Friday, February 5, 2010

Noon Slamdown Makes Its Appearance, Then Abates, Then Reverses

The slam-down early in the morning led to a respite until after 11:30 AM ET. The jobs report ended up having little effect on gold, one way ot the other, despite a short-term rally from 8:30 to 9:00 that took the metal up ten dollars an ounce. The gain was given up entirely over the next hour and twenty minutes, leaving gold in a range between $1,052 and $1,062; that range was recently broken through on the downside. As of 11:54 AM, the Kitco Gold Index has broken up gold's $17.30 decline on the day into $7.10 due to strength in the greenback and $10.20 due to predominant selling. The near-noon slamdown arrived.

After slumping below 80, right after the jobs report was released, the U.S. Dollar Index recovered before rising yet again. The Index was in a range between 80.25 and 80.35 until recently, when it shot up to a new daily high of 80.60 as of 11:49. As of jsut before noon, despite a pullback to 80.53 as of five minutes later, the greenback seemed unstoppable.

As of that same time, spot gold was been slammed down to $1,045.90 - within three and a half dollars of its daily low of $1,042.50. Not much hope on the afternoon front...

Update: Gold didn't completely recover from that slamdown, but a partial recovery did ensue. After plunging down to below $1,044, the metal bounced back to above $1,050. A pullback at 12:30 PM EST was erased and the price ended up slightly higher. Since then, it's settled into a trading range bounded by $1,048 on the downside to $1,052 on the upside. Interestingly, the near-$1,050 level has given support.

The U.S. Dollar Index has been marking time as well after reaching yet another since-July high at 80.624 just before noon. The Index pulled back to below 80.5, and then rose part of the way back up: as of 1:34 PM ET, it was at 80.56.

The preponderence of today's decline so far swung back to strength in the U.S. Dollar. As of 1:39, the $13.60 drop was divvied up into $7.30 due to the gBlockquotereenback, and $6.30 due to predominant selling, by the Kitco Gold Index.

As the end approaches for what's very much been a down week, the gold market went calm. There may be a last-hours surprise, but it's unlikely.

Update 2: Well, there was a late-hours surprise - particularly surprising, given how gold's performed up to the early-afternoon stretch. The metal ended up recovering all of the day's loss and closing the week's trading at exactly $1,065.00. The rise started at 2 PM ET, when gold was just above $1,050. It steadily climbed to the $1,065 level and bobbed around until the end of the session. As a result, the metal ended with a a daily gain of $1.80. The Kitco Gold Index divided the gain into a loss of $3.00 due to a strengthening U.S. dollar and a gain of $4.80 due to predominant buying. This chart shows how bad things got this week:

Incredibly, the RSI for gold never got below the oversold point during yesterday's and this morning's carnage. Today's gain is thin, but the low point of the line shows how bad things got. There did prove to be solid support at the $1,050 level, even if its assertion was iffy earlier in the day.

The U.S. Dollar Index topped out at the same time: its daily high of 80.69 was made just before 2 PM. Subsequent to that high, the Index slid down for the rest of the afternoon until it found a range just before 5 PM, centered around 90.25.

This one-year chart shows the greenback in the same range it was as of last June and July:

The weekly chart, going back the last three years, shows that the Index has touched its 200-week moving average:

The only bearish sign in either of those charts is the daily's RSI tripping into oversold territory. Technically, it's hard to make a bear case for the greenback unless this rally ends up peaking at below March '09's. That would require a topping below 89 followed by a sustained decline. To do so would require, say, a pick-up in inflation and a too-slow response from the Fed. Three linked questions worth pondering: has the rallying of the U.S dollar, even though the last leg was crisis-prompted, already discounted a Fed Funds rate hike? If not, and it's the greenback carry trade unwinding, at what point will the unwind cease? If it does, then what'll happen to the greenback once that bullish pressure is gone?

A further question: what happens to President Obama's grow-the-exports plan if the greenback's rally proves to be both sustained and long-term? The answer to this one points to a certain trade-off in the D.C. financo-political calculus. Rising greenback = happy foreign creditors and hobbled exporters. Falling greenback = unhappy foreign creditors and aided exporters. So far, the greenback's rise has been unaccompanied by serious Fed intervention in the currency market. I wonder how long that can continue: at what point is it decided that "America" has been fair enough to foreign creditors?

Moving back to more quotidian matters, this final chart is a six-month graph of the gold:GLD ratio. If it's below 10, then physical gold is selling for less than the paper-gold equivalent (ten shares of GLD):

Unusually in the last six-month period, the ratio has moved below 10 twice in the same week. What's also unusual about this particular dip is that it didn't lag any day-to-day resurgence in the gold price. As noted above, gold barely budged on the day even if it recovered nicely in the afternoon.

As the week ends, gold's left with a weekly decline that's far less than might be imagined given yesterday and this morning. As of last Friday, the metal was at $1,080.20 spot. Today, it closed at $1,065.00. The weekly decline was only $15.20, or -1.41%. What made yesterday so awful was the same factor that mitigated the weekly decline: before it, gold was on track for a nice weekly gain.

I'd like to leave you with a brief description of a tantalizing theory - the "Indian floor" - accompanied by a much better-looking 10-year chart for the metal. Even in weeks like this one, there's always someone willing to romanticize a support level.

Thanks for stopping in, and enjoy your weekend.

Technical Analysis Worth Revisiting

A month ago, Przemyslaw Radomski wrote a techically-based analysis of the gold market that compared the most recent decline to ones past. The three earlier ones showed that a correction seemed to end before it actually did, and the real end pulled gold down even lower before it was over. Although stretched out, the current correction does fit the pattern Radoimski identified a month ago. His article is well worth reading, or revisiting, because it did turn out to be prescient.

Just below is Radomski's original annocted chart [commentary's in the accompanying article] with an updated version of the same chart following it:

As the latter chart indicates, the most recent correction resembles the from June-July '09 and August-September '08. Given the current Eurocrisis, the earlier one seems the better fit even if the snapback exuberance level has been more like the one from seven months ago. Note that the current chart's stochastic oscillator is touching the 20 level, indicating GLD's on the verge of being oversold right now. Also note that the RSI on the top has topped out at a level that most resembles the August-September '08 correction.

I should also point out that, although the resemblance between now and the '08 correction is most evident, the drop back then was sharper than the one now. That's clear from the latter chart too. Please note that the resemblance does not indicate there'll be a rocket-up in the near future like the one in late September of '08.

Barron's, CNBC Question Gold's Safe-Haven Status

These two articles, although based in the recent rout, may be a straw in the wind. Over at Barron's, Randall W. Forsyth points to the surge in both the U.S. dollar and the yen; both currencies' performances indicate unwinding of carry trades in both of them. He had this to say about gold: was throttled along with other risk assets, such as commodities, instead of serving its traditional role of insuring wealth against the vicissitudes of markets and politics.

Again, if Thursday's rout had been a mere flight to quality, precious metals would have been up, not down sharply. This pattern suggests a reprise of the near-meltdown of late 2008 and early 2009, which also saw the yen and dollar soar in the scramble to repay borrowings in those currencies, which was paid for by the dumping of risk assets, including the traditional store of value, gold.
More blunt is this headline for yesterday's Fast Money Rapid Recap: "Gold Loses Safe-Haven Status For First Time in History."

Note that the rout is being accompanied by talk that's more indicative of a bottom than a precipice. There's been a lot of mainstream skepticism revealed in the last two months, which clearly indicates that gold has not been in an all-out bubble as of now.

As far as contrarian indicators are concerned, these two articles can serve as one...but it's still treacherous out there. The greenback shows no sign of letting up, and gold shows no sign of any genuine reversal. The contrarian play would best be reserved for long-term holders with an adequate ration of patience (and, perhaps, a leg-in strategy.)

A Gold Watcher Uses The "C" Word

Namely, "capitulation." The author of the Expected Returns blog asks, "Are Gold Bugs Capitulating Yet?":
In any bull market, corrections of this kind are the norm, yet investors get so caught up in the daily swings that they end up selling at precisely the point that would have yielded them maximum profits. In other words, they sell at the bottom. The healthy correction in gold stocks should have long-term gold bulls celebrating on the streets, yet many are at maximum levels of despair. I suspect many latecomers to the gold party have finally capitulated and are swearing off investing in gold forever- that is, until we put in the next intermediate term top, at which point, they will be buyers again. The increasing bearish sentiment gold is a bullish sign and very conducive to the next leg up....
Bullish words, especially given what's happened over the past couple of days.

Chartists Find Support, But...'s not at a level that inspires much confidence. Reuters reporter Jan Harvey asked a few technical analysts for the next support level and came up with a median of about $1.025.

Since higher support levels have been obliterated recently, two of them said that the next support level is around $1,000 - the level at which the November run started. Here's one:
Gerry Celaya, an analyst at Redtower Research, said from here a line taken between the lows of January 2009 and mid-October established support around the $1,026-1,030 zone....

"That whole area is now becoming more and more important as the next barometer of gold sentiment on a trading basis," he said. "If we go below $1,030-1,020, anybody who is hoping this is pullback within a broad channel would start to (rethink)."

