenomenon. Both monetarist measures and the overheating hypothesis have been found wanting, and both are easy to discredit nowadays. On the other hand, gold - because of its apparent uselessness - makes for a good proxy of inflation. Rather than use a metrical definition, Tamny describes inflation as a period when capital moves into hard assets and out of business uses.
[R]ather than a measure of prices that change for various reasons that have nothing to do with currency policy, inflation is at its core the painful process by which capital flows to the hard assets of the earth and away from innovative, wage-creating industries. As individuals we don't so much hate inflation for the rising prices as much as we balk at it because our chances to capture good jobs and good wages are compromised for capital essentially hiding.

As the rising price of gold has revealed throughout the decade we've been inflating, no matter what the more quiescent government measures of consumer prices have been telling us. A weak dollar explains our economic unhappiness because a weak dollar is what has made capital disappear....

In short, inflation is about capital going on strike...

His definition won't please monetary economists, but he does have a point because money is fungible. There's no iron law saying that an increase in the money supply must push up consumer goods exclusively; other goods can be pushed up too.

A sharp economist will note that he leaves out a particularly insidious kind of inflation, one that's quite evident in the PRC right now. Jacking up the money supply, under certain economic conditions, induces a bubble in the capital-goods arena. As a result, too much capital is diverted into "innovative, wage-creating industries." This kind of bubble is the most insidious because it appears the most sustainable and benign. Who doesn't like growth?

In reality, it's the closest bubble to the mythical one-hoss shay...and the one most likely to induce depression when it finally pops. We've seen what happened to the U.S. housing market after the residential real estate bubble came and went. Imagine that same fate exerting its grip on the producers' end of things.

Gold Skeptic Returns, With Same Message

After receiving some voluble - and, using his own word, "cogent" - criticism for his earlier thumbs-down on gold, the Toronto Star's David Olive has returned to the same theme. This time, he points to other commodities that have rose at a greater rate than gold has in 2009. Not mentioned is the fact that those commodities (unlike gold) were down hugely in 2008.

He's softened his tone, but the message is still the same. Of interest is his quote of Doug Kass near the end of his piece:
The gold bears seem more certain of themselves. Doug Kass, forecaster at, includes among his forecasts "the price of gold topples" to $900 by the beginning of the second quarter of 2010, and "the U.S. dollar explodes higher." That latter would be bad for gold; its upward momentum has been tied to expectations of the greenback cratering.
Doug Kass is the same person who said that U.S. stocks presented "the buying opportunity of a lifetime" right at the March lows. He's a short seller by trade, and he seemingly sees a short-term shorting opportunity in gold. His bullish prognostication for the U.S. dollar, given its recent performance, is plausible.

However, confident bears and skittish bulls make for picture that's consistent with an oversold market.

Gold Turns Up After

After a Friday drop that took gold's price within speaking range of its December interday low, the price of the metal turned up. Early morning trading saw $1,100 bested; as of about 5:45 AM ET, $1,105 was almost reached. Starting just before 8 AM ET, though, gold fell below $1,100 and even below $1,095 before recovering. The Kitco Gold Index, even after the spill, credited $4.40 of the rise to predominant buying as of 8:30 AM.

The greenback hasn't moved much since the start of weekly trading, but what movement there's been has been up. As of 8:59, the U.S. Dollar Index jumped up as high as 78.338 before retracing somewhat.

As this Globe and Mail report recounts, the push-up in gold is likely due to bargain-hunting.
“[Prices] are recovering a bit,” said Eugen Weinberg, an analyst at Commerzbank. “The slump of the last week might be considered by some bargain hunters as being an excessive one.

“Some see in gold protection going forward, if the correction on equity markets continues ... but also there is some physical buying at the current levels after the strong decreases.”
Later, though, the article also says that Indian gold buying was "in limited quantities" even below $1,100.

This Bloomberg report also mentions bargain-hunting, but starts off with attributing the rise to expectations that the U.S. dollar will continue to fall. (As noted above, those expectations have been confounded for the moment.) Later in the article, it's hinted that platinum demand has cut into investment demand for gold.

The gold-at-a-discount indicator closed last Friday at 10.20, and it sunk interday to below 10.10. As this post explains, I'm now presenting it as an item of reader interest. A closer look at it shows that it has a tendency to lag when the gold market turns up. Presumably, that's because GLD buyers push the ETF up to a greater degree than gold traders push gold itself up when the metal begins rising on a sustained basis.

This daily chart of the U.S. dollar, courtesy of, doesn't given much ground for gold-bull optimism:

As can be seen, there's now a clear pattern of higher highs and higher lows - coming from a time when the U.S. dollar was in the doghouse. Granted that much of the rise since early December corrected an in-retrospect undervaluation of the greenback, and that the U.S. dollar is going to need some more favorable fundamentals before rallying further. The chart, though, shows that this is not the time to hope for a greenback bear market.

