Gold plummet continues

As of the time of this post, the price of gold's still dropping like the proverbial stone. Spot gold's at $1126.30. This news report, written before the lastest decline got rolling, ascribed the drop to a greenback rally and unwinding of year-end positions.

Spot silver's declining along with gold. It's now $17.56, down 61 cents on the day. And, of course, the three major U.S. averages are down about 1%.

Goldbug At Seeking Alpha Stays The Course

Daryl Montgomery avers, in "Gold Starts Its Technical Correction While Dollar Rallies," that the intermediate-term uptrend for gold is intact; so is the greenback bear market. He uses technical-analysis techniques to make the argument, but he also points out that the last two recent greenback rallies were concentrated in one currency - and can likely be chalked up to central-bank intervention, not a turn of the tide.


A goldbug published at the Market Oracle, is more pessimistic in the short term. Ned W. Schmidt, by tying gold in to year-to-year growth in Fed credit, believes that "Gold [is] in High Risk Period, Could Test Support at $970."


Update: Another technical analyst, also published at Market Oracle, concludes that the greenback may well have turned upwards. The reason given is the US Dollar Index closing above its 50-day moving average: "Taking a closer look at last week’s action, we see that the Dollar has staged its first real breach of its 50-day moving average. This is MAJOR as it is the first time the Dollar has achieved anything resembling REAL strength from a technical analysis standpoint in well over nine months...."

Barron's "Getting Technical" Columnist Still Bullish On Gold

One of the interesting divergences in this gold spill is the preponderance of technical analysts who are still bullish about the yellow metal. One of them is Michael Kahn, author of Barron's "Getting Technical" column. After starting off by saying that gold went through a needed correction, which gave momentum traders "a taste of market reality", he says that the recent parabolic rally could go back to its starting point of US$1000/oz. However, the demand for the metal makes a drop to that extent unlikely. The title of his article gives his post-correction call: "Gold's Next Leg Up is $1,350 an Ounce."

He ends by noting that the gold bull market is a multi-currency one, and with: "I consider the current smack down to be a necessary consequence of too many investors getting too bullish at the same time. Once the excesses are cleared, the bull market can resume. "

Cautionary Note From The Chicago Tribune

Taking the recent drop as a cue, the Chicago Tribune's Gail MarksJarvis points out the dangers of plunging into an asset class without knowing what moves its price: "Gold no investment safety net." This point was particularly eye-opening:

What's disturbing is that this frenzy seems to have had a special appeal for seniors. Richard "Mac" Hisey, president of AARP Financial Inc., said that seniors have been calling for help finding gold. One woman, who was worried about living on CD income, wanted to know if she should use her credit cards to stock up on gold.

She was warned not to do it. If she did use her cards, she now owes more than her gold is worth.

Ms. MarksJarvis quotes Jim Paulsen, chief investment strategist for Wells Capital Management, as saying that gold is overvalued relative to the entire CRB index.

Thoughtful Article On Resurrection Of Gold

The piece is by Martin Hutchinson, in which he discusses the world moving closer to a gold standard. Not a full one, but a quasi-gold standard where gold reserves are built up and used to smooth out the currency price of gold. The example he gives, for the U.S., is: selling some gold when, say, the greenback price rises above $1000 and buying some when the price falls below $900.

The reason for doing so is that inflation doesn't seeem to have the same magic as it used to. Failing that move to a gold tie, the monetarists' monetary rule - limiting increases in a mixture of monetary aggregates to 2-4% annually- could also be used.


The trouble with his example, as hard-core goldbugs know, is any such gold-price targeting leaves a large majority of the currency unbacked by gold. That point doesn't defeat Mr. Hutchinson's plan, as it doesn't depend upon full gold backing, but the lack of backing may lead to a country's reserves being cleaned out entirely. The example of selling into $1000 gold does hint at it.

Campaign For Increase In Chinese Gold Reserves Continues

This time, it's an article in the main PRC paper, the People's Daily. The proposal in question was written by an assistant professor of economics, not a government official, but it did make the main paper. The campaign evidently has some powerful backers. The professor, Jing Naiquan of Zhejiang University, made the point that the U.S. dollar's credibility was boosted by the U.S. government's large gold reserves. He was careful enough to point out that other major currencies have a major proportion of reserves in gold, but the suggestion is clear: if the PRC's renminbi is going to displace the greenback, it'd better be backed by a lot of gold.

That may be the reason why an academic is running with the ball. A high government official making the same suggestion could cause a flap in the U.S. for making that point.

More details are in this Reuters story.

Bank of Korea Says No To Additional Gold Reserves

This Bloomberg story quotes the central bank's head of the department of reserve management: “'There’s an illusion in gold,' Lee Eung Baek... said in an interview. 'We follow the big trend. Gold isn’t the trend. Out of more than 200 nations, how many countries have bought bullion?'”

Only 0.03% of the South Korean central bank's reserves are held in gold - and it loks like that portion is going to stay miniscule. South Korea ain't China, that's for sure.