"They would start to look to a retreat back into the low end of the trading range, around $980."
Complete erasure of that gain, from the end of October to the beginning of December, would establish it as a mini-bubble - and would not bode well for gold this year. Bubbles go back to where they were, and the asset's price doesn't go back up for some time.

Indian Gold Buying Restrained Despite Rout

The sub-$1,070 level has been mentioned as a bargain point by Indian gold dealers, but the buying activity turned out to be restrained according to an Economic Times report:
India's gold buying continued on Friday afternoon, with limited quantities changing hands as prices hit fresh three-month low, dealers said....

Demand has slowly picked up from late Thursday evening, dealers said.
One of them, quoted in the article, said that most of the buying he transacted was due to earlier-placed automatic orders. As far as fresh orders are concerned, buyers are holding back somewhat right now.

Given yesterday's rout, I can't really blame them.

Moving back to North America, holdings in the SPDR Gold Shares Trust dropped again yesterday for the second day in a row. From Wednesday's 1110.34 tons, holdings shrunk to 1104.55 tons for a loss of 5.79 tons. For the first time since mid-January, a decline has been met with liquidation by the Trust.

I can't say whether this is a sign of capitulation or whether it's the harbinger of a new decline. It is, however, something for gold watchers to mull over. It does show that the Trust's holdings are subject to price swings on the downside too.

Revisiting The IMF Sale

Given the carnage over the last couple of days, the IMF sale has faded into the background. David Lew of Commodity Online has kept the memory green by bringing up the subject again, in an article entitled "Why there is golden silence on IMF gold sale." His piece features speculation on the subject from Mark Robinson:
Respected bullion analyst Mark Robinson says there is suddenly no talk about anyone buying the rest of IMF gold. “I feel the silence these days on IMF gold sale could be a well-knit strategy from China. The Chinese central bank is eager to buy IMF gold to shore up its foreign exchange reserves. But China is not willing to pay the kind of money that India paid to IMF to buy gold. China wants to buy IMF gold below $1,000 per ounce. It looks if gold price continues to fall like this way, soon you will find gold hitting below $1,000 per ounce and China will then jump into buying the IMF gold,” Robinson told Commodity Online.

Robinson argues that there is a feeling among central banks across the world that India paid a little too high price to buy the IMF gold and thereby put them in troubles. “No central bank wanted to touch IMF gold above $1,000 per ounce. So now that gold price is falling, central banks must be waiting for further falls to scout for IMF gold,” he added.
The article also mentions that India's purchase price for the 200 tons its central bank bought was considered much too high at the time. That price, which was only slightly below the current price, now looks low. However, the decision makers of central banks are not likely to be market-oriented enough to shift perspective in this way. It's likely that, if $1,000 was the ceiling price then, it's the ceiling price now. However, getting the IMF gold at below $1,050 will enable the People's Bank of China staff to say they bought more sensibly than buyers at the central banks of India.

Eric Sprott's Hope Still Springing Eternal

At a press conference yesterday, he said that gold will reach $1,500/oz sometime this year and $2,000 within the next two years. Sprott also made the announcement that he will donate C$100,000 to the Canadian Athletes Now Fund for every Olympic gold medal a Canadian athlete wins. That pledge is on top of a C$215,000 committment to help Canadian athletes at the Winter Games with travel and lodging expenses.

Far be it for me to be churlish, but $1,500 gold seems a bit of a stretch right now. At spot gold's current price of $1,057.00, gold would have to rise by $443.00 or 41.9% to make that goal. Gold did rise from $810 on January 16th 2009 [London PM fix] to $1,218.25 on December 3rd [AM fix] for a gain of $408.25 or 50.4% from yearly low to yearly high. So, if 2010 turns into another 2009, $1,500 at some point in the year isn't totally out of reach....assuming that the current low is at or near the yearly low.

However, that's going to take a real bear market in the greenback. We're nowhere near that stage now.

Gold Declining Still, Though At Lesser Rate

After taking a rest in a trading range last night, gold kept falling this morning. The $1,060-$1,065 trading range was pushed up against on the upside as of 7:30 PM ET last night, and again very early this morning, but held until it was successfully broken on the downside at about 3:30 AM. A sharp fall that took the metal down to $1047.60. The range was replaced by a lower one, as gold began to drift between $1,050 and $1,055. As of 8:04 AM ET, and before the employment data release, spot gold was down $10.10 on the day. The Kitco Gold Index has $7.20 of that decline due to predominant selling, and $2.90 due to U.S. dollar strength.

As for the greenback, it keeps on going up. The U.S. Dollar Index managed to best the 80 level just before 8 PM ET, shooting up to 80.28 within fifteen minutes. That breakthrough was met with a particla pullback as the Index settled in to a range bordered by about 80.07 and 80.15. The second upsurge began at 2: 40 AM and went for more than an hour, pushing the Index all the way up to 80.43 by 3:35 AM ET. (Shortly afterwards, as noted above, gold was hit.) Another, choppier, pullback followed that took the Index down to 80.10. Since then, it's rallied somewhat to reach 80.25 as of 8:16 AM.

This chart doesn't say it all, but comes close to doing so:

The RSI index shows that the greenback's gone back to oversold levels. I note that subsequent oversold levels have accompanied higher highs.

Perhaps incredibly, the 60-day chart of the Kitco Gold Index shows that gold in terms of the index made a double bottom yesterday, making for a counterpoint to the busted doble bottom in raw terms:

A Bloomberg report, webbed by Business Week, is headlined "Gold Declines to Three-Month Low in London as Dollar Rallies." The rout was, of course, ascribed to the greenback:
“People are very uncomfortable with the euro,” said Bernard Sin, head of currency and metals trading at bullion refiner MKS Finance SA in Geneva. “If liquidation continues,” bullion may retreat to around $1,025 an ounce, he said.
Other experts quoted remained optimistic, but none of them used the word "capitulation."

Both that report and a Reuters one mentioned risk aversion as another cause. The first expert quoted in this report was also bearish near-term:
"It looks like the next few days are going to see further weakness in gold and further strength in the dollar," said Standard Chartered analyst Dan Smith. "We see $1,020 an ounce as the next point to look for."
Both reports also mentioned that commodities were down pretty much across the board. The Reuters piece ended with some handicapping of the jobs report and this characterization of recent gold market:
Standard Chartered's Smith said the growing risk aversion permeating the markets meant the jobless figures would have to be much better than expected to change the direction of the market.

"In the last few days we have seen anything that is vaguely negative leapt on, and anything positive generally being ignored," he said. "The numbers will have to be extremely good to make any difference to the current market mood."
The non-farm payroll report was slightly worse than expected: a loss of 20,000 instead of the expected 10,000. Revision of December's number added to the losses that month: 150,000 instead of the reported 85,000. But, the unemployment rate was lower: 9.7%, below an expected 10.1%.

Just prior to the announcement, spot gold had crept up to $1,057.40. The U.S. dollar blipped up to 80.303 at the time of the release, but plopped down later; as of 8:58 AM ET, the U.S. Dollar Index was 79.99. Spot gold climbed up to $1,061.60.

Thursday, February 4, 2010

Gold Crushed As U.S. Dollar Soars

The earlier-noted rise in gold ex-dollar has turned into an air pocket. The near-usual morning pounding, from which the gold market has had a respite for the last couple of days, returned with a vengeance. Starting at 9 AM ET, when gold was still above $1,100, a downdraft started; it turned into a rout at the end as technical support level were sliced through. It wasn't until 10:20 AM that stability entered the market - with gold well below $1,070 - which was followed by a further decline. The day's low (so far) has been $1,061.60, a price well below the late-December and end-of-January lows. The previous double bottom at $1,075 has been broken, making for another bullish chart pattern that's been busted by subsequent events. [The first was a reverse head-and-shoulders whose neckline was risen above on Jan. 11th. That neckline was at $1,145.]

The last bullish pattern was busted by tightening moves by the People's Bank of China. This one has been busted by a soaring greenback and double-dip fears. The U.S. Dollar Index, after marking time just below 79.6 between 7:35 and 8:40, rocketed up to well above 79.9 by 10:15. After a brief pullback, the Index made a new high at 79.936 as of about 11:25 AM. 80 is close, and I'm sure it's well-watched.

The rising greenback was likely the trigger, but the Kitco Gold Index has the bulk of the loss attributed to predominant selling; only about 1/7 was attributed to strength in the greenback. As of 11:36 AM ET, the drop from yesterday is $45.60. That daily loss is by far the biggest I've seen since opening up this blog. As of that same time, spot gold was $1,063.70.

Indian buyers, needless to say, now have their bargain.

Update: After this morning's carnage, gold has been marking time. There hasn't been any secondary reaction, just a trading range between $1,060 and $1,067.

What there is, is panic. A report on the morning rout has this quote, the second of two from professional gold-watchers:
From a technical point of view, gold still looks vulnerable, analysts said. "The market looks very heavy here," said Peter Hillyard, head of metal sales at ANZ Banking Group.

"The chart reveals a yawning chasm that could take prices back to $1,010.... it may start slowly but gain momentum as it comes lower," he added. "I think it will fall on the cumulative effect of stops being triggered."
The report itself also mentions that the Euro was driven down by comments from European Central Bank president Jean-Claude Trichet, "predicting many [EU] members will have large, sharply rising fiscal imbalances."

