« Sticking fingers in a leaking dike, Thurs., June 8, 2006, 9:55 AM | Main | Everybody has taken the day off, Thurs., June 8, 2006, 12:15 PM »
June 8, 2006
Why the gold price is falling, Thurs., June 8, 2006, 11:40 AM
Gold is a commodity both like and unlike any other. There is a supply-demand factor as well as an emotional factor. That much we know. But there is another factor called speculation, which is based on market guesswork.
Andyg123" has written:
"I'm not so sure anyone can "predict" the future of gold. It's much easier to determine the future of global economies as even dumb little me can do so.If we are repeating the 1970s and we are at 1974, gold has peaked for nearly six years if you loosely follow history. Maybe gold will rise. Maybe it won't."
Today comes word from the Prudential Equity Group metals research analysts that metal prices have died and gone to heaven. Download Prudential Metals Report dated June 7.
By that I mean to say that Pru is interpreting markets that speculation has been zapped. Bankers would like to think that way.
I'm not so harsh on speculators because I think they have a more open mind.
Presently the gold traders of the world are hung up on their questioning whether the U.S. is going to fight inflation or not. They see a 10-year U.S. Treasury Note that yields about 5.0 pct and a Fed overnight bank lending rate at about 5.0 pct. And they know that through this dance between key rates, the ultimate outcome " economic growth/inflation or recession/deflation " will happen.
So their figurework goes like this: if Fed rates go higher than bond yields, then score one for the recession/deflation side; but if bond yields go higher than Fed rates, score one for growth/inflation.
So " try to follow the logic " if bond yields fall, then the Fed can actually drop its rate or keep it from rising higher. That way we can avoid recession/deflation AND have growth without inflation, i.e., without an inflation problem.
So what the Fed and the bankers are trying to do here is to drop the bond yields and drop the price of gold in order to give the appearance that the economy is still a "goldilocks" one that they can manage.
Of course this is not what the gold traders expect will be how the game will be resolved in the end. They think that inflation is an issue, brought on by the waste of war, and that interest rates and bond yields will rise, but rise only to the point that the housing market comes to the point of a breakdown, whereupon the Administration will step in and print its own money (through its fiscal actions) in the belief that the Fed will not remove it (through monetary policy).
So, what I am really saying is that Henry Paulson was brought in to do a job that Ben Bernanke can't seem to accomplish with the tools he has, or that Paulson's predecessor at Treasury could not do, which is to get his Wall Street banker friends to direct their capital and their client's capital more to bonds in order to hold those yields down.
So I do expect to see, from this point forward, more heavy asset weightings in bonds and less for equities in the Wall Street bankers recommended portfolios. Moreover, I expect to hear more talk from Wall Street that inflation is not a problem (such as Stephen Roach at Morgan Stanley) and that a "soft landing" to this economic cycle will resolve the problems.
In fact, I think we are all going to be hearing the words "soft landing" to replace the old and stale rhetoric of "goldilocks".
These people have a vested interest to have the gold price fall and the $USD rise. The world, however, is bigger than the Fed and Administration and a wiser place today. So ultimately the world will decide where the price of gold will go.
Yes, today the price of gold is falling. It is being pushed down. The further it is pushed, the bigger will be the reaction. Ultimately the people will decide. The people, here and abroad, will decide if they want to buy certain goods at higher prices, and they will decide if they will spend from their savings or demand more return for their labor in order to maintain their habits. Elected representatives too, here and abroad, will decide if they will continue their penchant for deficit spending " always borrowing from the future.
As I see it, the people in power " the Presidents and Prime Ministers, the Finance Ministers and Central Bankers -- are there for a short time. Some things, however, never change.
And that is why gold might fall in the short run, but very long term it must continue to rise, and that's because costs (including inflationary costs) are always rising.
Btw, I see from the Prudential report available here, that Dr. John Tumazos has metal cost estimates in future pegged to somewhere near his estimates of the cost of production. He feels the cost to produce (the majority of) gold bullion is not higher than US$450, so his estimate falls in line.
So (without knowing for certain, and without having the time to read his lengthy report) I gather that Tumazos is negative on the metals because he believes that economic demand is weakening, the interest cost of inventorying the metals is rising, and that speculative demand will soon die.
All of that is possible, but I'll take the other bet.
Posted by Posted by Bill Cara on June 8, 2006 11:40:50 AM | Category: Bullion
Discourse
Bill,
If people can get a risk free 5% return with money sitting in the bank why would they buy Gold ? Unless they fear the inflationary effects of holding paper money. Did I just answer my own question ? ...
Posted by: TheAdonis ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
June 8, 2006 11:59 AM [link]
I've choosen my nickname a long time ago.
By chance, this hapens to be one of the hottest topics of recent times.
I've never invested in gold.
Can anyone explain me in just a few sentences: WHY IS GOLD AN HEDJE AGAINST INFLATION?
A few links would help too.
Thanks, from Portugal
In May, Peter Eliades wrote in his cycle report regarding another key indicator, the "discount rate":
"Whenever the Federal Reserve discount rate has moved up to 6 percent (7 times since Dec. 1915) anytime over the past 91 years, it has never failed to stop any stock market rally in its tracks...with only one exception (preceding 1987 crash, which made all-time highs two years later) it has been dealt a blow that would last for several years to come."
The discount rate was increased to 6 percent on May 10th:
Posted by: JIM at
June 8, 2006 12:11 PM [link]
I have noticed for many months now, but increasingly lately that the price MOVEMENT of $GOLD seems to be correlated to the $SPX (broad market index) in the very short term (minutes) and to a lesser degree in the near tearm (days/weeks). Is it possible that there is programmed trading in funds that drives them to buy/sell $GOLD along with stocks to keep their portfolios within a prescribed allocation? Could it be that this factor (if it exists) has become significant? If so, what does that mean for the absolute price of $GOLD as the broad market pulls back over the next few months?
