Financial Sense Newshour Shows A Little Nervousness

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


On that line, a Commodity Online article linked to at LewRockwell.com asks "Is gold price set for crash below $1,000?" The featured expert is Mark Robinson, a bullion analyst in Dubai. He says:

“Gold is on a bearish mood these days after the precious metal’s spectacular ascent to the record high of $1,227 per ounce in November last year. Gold price may not boom above $1,227 this year, if commodities get into a slump in 2010. A crash in gold price below $1,000 per ounce can not be ruled out,”...

According to Robinson, the main problem with gold is that “its price has been over-hyped by some bullion analysts and forecasters.” “It is funny to see so many gold predictions going around in the search engines on the Internet. Gold price is being predicted from $1,000 per ounce up to a whopping $5,000 and even $10,000 by analysts and investors ranging from Jim Rogers, Marc Faber and Nouriel Roubini to research assistants in small broking firms,” Robinson told Commodity Online.

Note the tone he takes in the second excerpted paragraph. It's not unlike the remonstrances heard during a mature bear market. How hype-blind we were, how blind...

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


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

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

Gold Scrapes A New Bottom, Then Pulls Up

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

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

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


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

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


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

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

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

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

Inflation Angst

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

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

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


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

Takeovers Increasing In The Gold-Mining Field

As has been noted in the Financial Sense Newshour podcasts for some weeks now, senior gold companies are buttressing their reserves by taking over junior exploration companies with multimillion-ounce deposits. Kishori Krishnan of Gold Investing News has written a round-up of the latest deals with this teaser of an introduction:

Gold miners are adding to their reserves. And fast. Given the strong metal prices, precious metal miners are using their cash flow from existing operations to pay for new acquisitions.

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

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

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

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

This is telling us something important....

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

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

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

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

Investment Professional Forecasts $800 Gold

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

"Global liquidity is tightening a little bit and that's usually bad for a hard asset such as gold," says Thomas Winmill, manager of the Midas Fund. "If we see fiscal [discipline] [and] monetary discipline in the U.S., I would say we might see gold go back to its marginal cost of production, which is about $800 per ounce," nearly 30% below current levels.

He pulls back from it, though, and expresses the hope that gold will average $1,200 in the first quarter of this year. The Tech Ticker post says that he's making the point that gold is volatile, and shouldn't be plowed into by the regular person. To be fair, his bearish forecast is more of a scenario given the conditional nature of it. However, gold fund managers are expected to be bulls. Winmill has deviated from the usual line in a significant way.


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

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



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

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



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


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

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

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

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

Overnight drift

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

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

A Globe and Mail report attributes gold's movement to the greenback's, and the recent drop to President Obama's announcement of a partial revival of Glass-Steagall:

“The dollar has been the driving force (for gold),” said Peter Fertig, a consultant with Quantitative Commodity Research.

He said while gold and other commodities had overreacted to the Obama news: “Uncertainty about U.S. financial system regulation is a factor which might be in the market for some time, until there are concrete details.”

It also says that Indian buying will kick in should the metal's price keep falling. "'Traders mostly will look at buying below $1,070,' said one dealer with a private bank in Mumbai."

A Marketwatch report is more bearish in tone. Its feature quote is from a Hong Kong financial executive, who says that the greenback carry trade is unwinding:

"With fear returning to markets and investors' minds after they had previously bought into the recovery story, most assets have been sold off sharply, including gold, helped by interest-rate-hike fears that have encouraged those speculating with borrowed funds in carry-trade currencies -- such as the yen, [U.S. dollar] or also Swiss Franc -- to unwind their positions," said Martin Hennecke, an associate director at Tyche Group Ltd. in Hong Kong.

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

A third report, from Bloomberg, has a hopeful headline: "Gold May Climb in London as Weaker Dollar Fuels Investor Demand." The first expert quoted mentions physical demand as an emerging cushion:

“Yesterday we had a lot of pressure on gold, and overnight we’ve seen some physical demand,” said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “The physical market thinks these prices are fantastic to buy at....

Suresh Hundia, president of the Bombay Bullion Association, is quoted therein as saying that demand will "certainly" exceed last year's depressed level.


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


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

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

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

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

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

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


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

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


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

This Marketwatch report attributes the drop to causes that made their impact in the morning: concerns over Chinese tightening, the drop in the Euro due to continued fiscal troubles in Greece, and Obama's proposal to clamp down on big banks. A quoted authority also noted that gold's been quite responsive to the U.S. dollar as of late:

"Gold has been very responsive to the dollar of late," said Leonard Kaplan, president of Prospector Asset Management. "As the dollar rallies, gold is going to go a lot lower."

And, of course, if the dollar doesn't rally...