Quiescence has also come for the U.S. dollar; the 80 level has not been breached. If anything, a gentle downtrend has prevailed in the early afternoon, which took the Index down to 79.819 as of 1:20 PM ET. The greenback looks likely to drift.

As of 1:30 PM, the daily loss is at $48.50 and gold is at $1,060.60. That's less than two-and-a-half dollars above its daily low of $1,058.30. Only $5.80 of that loss is attributed to U.S. dollar strength by the Kitco Gold Index.

As mentioned above, the gold market has calmed down now...but the rest of this afternoon is going to be dicey.

Update 2: Another shoe didn't drop since the last update, although it was dicey around 2:20 PM ET. Gold made a new daily low of $1,057.40 at that time, but didn't end up escaping the trading range. The only sustained lowering during the rest of the afternoon was a narrowing of that range, to $1,060-$1,065.

The final drop on the day clicked in at $46.10, on the regular-trading close of $1,063.20. The Kitco Gold Index divided the drop into $8.30 due to strengthening of the U.S. dollar and $37.80 due to predominant selling.

As for the greenback, the U.S. Dollar Index did take a poke at 80 but shied back. After a mid-afternoon decline, it continued to rally until the 80 level was bumped up against just before 5:00. Since then, it's been testing that resistance level - not going much above, but falling only barely below. The day's high in regular trading was just above 80.02.

The term "risk appetite" came up in a Wall Street Journal Online report on the meltdown. This assessment was offered:
With the cost of insuring euro zone debt soaring, the nervousness in the credit markets is sending inventors into cash. That leaves the dollar to benefit as a safe haven at the expense of gold, which traditionally has been viewed as a safe haven but has come to be seen in recent months as a risk play. With the threat of higher inflation low for the moment, gold's support as an inflation hedge is also absent.

Investors have been buying the metal when they are optimistic about markets and economies, and selling it when they are afraid. This trade has been fueled in part by ultra low interest rates that make money for investment more available. Low interest rates also reduce the opportunity costs of owning gold, which pays no interest.
Earlier, it mentioned the rise in jobless claims as the trigger for a removal of risk appetite, from pretty much everything. The U.S. stock market was also routed.

A Retuers report touches on the same theme, bout points to technical deterioration as well:
Scott Meyers, senior analyst at Pioneer Futures, a unit of MF Global, said gold has slid below technical support levels.

"There is not a lot of technical support in gold right now. It is more of a function of how the market reacts to whatever stimulus is forcing the market lower right now," Meyers said....

"If you are short, you stay short, because there is no real reason to be a buyer unless the market sold off more," said Rick Bensignor, chief market strategist at broker-dealer Execution LLC....
Left unsaid was whether gold was scorched by a bear raid or longs were scrambling for the exit, or the first followed by the second. The story itself is headlined, "Gold posts biggest one-day loss since 2008." A companion Reuters report didn't say either, but did contain this item: "April contract dropped $15 within a minute at 10:16 prices fell below major technical support at $1,070 to $1,075." It also mentions a Barclay's Capital technical-analysis bear call, based upon gold sliding below their recommended $1,070 stop-loss price.

Myself, I have to admit that today's rout caught me completely by surprise. I can understand the Barclay technical team's bearishness: as mentioned above, two bullish patterns have gone awry [chart from]:

There's an old Scottish proverb that says, "fool me one, shame on you [for tricking me]; fool me twice, shame on me [for getting sucked in again.]" It may be relevant in the days ahead as technically-based longs get soured.

The Gold/GLD ratio, as graphed here, didn't go below 10; instead, it reached highs that haven't been seen since late December. Instead of physical gold seelling at a discount to GLD, which is indicated by a ratio of below 10, GLD's paper gold sold off more than physical gold itself. However, unlike in December's bulge, the ratio hit the low end of its candlestock at the end of the day: it closed at 10.19.

In closing, there's a lot of fear out there now. I leave you with the opener to a Mark Hulbert article that, in retrospect, has proven to be portentous:
Gold bulls breathed a huge sigh of relief on Monday, as bullion's $22 rally rekindled hope that gold's two-month-old correction might finally be over.

Yet in that rekindled hope is a problem, from a contrarian point of view. Contrarians would be more confident that gold's rally is sustainable if there weren't such an eagerness on the part of gold timers to declare that it is....
Rest here, all worth mulling over.

Postscript: A commentary by Jon Nadler contains a quote from Matthias Detremmerie that attributes the earlier rally to short-covering and today's rout to stop-hitting:
“What you see is a clear indicator that gold is currently a high risk trade”, said Matthias Detremmerie, founder of “The recovery that we saw over the last few days had signs that something was missing. Investors didn’t step in and most of the rise back above $1,100 an ounce had been seen on the back of short positions getting erased and leading to a rally fueled by nothing more than short-covering.”

Mr. Detremmerie added that “today, we saw the inverse as layer after layer of support was pierced. This was a stop-loss frenzy, and once the market moved below last week’s low of $1,074.40 an ounce the floodgates went open. This move – to some extent seen as “capitulation of the bulls”, in combination with a contraction in open interest that has been seen over the last weeks, has some very bearish implications. $1,000 is now certainly back on the radar”, Mr. Detremmerie concluded.
That Hulbert article may well have had its influence on longs, who've been trading with tight stops. There's a certain irony in Nadler ending his commentary with "Cautious Trading," as tight-stop cautious trading seems to have been the tinder that set off the rout.

A Dollar/Gold Double From Zero Hedge

From the unwinding-of-the-carry-trade department, Zero Hedge makes a point of noting the correlation between a surging greenback and a plummeting stock market. With regard to the latter, the much-awaited correction is upon us.

"Tyler Durden" is best presented using his own words:
Who would have thought that the much anticipated European contagion would actually arrive. It was priced in right? Algos and correlation desks are flabbergasted that this is one situtation that the Fed apparently is helpless with. And if it does, it would only be dollar positive and stock market negative. Indeed, regarding the first, the dollar is now back to July 2009 levels.
Graphs included.

An earlier post discusses the same steath rise I myself have noted: ex-greenback, gold is rising. Again, in his own words:

...The preliminary conclusion [as to why gold was only down to its December lows while the U.S. dollar vaulted up to highs not seen since last August] is that gold has proven quite sticky at the top, even as the dollar has regained some of the investing public's confidence. One reason for this may be gold's slow start to the upside as the next chart demonstrates. Gold only commenced its nearly parabolic rise in September, a time when the dollar was already substantially weaker compared to its March highs: if appears it took quite a bit of time for gold investors to realize the potential ramifications associated with the dollar's weakness, and how to hedge appropriately.
In other words, the earlier fall in the greenback took some time for the market players to get adjusted to. Gold was a late-train hedging theme.

The rest of the post discusses silver and oil in a pair-trades context.

[Edit: I didn't catch it at the time, but the stickiness has turned into an air pocket; gold got crushed this morning. The same lag effect, noted in the above quote, evidently works on the downside also.]

Wise Article About Bubbles

This article comes recommended by Jon Nadler in his Feb. 3rd market commentary, and it carries a fair bit of market wisdom. It's by Andrew Allentuck, and it discusses bubbles. The title's quite a grabber: "Know your enemy."

He discusses bubbles of the past, and sketched out the necessary conditions for one. Most of the examples come from the Internet bubble that ended in 2000. His depiction of the "barn-door effect" is worth taking to heart:
Another telling sign of bubble formation in an asset or asset class is called the "barn-door effect," a rush to get a piece of the game before prices move higher. (The barn-door effect can also be seen when a stock has been promoted in an initial public offering, prompting a rush among investors who fear that if they don't buy, they will lose out on the inevitable profits to come.) But there is always some point at which expectations of ever more wonderful earnings or market share - whatever - are disappointed. Then the descent begins. The last investors to buy in hasten to leave and find that there are no buyers willing to pay anything like what they paid.

The problem begins when the masses see investors who bought in early make money on an emerging asset or investment sector. New investors think there is little risk in joining them. "The truth is that after the easy money has been made, risk - which are the odds of price gains running in reverse - begins to rise faster than price," says Charles Mossman, a professor of finance at the University of Manitoba's Asper School of Business. As public enthusiasm increases and investors scoop up the best assets, say the stock of the best companies in a sector, the also-rans get bought up, Mossman says. Declining stock quality increases investment risk. The bandwagon effect that has supported asset prices collapses when investor expectations are disappointed. The rush to the exits begins.
In the gold market, the "also rans" are exploration stocks with lots of hope but no chance of begetting a producing mine except at bubble-high prices for gold. Brent Cook of Exploration Insights came up with one characteristic of such a company: its flagship property is one that's been passed from exploration company to exploration company to exploration company, repeatedly promoted but never developed. When exploration companies of this stripe are rocketing up, then gold's definitely in a bubble.

I myself treaded the same bubble path 'way back in late November, but I have to say that Allentuck's own take is more down-to-earth.

Gold Slumps Overnight, Pushed Down By Greenback

The greenback bull market is back, pushing the U.S. Dollar Index to a seven-month high. Shortly after 7 PM ET, the Index made a run at 79.5, which crested as of 8:10 at 79.52. The greenback backtracked to a range centered around 79.4 before making another run upwards early this morning. That upwards move lasted more than four hours and took the Index up to its multi-month high of 79.712. Another pullback took the Index down below 79.6, leaving it in a range between that number and 79.56.

