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August 26, 2005
Greenspan talk sets off gold, Fri., August 26, 2005, 10:51 AM
Moments before the gold market took a header, dropping a lot in a couple minutes following the Greenspan remarks, I received this reader mail:
Bill, you have a truly great website. I learned a lot from your posts. I just want to say Thank You.
I also have a question on gold. What do you think are the reasons for gold to further appreciate in price? Is it purely because the rise in demand from China and India? Or is it because more people will treat Gold as investment to hedge against inflation?
Based on what I read at techuncovered.com , it doesn't seem we will get hyperinflation in the next 5-10 years.
Thanks, I really appreciate your insight. /Ralph"
Ralph, you are asking a legitimate question a few hours, days or possibly weeks before the gold market likely has a jump by possibly $50 or more to move up close to $500 per troy ounce.
Why am I so confident in making that forecast? Well, the Talking Heads for Wall Street are trying to focus you away from the reality that we are in an inflation cycle. I know that because I can read charts. See PPI/CPI charts below.
But, also look at what just happened to gold contracts. The dump happened to be shorts that are trying to make a bad economic situation look acceptable. It's not.
Look at this table of the current forward market in gold contracts. Note the much higher prices going forward. If the market had dropped in the past few moments, ALL GOLD CONTRACTS would have dropped. They didn't. Only the next two months dropped.
The sellers of the current month contracts are actually buying longer term contracts in order to hedge themselves for the actions they are taking to make you think gold is dropping. So the focus on the current month contracts as an indicator of where gold is headed is a ruse.
Here is the rub: if the traders of forward contracts decide at once to sell ahead and simultaneously buy current (October and December contracts), the gold market will explode upward.
What Greenspan has just said is that capital market risk needs a higher premium. There are economic imbalances that will " sooner or later " be corrected. He's hoping later " well after his retirement at the end of the year. It may happen earlier.
These charts show that consumer price inflation (CPI) reversed trend in 1Q04, and has been in a new rising inflation cycle since. The producer price index (PPI) reversed trend and started to rise in 3Q03.
As you know, PPI leads CPI because goods sold by producers at higher (or lower) prices to the retailers take time to work the price changes into the consumer economy.
So, the next time some TH starts to say there is no inflation problem, I say just tune out.
Posted by Posted by Bill Cara on August 26, 2005 10:51:52 AM | Category: Gold
Discourse
The Jun '09 futures are simply priced off the yield curve: 438.5 * (1.04) ^4.
Why? If I buy and hold gold, it costs me real money (foregone interest and storage fees) for 4 years. The forward simply equalizes the arbitrage relationship, ALL else being equal.
So, rather than telling us that gold is headed higher, it tells us that there is nothing extraordinary going on in the market. When would the futures be telling us something extraordinary is going on? When the forwards actually DROP relative to the front months...it will tell us that people are demanding immediate delivery as they think there is a shortage brewing.
Posted by: Achal at August 26, 2005 3:50 PM [link]
Dream on.
/Bill
Posted by: Bill Cara at August 26, 2005 4:19 PM [link]
Bill, Thanks for your insight.
Will the rise in PPI translate to rise in CPI this time? Following is from the economist magazine:
"Overall, the upward pressure that Chinese imports of raw materials have put on the prices of oil and other commodities has been more than offset by the downward pressure of Chinese manufactured exports. As a result, another important aspect of the China effect is low inflation."
Also, "the pace of growth in real wages has been unusually weak in recent years."(due to cheap labors in China, India)
and "America's after-tax profits rose to their highest as a proportion of GDP for 75 years"
considering these points, doesn't it seem profit margin squeeze is more likely to occur than price increases?
Posted by: Ralph at August 27, 2005 1:36 AM [link]
Bill-
Thank you so much for sharing in this way. That analysis above is very telling. After I read the text of the Greenspan remarks I thought to myself, "My gold position should do very nicely this morning". Instead it DID THE OPPOSITE. After listening to Mr. Embree (whoever hasn't taken the time yet to do so, should do it now at the ROBTV archives) and now seeing this analysis I am shaking my head at the worldwide "conspiracy" against gold. This must truly be a "national security issue" for these people as Embree opined.
Posted by: Mark at August 26, 2005 11:28 AM [link]