Posted by: ToddL at
June 8, 2006 12:22 PM [link]
TheAdonis would rather keep his money in a bank where maybe hundreds or thousands from China or India might want it? I'd rather have mine in Gold where hundreds of millions definitely want it!
We are close to an intermediate-term cycle bottom in the gold price I think.
Posted by: Bill Cara at
June 8, 2006 12:25 PM [link]
Yes, an intermediate term bottom. It's deeper than everyone who wanted to buy pullbacks was expecting. It bit me yesterday as my play at 10am turned flat by 2pm.
No banks for me! After inflation, what has the return on the SP500 been for the last number of years?
Not an inflation hedge? The Fed will be forced to cut when even the talking heads switch their language to "soft landing" as by that time the trainwreck will be happening. Then gold takes off.
Keep your powder dry. There's some time before this thing gets going again.
Posted by: MarkM at
June 8, 2006 1:05 PM [link]
we've all heard about irrational fear. lately, i think we've been suffering from irrational hope. among the myriad ways to look at 'the gold thing,' check the chart of GLD, for example.
and if it is a h & s pattern, as is surely looks to be, then we have quite a ways to go to cover the distance btw the head and the neckline. look out below and look out above if that's where you got it.
Posted by: rach3 at
June 8, 2006 1:27 PM [link]
I don't think so. Please check out the following:
http://www.financialexpress.com/fe_full_story.php?content_id=129715
Apparently an IMF report shows that IMF rules have winked at or encouraged double counting of gold reserves at central banks. Which means that indeed GATA and the other so-called conspiracy theorists have evidence for their long standing allegation of gold price suppression..
If the price is being suppressed artificially, we can assume there are reasons why it has to be...maybe unwinding shorts, pent up demand, and supply factors that ensure an exploding price...is left unchecked.
Today, one of the stage props of the war on terror, Zarqawi was brought out...tomorrow we can expect Osama at a crucial stage of the game...but economic laws will still work. Gold is actually doing quite well despite the huge amount of pressure brought to bear on it. I would watch the summer out before jumping to doomsday predications for the gold price. I was admittedly optimistic to think the correction would not extend below 67..I bought just above and didnt sell on my stops, feeling certain that the correction would be done by June 1st week end. I have till Monday to see if that is right or not. But my feeling is, the worst damage may have been done...
Posted by: goldilox at
June 8, 2006 5:36 PM [link]
Burn these charts in your mind. See what was required when last faced with simular monetary problems in the 70's:
As defined from the above link:
STAGFLATION is:
Increasing costs and decreasing business activity = lower corporate profits and individual income = lower tax revenues plus exemption of the many from the Alternative Minimum Tax category = in the face of continue high spending an explosion in the US Federal budget deficit = in the face of a continuing US Trade deficit and a runaway US Current Account deficit = a severely lower US dollar = significantly higher gold prices = $1650 for gold!
Posted by: JB at
June 8, 2006 6:13 PM [link]
My theory on the increase in demand for gold and perhaps Bill will agree with me, is the growth of the Indian and Chinese middle class. India for instance had a virtually non existent middle class 50 years ago and currently has an estimated 300 million people classified as middle class . These numbers are growing at 5-10% per annum meaning an extra 50-100 million more people are elevated to middle class. The growth in the middle class has led to an increase in demand for gold because gold is seen as an excellent store of value in eastern countries especially China and India. The private possession of gold was banned in the US between 1933 and 1975 and this can perhaps be seen as an artificial supression of gold demand. India and China have both been growing explosively in the last few years and with the addition of wealth the citizens of these countries are demanding gold like never before. Thus in the long run it is perhaps inevitable that gold will cross $1,000 and more in my opinion. I do not see gold prices collapsing unless the Chinese and Indian governments ban the private possession of gold which is highly unlikely.
Posted by: TheAdonis at
June 8, 2006 6:16 PM [link]
Technical trading
, Gold in terms of USD is down to the 61.8 Fibonacci level which is close to the 100 EMA and a the slight uptrend support.
Posted by: real1 at
June 8, 2006 9:48 PM [link]
I see gold moved into a lower range overnight between 604 and 608. Oil is up. $USD slightly down. These are supportive.
BB would love to see a 5 handle on gold before long. He's a few bucks away from making it happen and who would of that that a few months ago?
I am expecting the rhetoric to continue right up to the June meeting. I am not banking on any outcome for that meeting, although NOT raising would be a serious blow to "transparency" and Fed credibility after this verbal campaign.
As ALL asset classes (except bonds) are deflating simultaneously, liquidity withdrawal seems the only logical conclusion to me.
Safe trading all.
Posted by: MarkM at
June 9, 2006 5:15 AM [link]
What's a "5 handle" ?
Posted by: omphalos at
June 9, 2006 8:38 AM [link]
Thanks MarkM.
Just noticed this this morning:
http://stockcharts.com/h-sc/ui?c=$gold:$xeu,uu[h,a]dalaniay[db][pc155!f][vc60][ila12,26,9!lh14,3]
w/ RSI:
http://stockcharts.com/h-sc/ui?s=$GOLD:$XEU&p=D&yr=0&mn=3&dy=0&id=p96908351541
Hmmm, I'm nibbling here and when that MACD and/or Stoch turn around I'll be even more interested.
Posted by: omphalos at
June 12, 2006 9:23 AM [link]
oomph-
Interesting chart. ;)
Posted by: MarkM at
June 12, 2006 1:11 PM [link]
Significant events drive markets. What is occuring today is best described as irritional fear! Bring it on, short sellers need some love too.
Posted by: oratier![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
June 8, 2006 11:55 AM [link]