Gold dropped, of course, but the $1,100 level held nonetheless. The first rise in the greenback pushed it down less than five dollars an ounce, and the $1,105-$1,110 range held until early this morning. The first test came on the upside, shortly after midnight ET, topping out at $1,111.50. Because of the rising greenback, though, the range was broken through on the downside as of about 4 AM ET. Gold then fell into a lower range, bordered by $1,100 and $1,105. The morning low was made almost exactly at 6 AM; thanks to coincidence's workings, the value of that low was exactly $1,100.00.

As of 8:10 AM, according to Kitco, gold was at $1,102.20 and was down $7.10 on the day. The Kitco Gold Index has the metal down $2.30 due to U.S. dollar strength and $4.80 due to predominant sellling. Even though the greenback has retreated from its 7-month high, gold has not advanced back to the above-$1,105 level it was at when the U.S. Dollar Index was last at the level it was at as of 8:10.

The greenback's rise, prompted by fears of more bad news from Euroland and an expectation of no rate hike by the European Central Bank, was identified as the cause of gold's drop by a Reuters report.
The prospect of further gains in the dollar, which would cut gold's appeal as an alternative asset and make dollar-priced commodities more expensive for holders of other currencies, is seen as a risk for precious metals this year.

"We are looking at the likelihood of dollar strength this year, primarily based on Fed (monetary policy) tightening," said Deutsche Bank's head of research Michael Lewis.

"On the forex side we have a target of 1.35 on the euro/dollar, and that is the reason we are slightly bearish on precious metals," he added. "We are not imagining a significant correction, but this is a dollar story."
Also noted in the report was the first change in the holdings of the SPDR Gold Trust since January 19th. The held gold dropped from 1,111.92 to 1,110.34 tons, for a loss of 1.58 tons yesterday. Indian demand was noted in the report as being tepid at these prices.

A Bloomberg report, webbed by Business Week, notes the same cause.
“Fiscal worries in the euro-zone countries weighed on sentiment,” fueling demand for the dollar, Darren Heathcote, an analyst at Investec Bank Ltd., wrote in a report. “Higher U.S. interest rates are also seen as denting the appeal of gold.”

The euro has dropped 3.3 percent against the dollar this year on concern Greece and other so-called peripheral nations will face increasing difficulty in curbing budget deficits that are in excess of European Union limits. Greece, Portugal and Spain have suffered a “permanent” decline in competitiveness since joining the euro, European Monetary Affairs Commissioner Joaquin Almunia said yesterday.
Also included in the article is an optimistic note from James Moore, who predicts that gold will eventually get up to $1,500/oz. His forecast is gone into more detail in this report. Suffice it to say, he professes bafflement at the safe-haven status of the U.S. dollar given U.S. deficits, monetary-base expansion, etc. He also holds out hope for increases in Chinese investment demand as inflation bites.

As 9 AM approached, the greenback is rallying once again. The U.S. Dollar Index broke out of its 79.56-79.6 range on the upside, shooting up to 79.673 as of 8:48 AM. Partially responsible was unexpectedly high new jobless claims and slightly less-than-expected productivity gains. As of 9 AM ET, gold was down $8.20 on the day as the economic news influenced the gold market too. The decline was mostly due to predominant selling - $4.50 worth.

Wednesday, February 3, 2010

Gold Held Down By U.S. Dollar, But...

Given the slump early this morning and the softness before the ADP jobs report, the rise in the U.S. Dollar Index that started right before 10 AM ET has been a surprise. Even more of a surprise, perhaps, is the fact that gold hasn't been pushed down all that much as a result.

That jobs report pushed gold down initially. From the $1,117 level as of 8 AM ET, gold fell more than six dollars an ounce in a half-hour. A short pause was replaced by a rally up to $1,116, but the dollar rally clipped it short and drove the price down to a daily low of $1,108.50. Once the greenback rally stopped, though, gold climbed back up to reach $1,115 before pulling back again.

The sedateness in gold makes for an eye-opening contrast to the spurt-up in the U.S. dollar. After an initial boost above 79.1, the U.S. Dollar Index pulled back a little until the above-mention 10 AM threshold. Then, it went on a tear that took it well above 79.3. After a slight pullback, the Index made a day's high of 79.372 as of 10:42. Since then, the dollar slid down in waves that took it down to just below 79.25 as of 11:18. Subsequently, it rallied somewhat to almost reach 79.3: as of 11:28, it was at 79.2881.

Despite the $1.70 drop recorded at 11:30 AM ET, Kitco's Gold Index still had a gain of $2.70 once the greenback was factored out. As of that same time, gold was at $1,112.00. The two-day uptrend has been halted for now; afternoon trading will show if U.S. dollar strength heralds a more determined pullback. It's happened before...

Update: Gold hasn't been slammed down, but it did fall at a fairly steady rate from 11:20 AM ET to 12:45 PM. As of 1:20, Kitco's Gold Index had gold down due to the rising U.S. dollar almost exclusively; the gain from predominat buying has been whittled down to ninety-five cents.

The U.S. Dollar Index got to 79.4056 on the final push-up of what proved to be a strong late-morning rally; it ended at 11:42 AM. Since then, it's churned in a fairly wide range between 79.3 and 79.4. It's now recaptured most of its Friday gain, as aftershocks from the Greek crisis hit the marketplace. The fear's now of a spread to other fiscally weak Euronations (and Dubai.)

Early afternoon action has shown that gold still falls in the absence of a slam-down. Skittishness on the short side, not to mention fear of whipsawing on the long side, could explain why there's been no heavy weight thrown around in the noon hour. As of the time of this post, spot gold's at $1,109.90. Even after the slide, $1,110 ended up holding (so far.)

Update 2: As it turned out, $1,110 did hold as a support level but it made little difference. The rest of the afternoon saw gold marking time in a narrow trading range with $1,106 as the bottom and $1,110 as the top. It closed regular trading at $1,109.30, with a $4.10 loss on the day. The Kitco Gold Index (KGI) credited gold with a $1.70 gain due to predominant buying after strengthening of the U.S. dollar was taken into account.

This 60-day chart of the KGI reveals quite a different underlying story than the raw price chart shows. It starts just after the December correction got rolling:

It certainly shows that the bulk of the correction is due to the U.S. dollar's advance. Note that the spread widens when gold is low, where the greenback's influence is most felt, and that the second part of the double bottom shown by the raw gold price (in red) is matched by a higher bottom in the KGI (blue.) It may not be much comfort for traders, as gold is traded in U.S. dollars, but it might be to any investors or accumulators. Of course, if the U.S. dollar keeps ramping up, the KGI may not even serve well as reassurance of a slow rise in overall gold demand.

As far as the greenback is concerned, the U.S. Dollar Index broke out of that range established early this afternoon - on the upside. After shooting up above 79.43, the Index pulled back before regrouping and climbing back up above the 79.4 level. The day's high of 79.455 was reached at about 4:50 PM ET. Since then, the Index has been moving in another range bottomed by 79.4. The greenback ended up close to its Friday high after giving up more than all of that gain as of early this morning. It was certainly a wild ride for the Index today, but one that was solidly upwards since 4 AM: from below 78.7 to above 79.45, in a little less than 13 hours. The present range might well be broken on the downside simply due to rally exhaustion.

The gold:GLD ratio closed at 10.21, the same level as its 50-day moving average, but it showed an added premium for gold most of the day. (This ratio is calculated by dividing the price of gold by the price of one GLD share. When it's below 10, physical gold is selling at a discount to GLD's paper gold.) Its lowest value this trading day was 10.19, and it got as high as 10.35. A chart of it, courtesy of, is here. My own eyes tell me that the behavior of the indicator, and of gold itself, is a lot like early September's jump-up except somewhat weaker. Time will tell if my opinion is borne out.

A Reuters report attributes the softness in gold to the dollar plus technical factors. These four points in the Reuters list are of note:

* Gold turned lower as the dollar rose against euro and the EU backed a Greek deficit-cutting plan.

* Much stronger euro -- the $1.41 or $1.42 levels -- would be more compelling to support gold rally - Bruce Dunn at Auramet.

* Market seen overbought as April futures hover above 14-day moving average at $1,108 - traders.

* Charts show gold rallies usually taper after two sessions, and that explains Wednesday's weakness - CitiFX.

Also therein is a bearish recommendation from Barclay's Wealth Management USA.

The Wall Street Journal Online report starts off by not mentioning the usual suspect. Instead: "Gold futures slipped slightly Wednesday on market caution ahead of Friday's release of U.S. jobs data, as well as chart-based resistance." The stronger greenback was mentioned just afterwards; its rise was attributed to both the ADP jobs report and a strike call from Greece's largest union which brought default fear back in the market. Regarding technical reasons:
The market is "a little tired" after bumping up against the $1,126 area, said George Gero, vice president with RBC Capital Markets Global Futures.

Resistance for the April contract came from a trendline running through the December high of $1,229 and the January high of $1,166.70, said Derrick Lewis, vice president and senior trader with Cleartrade Commodities.

