GOLD — Nearing a Turning Point (November 12, 2008)
Despite gold’s latest weakness and the possibility of further breakdown, I believe we are nearing a turning point in the tenor and direction of the market. Before long, gold will begin a new and sustainable upward march.
Until then, with the yellow metal in the $700 to $730 range - and certainly at lower price levels - price-sensitive demand from key Asian and Middle Eastern markets should stabilize the market.
With $1000 gold very likely in the next year - and still higher prices beyond - the risk/reward ratio is very much skewed to the plus side.
Commodity Disinvestment Running Its Course
As I have written in past Gold Briefs, much of gold’s weakness in recent months can be blamed on a wholesale indiscriminate shedding of long commodities positions. Often sellers were not holding individual commodities but baskets or indexes that included gold - so gold got dumped with everything else.
The wave of commodity disinvestment was triggered by the freezing up of credit and a rush to raise cash. Along the way, large physical sales of borrowed gold knocked the price sharply lower . . . and program trading by hedge funds as well as the deteriorating world economic outlook engendered still more selling.
Moreover, with world stock markets in retreat, some wealthy private investors have likely been liquidating gold and silver positions to cover their equity losses.
In addition, the decline in inflation and inflation expectations due to (1) the fall in oil and other commodities prices and (2) the increasingly gloomy economic outlook have also dampened demand for gold among some who look to the metal as an inflation hedge.
Now, it looks like the intensity of commodity disinvestment may be diminishing. In fact, it is likely that commodity holdings by hedge funds and other large-scale players have been so depleted that there’s not much left to sell.
News from China should also dampen the lighten the psychology affecting commodity markets. The announcement of an aggressive economic stimulus program valued a 4 trillion Yuan (about US$586 billion) with much of the money going to commodity-intensive building and infrastructure projects should offset some of the weakness in commodity demand in other geographic markets.
Golden Dichotomy
The dichotomy between very positive individual investor interest in gold versus very negative institutional investment and trading activity continues.
Household investment in gold - as a safe haven, inflation hedge, and portfolio diversifier - remains strong in most markets. Indeed, coin retailers continue to report shortages of the popular gold bullion coins - the American Eagle, Canadian Maple Leaf, the South African Krugerrand, and the Austrian Philharmonic. And, bar fabricators similarly report high price premiums and long delivery times for small bars heading to the Middle East and Asian markets.
Our Indian contacts see improving gold demand after some hesitation and price resistance in October, a month many of us had expected would be a knock-down period of gold buying ahead of the seasonal holiday festivals.
India could be the key to gold’s short-term outlook. If stronger local demand continues, gold could turn upward sooner rather than later.
Silver Interest
CFTC data is now showing rising investor interest in silver, with the net long position of futures market investors at its highest level in a month.
But this is only part of the positive picture for silver.
India is again emerging as a swing player with strong local investment buying beginning to affect availability of metal in world markets.
Investors in India (buying small bars and silver jewelry) and investors in futures markets may finally be responding to silver’s perceived value relative to gold indicated by the gold/silver ratio lately in the historically high 70-80 range.
In the past week, there’s also been news from China, the world’s third biggest silver-mining nation, that domestic mine output is stalling. Meanwhile, industrial demand for silver in China, already accounting for some 70% of world silver consumption, is continuing to grow by more than 10% a year.
Does this mean that silver could lead the way to the Promised Land? Stay tuned.
More Money
The United States Treasury and the Federal Reserve are throwing a trillion dollars, more or less, into the banking system. And, there’s surely much more to come.
(I’m reminded of that wonderful repost by Nelson Bunker Hunt when, in 1980, after going broke in silver, asked by a reporter what it felt like to lose a billion dollars. Hunt shot back: “A billion dollars ain’t what it used to be.”)
It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy - including the United Kingdom and the Euro zone, China, Russia, Japan and on and on - are doing likewise.
We have never - in the history of money - seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value, in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable rise in price inflation that will propel gold skyward in the next few years.
After all, longer term, the price of gold is very much a monetary phenomenon - and a trillion dollars is still a trillion dollars.