The economic data released suggests the U.S. recovery is still in slow gear. Of interest in the latests National Association for Business Economics survey is that members are reporting that credit, although still tight, is loosening. Its release had little or no effect on gold, except perhaps to arrest the decline. As of 9 AM ET, spot gold was at $1,095.80.

Sunday, January 24, 2010

Gold-At-A-Discount Indicator: A Cautionary Note

I've picked through the workings of the gold-at-a-discount indicator, and have found it wanting for its original purpose. Over the last six-month timeframe, a simple and intutive accumulation plan - buying an ounce of gold at the beginning of each month - was less expensive than a plan that uses the indicator as a timing aid.

There are two graphs below these two explanatory paragraphs. First of all, a graph with a green line put on the 10 line. The first chart is the spot price of gold divided by the price of one share of GLD. When this ratio is below 10, physical gold is selling at a discount to paper gold as represented by GLD. Ten shares of GLD correspond to one ounce of gold.

Just below it is a chart of gold using the same timeframe. The vertical green and blue-green lines show the buy dates given by the gold-at-a-discount indicator. The buy dates are the day after the indicator goes below 10. That date-shift is crucial in understanding why it's not suited for its purpose:

At first blush, the indicator looks fine - if laggy in places. However, its purpose was to act as a timing aid for a buy-and-hold plan. In testing it for this purpose, I assumed two monthly accumulation plans.

Plan #1 was buying one ounce of gold on the first business day of each month, at the London PM gold fix as shown here. For North American buyers, the PM fix is the most likely price that'll be had. [It kicks in before lunch break, North American time.] I ignored transation costs because I assumed they'd be the same for both plans.

Here's the schedule for the straight monthly-accumulation plan:
Aug. 3rd: 1 ounce @ $959.75
Sep. 1st: 1 ounce @ $955.00
Oct. 1st: 1 ounce @ $1,004.75
Nov. 2nd: 1 ounce @ $1,062.00
Dec. 1st: 1 ounce @ $1,192.50
Jan. 4th: 1 ounce @ $1,121.50
Total: 6 oz for $6,295.50.

Plan #2 is a little more involved, as it uses the gold-at-a-discount indicator. If the indicator goes below 10 in a month, and it's the first time that month, then the ounce of gold is bought the next day using the same London PM gold fix.

If it goes below 10 a second time during the same month, the signal is ignored. The gold budget for the month is already blown.

If it doesn't go below 10 in a month, then no gold is bought during the month. Instead, the funds are saved for the next time. As of the next trigger day, a cumulative buy is made that brings the plan up to speed again. In the approximately six-month period, there were three duplicate signals [marked in blue-green vertical lines] and one month with no signal. Since there was none in December, two ounces are bought in January at the January price.

Here's the schedule for the indicator-assisted monthly-accumulation plan:

Aug. 3rd: 1 ounce @ $959.75
Sep. 3rd: 1 ounce @ $983.00
[Sept. 4th: second monthly signal; not acted upon.]
Oct. 7th: 1 ounce @ $1,040.25
[Oct. 30th: second monthly signal; not acted upon.]
Nov. 4th: 1 ounce @ $1,090.00
[Nov. 30th: second monthly signal; not acted upon.]
[None for December]
Jan. 5th: 2 ounces@ $1,121.50 each

Total: 6 oz for $6,319.50.

The straight monthly-accumulation plan costs $6,295.50. The indicator-aided plan costs $6,319.50. The monthly-accumulation plan is $24 cheaper.

Using the AM fix on the same days makes the indicator-aided plan fare worse. The straight-monthly costs $6,268.25. The indicator-guided plan costs $6,326.00. The straight monthly-accumlation plan is $57.75 cheaper.

Rather than drag it out by shifting the dates around on the straight accumulation plan, even though refraining from doing so makes the above analysis a comparative price history of a relatively short period, I'm going to stop here. The beginning-of-the month accumulation plan is the most plausible choice of dates, as people typically get paid at the end of the month or nearabouts. If the indicator can't beat at first blush, then there's something wrong with it.


The gold-at-a-discount indicator sounds, and even looks, plausible. Why, then, was it found wanting?

My initial interpretation of it, that physical gold sells at a discount relative to SPDR Gold Shares when gold's oversold, was wrong. A better interpretation is that GLD leaps up higher than gold itself when the gold train gets rolling again. This difference makes the gold-at-a-discount indicator, for the practical purpose for which it was aimed to aid, a laggard. It lags too much, relative to the next day London gold fix, to be of real help to a regular gold buyer.

Therefore, I'm going to change the disclaimer to read "This indicator is only intended for reader interest." And/or, "A quick test has shown that it does not help with gold accumulation plans."

In certain market conditions, it regularly sinks below the 10 line. This daily graph for the last 3 years shows that, in late '08 and early '09, it wasn't helpful for much:

I've put a daily graph of gold just below it, for comparative purposes. For the sake of reader interest.

And, I'll continue tinkering around with the concept from time to time.

For the sake of reader interest.