"Until gold can close solidly above this trendline and both the 18-day ($1,114.70) and 50-day ($1,129.90) moving averages, traders are more apt to sell rallies," he said.
The next important economic event being watched for is Friday's unemployment report. Overall, the picture is of a rally that was stopped because the U.S. dollar won't co-operate by falling. I leave you with a daily chart of the greenback, which shows a four-day holding pattern near overbought levels. Of note is the MACD lines on the bottom, which still show a bullish trend:

Another Cautious Bull, And One Less Cautious

Daryl Mongomery, in a Seeking Alpha article, reiterates the inflationist case but expresses caution in the near term:
Despite a barrage of press coverage during the last several weeks, the threat of inflation hasn't diminished, nor are the world's governments likely to return to fiscal and monetary responsibility for many years into the future. Gold will continue its long-term rally until that happens...

In the short-term, gold is not out of the woods just yet. Investors should watch the $105.00 level on GLD. Any significant break of this would indicate that GLD will drop to its 200-day moving average, which is around $100.00 and that spot gold would test the $1000 level. Silver would also break down from its trading range, roughly between the $16 to $19 an ounce level for spot (slightly lower for SLV). Seasonals are generally strong for both gold and silver in February, but weak in late spring...
He's right about February. Gold topped out both in February 2008 and 2009; both tops were around $1,000, then a record or near-record. This behavior was anomalous given the sell-in-May rule, but that anomaly's been in place for the last two years.

A much shorter piece by J.D. Steinhoilber is more explicitly bullish:
...Driven by demand from both private investors and emerging market central banks seeking diversification from paper currencies, we expect gold to reach $1500 at a minimum over the next two to three years, and it could potentially trade much higher if speculative dynamics really take hold. The downside risk in gold should be limited to $1000 to $1050.

Note that both of them believe that gold, at worst, will fall to $1,000. Not to be a downer, but there's a lot of potential fall if gold should drop to three digits and not bounce back.

Bullet List Of Financial Shenanigans

If you need a scorecared of recent financial miscreancies and monetary follies, this Commodity Online report will fit the bill. Also included are reasons against a robust economic recovery in the U.S.

The article ends with an exhortation to buy gold, but is cautious about timing:
Be very careful as we move forward in time. Trading is going faster and more volatile with wider trading ranges in precious metals and other markets. Try to be in position ahead of time rather than locking yourself into trades at the very last minute. Futures traders should always use stops and shares traders as well. Personally, I can see unbelievable opportunities to trade that we would never see again for many years. Turn these problems into opportunities. Those on the right side of the trade might get rich. Those on the other side are just victims. Stay Alert.

2009 Chinese Gold Production Figures Come In

As it turns out, the figure was below 325 tons but well above 300. According to the China Gold Association, 2009 output was 313.98 tons; 2009 is the first year that PRC production exceeded 300 tons. This result makes China the #1 gold producing country for the third year in a row.

Economist's "Buttonwood Notebook" Blog Describes Euro As Synthetic Gold Standard

There's still interest in the gold standard, as the downside of a fiat-money regime is clear to more than a few. In this post from "Buttonwood's Notebook," entitled "The new gold standard," the Euro monetary regime is described as acting like a gold standard. Since the European Central Bank isn't attached to any Euroland country, none can print their way out of deficit woes; the Greece crisis had to be solved by the Greecian government imposing austerity measures instead. This constraint makes the Euro system act like [a facet of] the gold standard of old, which also acted as a checkrein against monetary expansion though gold outflows.

It's an interesting comparison, but it begs the question: why aren't IMF loans to debt-ridden emerging markets categorized in the same way? Presumably, the answer is that market forces take care of the adjustment in the Euro system while the IMF swoops in with loans and austerity conditions only when an emerging nation is about to default. Evidently, the market for sovereign debt isn't enough to contain a determined flight to overborrowing.

For this crisis, the Euro system has acted as a checkrein. It's still a discretionary one, though...

Sprott Physical IPO Priced

Sprott Asset Management has long been associated with gold; Eric Sprott has been a regular speaker on the goldbug circuit for a long time. [Here's a report of his latest call, in which it's said that he favors a long gold/short equities pair trade for his hedge funds. Jim Rogers', on the other hand, is long the greenback and long gold too.] Traditionally, the firm has stuck to gold mining stocks; now, it's on the verge of launching a physical gold trust. The IPO price has been set at $10 a share, and the company is hoping to sell 75 million units for total proceeds of $750 million.

Thankfully for the company, the recent boost in gold should add to interest in the offering. It'll be listed on both the Toronto Stock Exchange, with symbol PHY, and NYSE Arca with symbol PHYS. Given the GLD is spoken for, not a bad choice.

As gold rises, Indian trader interest wanes

That's what a Reuters report discloses:
India gold traders continued to stay away from fresh deals on Wednesday afternoon as prices rebounded from their intra-day lows as the dollar weakened against other major currencies, dealers said.
The rest of the report says that $1,100 is the price point of interest as of now. Above $1,100, interest fades.

Differing Opinions, One From An Unusual Source

There are gold bulls and gold bears, but the two below make for an interesting contrast. The first article, "How low will gold prices spiral to when the bubble bursts?," is webbed by someone else but comes courtesy of Forbes India. The author's take is $700/oz, but an expert quoted said that it would take an unlikely spurt of non-inflationary growth for that to happen:
The world economy will have to improve. Drastically. The US growth rate needs to double at 6 percent, the world economy needs to grow at 2.5 percent and developed world stock markets need to grow by 50 percent in the next year.

Once that happens prices may slowly start to fall to 2007 levels (USD 695).

A counterpoint view, and a good summary of the bull case, is found in this article: "They Say Gold Bubble Will Burst Soon – I Say Ignore Them!." Perhaps ironically, this entry is from a personal-finance blog.

After Slight Driftdown, Gold Up

Evening trading got started with gold going up slightly. Starting at 8 PM ET, however, the price drifted down slightly to just above $1,110. This latest evening downturn left gold in a narrow channel with that same $1,110 as the lower end. Starting at midnight, the channeling ended and gold began to climb up. $1,120 was bested at about 2:30 AM ET. After a pause, another run-up saw gold make it as high as $1,125.80. After it ended, spike turned to downdrift and gold fell below the $1,120 level in a steady slide; that slide began to accelerate at 8 AM. As of 8:05, gold was at $1,114.30, virtually unchanged on the day.

The reason for both uptrend and downtrend was the U.S. dollar. As progress was made with Greece's fiscal situation, the safe-haven premium for the greenback melted away. The U.S. Dollar Index advanced slightly in the evening, entering a range which was centered around 79. Starting at midnight, the Index slid down smoothly with hardly a secondary reaction, right to 78.675 by 4:05 AM. A short period of indecisiveness ended with the Index rallying back up. By 8 AM, the Index had almost erased the early-morning decline. 79 was not to be reached as of then, though: as of 8:10, it was at 78.95.

An optimism-laced Bloomberg report makes the same attribution suggested above: gold climed because the U.S. dollar fell, and vice-versa. Two experts quoted were bullish:
“The euro seems to be on the upside, and that’s beneficial for gold,” said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “Physical demand is exceptionally good,” and prices may climb toward $1,140 an ounce if they surpass $1,125, he said....

“Price levels below $1,100 an ounce apparently attract buyers who consider this as a lucrative entry point,” Eugen Weinberg, a senior analyst with Commerzbank AG, wrote in a note to clients.
It's not just the analysts, either, Near the bottom, the article mentions a reaffirmation of two oprtimistic forecasts for the metal, including Newmont Mining's call for $1,350 gold by the end of the year.

In addition to the then-falling greenback, this Globe and Mail piece attributes gold's rise to technical buying.
Commodities were higher across the board as appetite for assets seen as higher risk was sharpened by well-received U.S. economic data and a bounce-back in equity markets.

“The recovery we have seen this week in stock markets, and the euro recouping losses it suffered last week is a positive environment for the metals market,” said Peter Fertig, a consultant at Quantitative Commodity Research.

“A weaker U.S. dollar also implies that institutional investors are returning to the market,” he added.
Another analyst was quoted as saying that gold is now a risk asset, moving inversely to the greenback like other risk assets.

Speaking of the greenback, this chart shows a relative-strength oddity at the top:

It's not often that an RSI chart goes into oversold territory for one day, after which the investment peaks. That being said, the greenback is still in an uptrend that was exaggerated by the Greece fiscal crisis but is still extant. As of 8:30 AM ET, the Index leapt above 79 and reached 79.1 even; the ADP jobs report came in, and the greenback reacted with a jump. The 22,000 jobs cut was seen as bullish for the greenback, but not for the stock indices except briefly even though the cuts were lower than expected. Gold itself slumped about two dollars an ounce in consequence.

The gold:GLD indicator closed at 10.21 yesterday. This special post has a discussion of it.

As the ADP data is being assimilated, gold has moved down but not by much. As of 8:50 AM ET, according to Kitco, gold is at $1,111.50 for a drop of $1.70 on the day. $1.10 of the drop was attributed to strengthening of the U.S. dollar.

Tuesday, February 2, 2010

Gold Market Quiet But Churning (Bumped)

[Bumped for order's sake, to keep it above the special post made tonight.]

Despite some testing on the upside and downside, the $1,110-$1,115 range held until a sustained push to the upsaide staring just after 11:30 AM ET. The daily economic news cycle passed without much effect on gold; the latest upswing has not been news-driven or immediately greenback-driven.

The U.S. Dollar Index, after descending below 79.1 at about 9:10 AM, and channeling between 79.06 and slighly above the 79.1 level, atempted to recover right after 10 AM. That recovery failed to hold, though, and the Index slumped down to 79 by 10:35. The Index got back in its range, bordered by the 79.1 level on the upside. As of 11:40 AM, it was at 79.06. The December housing data, which was optimistic but below expectations, evidently was misinterpreted for a brief spell. There's evidently a fair bit of bullish sentiment for the greenback. Given the frustration of that sentiment, the U.S. dollar looks more overbought than oversold at this point.

Kitco's Gold Index, as of 11:49 AM, showed a $9.50 gain for gold. Only $1.80 was attributed to the falling U.S. dollar; the rest was attributed to predominant buying. As of the time of this post, a more sustained push above the $1,115 level ensued.

Update: There was a push above, but it petered out. At about 11:45 AM ET, the spot price got to $1,117 but fell back to below $1,114 shortly afterwards. A second attempt to get and stay above $1,115 at 12:30 lated longer but ended too. As of the time of this update, gold's been in a narrow trading range bordered by $1,117 on the upside and just below $1,114 on the downside.

After slumping back to a range from 79.05 to 79.08, the U.S. Dollar Index fell below the lower value as of about 12:15. A quick but short-lasting dive took the Index below 79. Bottoming at 12:34, the greenback climed back up to the 79.05 level before sinking again. A pause right at the 79 level was broken through right after 1:30 PM ET. Given the recent weakness, the Index is on track to giving up all its Friday gains.

Perhaps unsurprisingly, gold hasn't benefitted all that much from the greenback's slump. As of 1:32 PM, Kitco has a gain of $11.10. $2.95 of that gain is from the weakening greenback, while $8.15 is due to predominant buying. Since the gain distribution is shifting, part of gold's rise today was discounting a futher fall in the U.S. dollar.

As of 1:38 PM, gold hasn't fallen but has paused; the spot price is barely above the 1,115 level at $1,116.30. It looks like another shot at the top end of the range is coming.

Update 2: The shot I mentioned actually ended at about that time. A final attempt was made right after 2 PM ET, which topped out just above $1,117. The above-mentioned range was actually broken on the low end, as gold drifted downwards for the rest of the session.

The weakness in the U.S. Dollar ended in mid-afternoon too. The 79 level was breached, but just barely. Instead of continuing the downturn, the Index hovered in a range centered around 79. As of 5:30 PM ET, it ended up at 78.98.

On Thursday, the Index closed at about 78.9. Yesterdays and today's drops have not pushed the greenback down to the level it closed at before Friday's jump, but today's was close.

The Kitco Gold Index divided up gold's $7.80 end-of-day gain into $2.60 due to a drop in the U.S. dollar and $5.20 due to predominant buying. The final close for spot gold, before evening trading started, was $1,113.40.

Two reports attribute the rise to techncial buying. Reuters puts it briefly:
* Gold rallied to a near two-week peak mainly on technical buying. As prices moved above technical resistance levels, more buyers entered the market - traders.

* Steep declines and volatility heading into January's month-end drove some players out of gold who renewed their buying once prices broke above several key upside targets- traders.

* Some analysts saw $1,076 an ounce as a buying level. Others cited the psychological $1,100 level as key.

Another report, webbed by, quotes an expert in the matter:

Tom Pawlicki, precious metals and energy analyst at MF GLOBAL in Chicago, cited the December low at $1,076 as a trigger that drew some investors back into the market.

Looking at investment flows data, he said he saw a contingent of traders that were long gold, liquidated on recent declines, then quickly tried to get back in as prices rose.

"People were pretty much getting whipsawed by the volatility. A lot of people were starting to line up for a breakdown to new lows when the dollar was climbing against the euro, but that didn't happen. So, now they're trying to get back in," said Pawlicki.
Both reports credited U.S. dollar weakness as contributing to gold' gain.

As it turns out, I was wrong about yesterday's rally being due to short covering. Longs being whipsawed out and in produced a similar reaction.

The question remains: is there any potential demand left to push gold up higher, or is this run finished? The question depends upon the U.S. dollar, since there's no immediate gold-benefitting crisis on the horizon right now. Gold has shown a bit of rally on good U.S. economic news, but that's largely a side effect of the sinking greenback. There have been hints that the gold market is tipping away from "recovery means Fed hike" to "recovery harbinges [more] inflation", but those hints have been too few so far. There's only been that apparent trend when gold's been at bargain levels. From what I've seen near-term, it no longer is right now.

My own hunches say that gold's in for a rest tomorrow, but I've been wrong before. Let me leave you with this chart of gold as of the end of regular trading today, which shows a nice double bottom:

Special Post About Gold To GLD Indicator

Although this indicator is presented as an item of reader interest, I'm making this special post because a glitch in's data this morning obliterated a dip in its value below 10 yesterday. So, I've edited out the section in the morning report that deals with it and am making this special post here.

The indicator consists of dividing the gold price by the price of one GLD share. When that ratio is below 10, indicating that physical gold is selling at a discount to GLD's "paper gold," gold is supposed to rise. I began reporting it with high hopes, but found later that it's too much of a laggard to rate using it in a time-targeted buy-and-accumulate plan.

Here's a post-glitch chart, showing that the below-10 level was triggered yesterday. Just below it is the chart for gold itself. Both are six-month daily charts:

Yesterday's low in the ratio, 9.94, was below the low made in the beginning of January. Unlike some others, this below-10 reading came on the first day of a strong rally. Some have come on the second day.

Since this item is presented as a matter of reader interest, the speculations below should be taken in that spirit:

The two closest precedents to yesterday and today's behavior were the below-10 hits on September 2nd and November 3rd. The latter presaged a November rally that's still remembered today. The former foreshadowed a much quieter rally, which saw gold inching up after a second day of strong gains ended. The performance of gold itself yesterday and today is similar to September's because the second day's gains were weaker than the first day's for both. The chief difference between September 3nd's follow-up gain and today's is, today's is weaker still. To the extent that the gold-GLD indicator is a valid interpretative tool, it (when combined with the gold chart itself) is suggesting that gold will inch up from here. We might get a trading range in the nesxt couple of weeks.

Sobering Production Note From South Africa

At least, for vintage goldbugs. South Africa's traditionally been the country with the low-cost producers. Not any more, according to this Business Report Online article. It says that notional cost expenditures - which include capital as well as cash costs for production - were $800/oz in 2008.

That figure makes South African companies high-cost producers - perhaps the marginal producers of the world. This fact is one for peak-gold believers, as it supports the overall thesis. So does the estimate of national cost expenditures rising to $1,400/oz by 2015.

Wolrd Gold Council Says Investment Demand Remains Solid

In an unusual counterpoint to Mark Hulbert's cautionary note about the resurgence of bullish sentiment among gold timers after yesterday's rally, the World Gold Council says that demand has remained strong largely due to investor inflows.
It said that these western investor flows have remained resilient even as the global economy has shown signs of recovery. Furthermore it said, evidence suggests that even the more tactical elements active in the gold market are being firmly driven by positive sentiment toward gold’s fundamentals. Further price support was provided by a progressive recovery in jewellery demand after a pressured first quarter.
The Telegraph report on the statement is sub-titled, "The World Gold Council said that suggestions of a gold price ‘bubble’ do not take account of gold’s market fundamentals, which remain robust." Constrained supply is also mentioned as a bullish factor.

So far, anyways, investment gold has been in strong hands. To take one example, the holdings of the SPDR Gold Trust were unchanged yet again yesterday. Gold-holders in that arena have held on even though there was serious fear of a renewed downdraft until yesterday.

Worries About China Spread Beyond The Gold Market

There's now concern amongst equity investors. Both the Shanghai and Hang Seng indices are down more than 10% after the People's Bank of China announced its tightening measures. This Marketwatch story points out that Chinese shares, and the entire economy, may be in a bubble. Of note is the intimation that the recent growth pick-up has not been flowing to the bottom line of listed companies as it used to:
Dylan Grice, strategist with SG Securities in London, calculates that returns on investment assets in China have fallen to a paltry 5% -- about the same lowly levels as those in Germany, and less than half those seen in some other emerging markets, such as South Africa and Brazil.
Grice calculates that shares should be selling at 1.7 times book value; they're currently at an average of three times.

Would a PRC share collapse be bad for gold? Ostensibly, the answer would be "yes." A bear market presumably means the inflation party is over and disinflation is setting in. That shift would impel Chinese investors to shy away from gold.

There's just one point of doubt, gleaned from U.S. history. The U.S. stock market was lousy in the 1970s becuase the inflation back then didn't benefit companies' earnings all that much. Instead, the consequent bubble-raising force pushed up hard assets.

I make this note not to predict, but to note a potential head-fake. Given market sentiment right now, it's most likely that gold would be knocked down by a continued stock-market slump; said slump would indicate People Bank of China tightening is kicking in.

After Reaching of $1,110, Gold Rally Pauses

As it turned out, there was a slight pullback last night that took gold down slightly below $1,100. After drifting down once night trading began, gold drifted back up to just below the $1,105 level until about 10:30 PM ET. Then, the price slid until it reached the $1098 level less than an hour later. $1,100 held, though, and the bounce-back carried gold up to the $1,105 level by 5 AM ET. Another pullback ended well above $1,100. $1,105 was broken through again in an early-morning rally that carried gold well above $1,110: by 6 AM, the metal was bumping against $1,115. A range developed between $1,110 and $1,115, which was holding as of 9:49 AM ET.

The U.S. Dollar index has given up close to all of its Friday gains. According to this alternate chart, the Index was at 79.087 as of 9:59 AM ET. (The regular one I've been using has been stuck.)

U.S. dollar weakness was the reason given by this morning's Globe and Mail report. The expert quoted therein was skeptical of the recent rally, specifically about potential ETF outflows:
“The recent gain of the last two days has been largely dollar-driven,” said RBS Global Banking & Markets analyst Daniel Major. “After dollar strength last week, we have had a bit of a recovery in the euro.”

He said an outflow of investment from gold exchange-traded funds was a risk factor for prices....
The Wall Street Journal Online ascribed the recent greenback weakeness to Euro strength caused by a Greek plan to reduce its budget deficit. The resultant easing of the Euroland crisis has pushed up the Euro with respect to the greenback. In addition to that reason, according to MF Global analyst Tom Pawlicki, there's also the proposed $30 billion lending program to small business. That annoucement is boosting risk appetite in general.

"Risk appetite" has become the new buzzword, suggesting a correlation between a rising stock market, falling U.S. dollar, and a rising gold price. Although a liquidity-based term, it does connote recovery turning inflationary.

That skepticism shown in news reports is not reflected in gold timers' calls. According to Mark Hulbert, those gold-watchers were quick to turn bullish as a result of yesterday's 25 dollar gain:
Consider the jump just over the last couple of trading sessions in the average recommended gold exposure among the gold timers tracked by the Hulbert Financial Digest. From a low of 18% late last week, it stands now at 32.2%.

This is not how sentiment typically behaves at market bottoms of more major significance, according to contrarian theory. The prevailing mood at such bottoms is one of skepticism, when any rise is treated as nothing more than a suckers' rally to seduce the unsuspecting into investing before the bear market resumes in earnest.

In contrast, it is a bad sign when, like now, gold timers are quick to declare that the worst is over. This is the source of the aphorism that bear markets like to descend a slope of hope....
He also adds that gold timers have become less discouraged by pullbacks, another worrisome sign to a contrarian.

As this truncated edition of the report comes to an end, I would like to apologize for it being late. As of 10:22 AM ET, gold has climbed back up above $1,110 after briefly sinking below that level. The recent drive-downs of the price that have kicked in as of 8:30 AM ET, have not made any appearance. As of 10:25 , the Kitco Gold Index has almost all of the $5.80 gain in gold so far as due to predominat buying. The U.S. Dollar Index has clocked in at 79.081. Spot gold, as of the time of this post, has notched up to $1,112.50.

Monday, February 1, 2010

Dormancy Period Ends; Gold Rockets Up

About this time last Friday, I was wondering if gold was going to stay below $1,080. Today, thanks to an ISM report showing a much stronger rebound in manufacturing than expected, gold has leapt upwards. $1,085 not only held but was bettered. Shortly after that report was released (at 10 AM), gold shot up from just over $1,085 to reach $1,098. Subsequent to that shoot-up, the price declined a little as the market settled down. A narrow range developed, centered around $1,095, until gold fell further. According to the Kitco Gold Index, almost all of gold's $12.20 gain as of 11:02 was due to predominat buying.

Therein lies a near-term paradox. The U.S. Dollar Index also strengthened since the report's release, bobbing up to 79.40 as of 11:05 AM ET. The only way to explain both is gold being oversold until this morning. There's a thin hope that the gold market's now seeing recovery as bullish due to future inflation, rather than bearish due to a consequent Fed Funds rate hike, but that hypothesis is a bit of a stretch right now.

The recent strength in the greenback contributed to the decline from nearly $1,100, as did a cooling-off period. The rest of the day will show if gold holds or pulls back a little more. I dare not forecast that gold will keep rising.

Update: I should have dared. After that respite, which featured a busted drop-back, gold began taking off again. Shortly after noon ET, preceded by inaction at the $1,095 level, the price soared up to $1,105.70 before pulling back a little. Even after that pullback, gold stayed above $1,100. As of 1:25 PM, gold gained $22.80. The Kitco Gold Index has all but $2.75 of that gain attributable to predominant buying.

Yes, the greenback has had little to do with the shoot-up. The U.S. Dollar Index fell since the original post, but the drop was not been as swift as the earlier one around 8 AM ET. Nor had the Index worsened its daily low of 79.190. The level at which it was at as of 1:28 PM, 79.25, represents less than 50% retracement of yesterday's gain. Gold has taken off despite the greenback enjoying a mere pullback.

It's been quite an upside surprise, only telegraphed by the negative sentiment which (I'm sure) is dissipating. Perhaps some short covering is accentuating the rise, originally triggered by the deficit news and amplified by the ISM report. Short-covering rallies tend to be intense but not long-lasting or very extended, unless the short-covering accompanies a change in trend. It's too early to say right now.

However extended this rally is, it's still going. Spot gold's still in a post-surge holding pattern; as of 1:37 PM, it's $1,103.30.

Update 2: The metal managed to get above $1,105, but the rally continued only in fits and starts after the last update. The U.S. Dollar Index continued to slide down, and did end up making a new daily low at 79.173 just after 5 PM ET. Despite that new low, the greenback was basically marking time as of 5:40 PM ET. Its value as of then was 79.2, for a greater than 50% retracement of Friday's gain.

Gold, after a slight rise that started just before 2:30, ended up settling into a range of its own that was centered just above $1,105. The end of regular trading saw the metal come to rest at $1,105.60. $21.40 of the $25.40 gain on the day was attributed to predominant buying by the Kitco Gold Index; only $4.10 was attributed to the U.S. dollar dropping.

The headline of this Globe and Mail report tells of the magnitude of today's rise: "Gold posts biggest gain in 3 months." The first quoted expert referred to that future-inflation hypothesis I mentioned, but treated skeptically, in the pre-update part of the post above:
“The [Institute for Supply Management] manufacturing number was good. There is the suggestion of inflationary pressures coming through,” said Robin Bhar, analyst at Calyon.
Also credited was the rise in oil, and a more general rise in "risk appetite." Another quoted analyst in that story seemed skeptical of the rally itself. (At times like this, it seems that everyone's a skeptic in one way or another.)

Not mentioned was the ramp-up in the U.S. deficit projection for 2010, which was disseminated at about the start time of today's rally. That $1.56 trilion number may well have put an inflationary cast on what otherwise would have been a "so good, it'll push up the rate hike" manufacturing report. Higher deficits increase the risk of some of them being monetized by the Fed, leading to higher inflation down the road. There's already speculation floating around that the soon-to-end quantitiative easing program will have a sequel, likely under a different name.

Another possibility is buying due to the Grecian budget crisis, even though the U.S. dollar has been the beneficiary. I mention this possibility because the Bank of America put out a report recommending European investors buy out-of-the-money calls on gold denominated in Euros, on the basis that the premiums were unusually cheap. The bull case for gold itself was: the recent discrediting of the Euro will encourage emerging-market central banks to lower their Euro holdings and buy gold as well as U.S. dollars.

Whatever the collection of reasons, I'm reiterating my own hunch about short-covering. Of course, covers have a cause; the above reasons yield a list of several. The question now is, will it continue? Recently, gold has been tested on the downside in late-night trading. I didn't know if a further test will happen tonight, as they tie in with rises in the greenback. There hasn't been one since the afternoon started. Also, the $25.40 rise is a game-changer which might well make the plungers skittish.

We'll see tomorrow. What I know about today was that the rise was far larger than anyone, including myself, anticipated...and I was half-expecting a bullish reversal early this morning.

Gold Not Doing So Badly After All In Most Other Currencies

That's according to "The Prudent Investor," whose Seeking Alpha analysis has charts of gold in terms of: U.S. dollars, Euros, the U.S. Dollar Index, Sterling, the Swiss franc, Yen, Australian dollars, Canadian dollars and Indian rupees. With the exception of the greenabck, the Index, yen and rupees, gold seems to have bottomed out in all of them. At least, that's what the author concludes.

Deconstructing Soros

At Seeking Alpha, the number of articles on gold have diminished over the last month. They no longer show up in the "most popular" list, except for this one:

It's not about gold per se, it's about gold and George Soros. Peter Cooper has deconstructed Soros' "ultimate bubble" remark at Davos to mean that Soros is talking his book while looking for a convenient entry point.
Newspapers like the normally sensible Daily Telegraph fell for his ruse, immediately jumping the gun to a prediction about a massive tumble for the yellow metal. Yet Soros said no such thing.

He merely pointed out what even the most ardent gold bug would concede, namely, that if you study the history of financial crises, then the credit-induced asset price inflation causes them moves from one asset class to another until it reaches gold as the ‘ultimate bubble’ or the last of the bubbles.
Cooper is of the opinion that the next bubble to climax is in U.S. Treasuries, which will be followed by one in gold.

As far as Soros jumping in, he already has according to Between June 30th and September 30th, Soros increased his holdings in the SPDR Gold Trust from 4,900 shares to 2,450,320. As of Sept. 30th, he had 5.48% of his portfolio in GLD.

An Eye-Opening Report For Contrarians

It comes courtesy of, and it's written by Adrian Ash. Contrarians should take note of the facts right after the first paragraph:
..."We are on the lookout for signs of basing," says a technical analysis from Barclays Capital.

"While most commodity markets have come under severe pressure over the past week, gold has held its ground impressively.

"Daily momentum oscillators are in oversold territory, while daily sentiment has reached extremes not seen since September 2008."

Only 15% of the non-professional Gold Futures speculators interviewed for the weekly DSI survey are now "bullish gold", says Barclays. Friday's poll of 22 gold-market professionals by Bloomberg News said that 11 expect Gold Prices to fall this week.

There are others in the article itself, most notably a 26-week high in relative bullishness on the part of commerical traders on the futures exchange.

Huffington Post Mentions Gold, Through Gold Skeptic

One of the talking points of gold bulls, aimed at dispelling the notion that gold's in a bubble, is the containedness of gold enthusiasm. Despite the entrance of some new gold bugs to the market, all big-money hedge fund operators except for one value investor, the bullishness is still confined to the same old crowd. Penetration of the gold story into mainstream-media outlets is most likely done through a gold skeptic. The latest example: the Huffington Post, where gold is mentioned by blogger and hedge fund managing partner Alan Schram. His attempt at debunking is brief:
In the last 30 years gold has not been a good investment, and substantially lagged both the S&P 500 and Bonds (as measured by the Merrill Lynch Bond index).

While gold may reduce your anxieties, it is an unassailable fact that gold (and oil) are not actually effective hedges against loss of purchasing power, and could lag inflation for decades. And gold is not a good insurance policy either. When the world's financial system was on the precipice in 2008, gold did not prove to be a particularly good hiding place.
Later in the post, he also mentions that GDP growth doesn't correlate well to stock-market returns. He ends, though, with the usual gold-skeptic mantra about gold having no intrinsic value.

As of the time of this post here, there were only three comments on Schram's own post; one of them was a correction to an earlier comment. A popular item at the Huffington Post often generates hundreds, and occasionally thousands, of comments. There's evidently not much interest in the gold story, either way, at HuffPo.

China Likely World's Largest Gold Consumer

According to this item, estimated gold demand in the PRC was 450 tonnes in 2009 as compared with 395.6 tonnes recorded for 2008.
The rising demand is being fuelled by increasing prices. While consumers in India, Turkey and the Middle East, traditionally locations with a high demand for the precious metal, have been put off by rising price tags, it's been quite the opposite in China. Consumers there are rushing to buy gold, attracted by buying into a rising market.

Albert Cheng, Far East Managing Director of the World Gold Council, attributes the rising demand to China's flourishing economy, which is enabling consumers to indulge in one of the country's favourite luxuries....

Chinese New Year demand is making itself felt too, and is contributing to the resiliency in the gold market. This year's New Year is Feb. 14th in the Western calendar.

U.S. Dollar Falls, Gold Gains

The first trading of the week opened with a slight gain for gold, which turned into a slight loss late Sunday night. Despite shedding more than 6 dollars an ounce between 8:45 and 11 PM ET, the decline stopped before $1,075 was breached. Gold then began climbing until it got back above $1,080 and established that price as a support level again. Around 6 and 6:40 AM, $1,080 was tested; it held both times. Since then, the price rose to above $1,085. As of 8 AM ET, the Kitco Gold index broke down gold's $5.40 gain into $1.60 due to a weakening U.S. dollar and $3.80 due to predominant buying.

Weaken, the U.S. Dollar Index has. After a huge gain last Friday, during which the Index jacked up from below 79 to almost 79.5, the Index has slumped back in a downwards see-saw pattern. As of 8:02 AM ET, the Index was at 79.31. Its high of the day was reached just before 4 AM ET, when gold was ensconced at above $1,080.

A Wall Street Journal Online report characterizes the above-described action as gold holding steady, with some skepticism about a rally:

Spot gold traded nearly unchanged in Europe Monday, helped by a bounce in the euro against the dollar and reports of decent physical buying.

However, speculators that exited the market last week amid a market-wide selloff still aren't reentering and are unlikely to do so while the dollar remains strong and there are concerns in the market about European debt and mixed data releases, traders and analysts said....

Traders said the gold market has taken on the attitude of sell the rallies.
The same bearish factors that have weighed on the gold market in the last few weeks - People's Bank of China tightening and the rising U.S. dollar - were cited as further causes for further declines by James Moore of in the same article.

A Bloomberg article expresses more optimism: "Gold May Rise for First Time in a Week as Dollar Spurs Demand." The story mentions bargain-hunters coming in, but doesn't downplay it like the one above. Experts cited, though are cautious:

“The U.S. currency is the key at the moment,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report. Still, “clear evidence of renewed and persistent physical buying” is needed for prices to rally, he said....

“The dollar’s sustained rally is spooking sentiment for gold,” said Hwang Il Doo, a senior trader at KEB Futures Co. in Seoul. “Signs of an improving U.S. economy are raising speculation that an interest-rate hike could come earlier than anticipated.”
The greenback is also brought up by a prognosticator quoted in a Globe and Mail report:

“Gold has done relatively well, looking at what has been happening in other commodities,” said David Thurtell, an analyst at Citigroup. “The dollar has been strong, and gold was always going to struggle on the basis of that.”

“It is difficult to see the dollar weakening further,” he said. “People have definitely been seeking out gold as a currency hedge, and if that hedge is no longer needed, that is going to cap some of the demand for gold.”
Caution still abounds, even if there are mentions that the current halt in gold's decline is due to bargain hunters. The U.S. dollar has just been too strong recently, and the spooking that the PBoC tightening has caused is still too remembered. Before the latter got rolling, gold was technically strong and on a roll above $1,160. Now, it's more than seventy dollars below that figure.

Further adding to worries is the state of the largest gold ETF, the SPDR Gold Trust. This Reuters report discloses that the Trust's holdings shrank 1.9% in January. Embedded therein is another cautionary forecast:

Analysts fear sustained outflows from gold ETFs if investors' attitude towards bullion sours, which could prove a drag on prices.

"Gold and silver investment demand has waned since the end of 2009, particularly as the U.S. dollar rebounded versus the euro," said BNP Paribas analyst Anne-Laure Tremblay. "In this context, most ETFs saw net outflows in January."

"Going forward, we expect gold to trend lower until the third quarter of 2010, and as a result, net investment demand generally for precious metals -- and therefore inflows into ETFs and exchange traded futures -- should be more subdued than at the same time last year," she said.
Speaking of the SPDR Gold Shares Trust (GLD), I found out (thanks to a commenter on this thread at Zero Hedge) that George Soros has indeed gone long gold in a big way. His fund now has more than 5% of its holdings in GLD, or 2,450,320 shares. According to GuruFocus, all of those shares were added between June 30th and September 30th of last year. As I suspected when his comment about gold as being in "the ultimate bubble" went viral, he was talking his book.

The gold:GLD ratio, as shown in this chart, closed at a normal 10.21 last Friday. The range that day showed that GLD shares were trading at a miniscule discount to gold itself, relative to normal levels. There hasn't been any extreme readings all last week. To remind, this ratio is presented as an item of reader interest.

Moving back to the greenback, this chart of the U.S. Dollar Index show how high it got last Friday:

What I'd like to call attention to is the RSI index at the top. The greenback was pushed up to the point where the RSI got into oversold territory for the first time since Decemer 21st and 22nd. The last time it got into oversold range, the greenback slumped back. Now, the greenback is slumping to the point where the above-70 level will only be breached for a single day instead of two. Note that, at the depths of the last low, the RSI got only slightly below 50. Bottoming at that range is characteristic of a bull market - hence the caution about gold's near-term fate expressed above.

As 9 AM approaches, gold is hanging steady while the greenback continues to slump. As of 8:55 AM ET, the U.S. Dollar Index has sunk further to 79.26 after reaching 79.19 at about 8:50. That near-term low point sliced off well over 50% of the greenback's Friday gain; the cause mentioned is the $1.6 trillion budget deficit projection figure. As for gold, the allocation of its gain by the Kitco Gold Index shifted more to U.S. dollar droppage in consequence. As of 8:58 AM ET, gold's $4.50 gain was split into $2.80 attributed to the greenback and $1.70 to buying pressure. Spot gold itself, as of 9 AM ET, was quoted at $1,085.40. A run up to the $1,090 level, as reached just before the New York market opened at 8:15 AM ET, was aborted.

If I may offer a brief comment to end this post, there's a lot of caution - and even bearishness - in the face of some resiliency in the gold market. Granted that a surge in the greenback will be a game-changer, but it's widely expected at a point when the U.S. Dollar Index has reached an oversold level. It may be contrary rather than contrarian of me to note the above, but I'm fairly sure that $1,085 will hold while the greenback takes a rest.