For ten minutes.
We had some great banter on this site last week because I am skeptical about $800 gold. Since those posts, gold has sold off a lot. I actually think this could be plus for the bull case. The chart for GLD has gold topping out in the high $530s a few days ago and has it around $503 right now. Even if GLD's numbers aren't exact, it pretty well captures the magnitude.
I think a drop that big in only three days might mean a lot of late money got shaken out. I do not know if the current level makes sense as a trading bottom or not but if gold does find a bottom somewhere close it could have another nice rally.
I am not rooting for $800 gold because I don't think that can happen without bad things happening to the US stock market. I think I am building in a forecast of down a little for 2006 (I'll that post up soon). While I may have it upside down, $800 gold might go along with down a lot.
One last note, I often quote Bloomberg as saying the Aussie dollar has a 0.94 correlation to gold. Dave, over at Dismally, questioned me on the number. While it's Bloomberg's number and not mine I have to say it does not seem to be holding up in this move.
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7 comments:
Uhhh, Roger.
Don't you know that we are past the peak Gold production already. We should be hoarding gold before the price skyrockets.
Ha,ha,ha.
hearty chuckle
Eh, I've had sell signals on gold the past couple weeks. There isn't any catalyst for gold. It's all speculation. Gold maybe tradeable from time to time, but it is a lousy long-term investment. No growth or dividends. Not enough inflation to worry about, either.
Funny that nations were unloading their gold at the lows a few years ago, though. Hahaha. Right near the lows.
If somebody thinks Armageddon is around the corner, it's probably better to own small gold coins to barter with. That, and some seeds. Oh, and guns.
I think many are looking at gold for the inflation reason, but some do not look at inflation as others. For instance, inflation might not be manefested by "higher" prices, but if our dollar buys LESS of something....we have inflation. So, With the deficit, the mass printing of dollars, our dollar could fall. Some are thinking that if the US dollar falls, then what else is there? GOLD.
( I am skeptical of this view, but I hear it often. )
g
The comments I made in the prior discussion are still relevent. Here they are again.
Mark Dodson, CFA at Hayes Advisors has posted several excellent points about gold.
The public has flooded into the StreetTracks ETF for a little better than a year now. It has been the fastest growing ETF in history. It gave the public the ability to purchase gold easily. And, 232 tones have been purchased. The fund increased in size by 10% last month! Each time a purchase is made the fund has to buy gold to back the shares.
There is a divergence that must eventually correct. Gold normally moves inversely to the price of the US dollar. It appears that some traders, who are short the dollar, are buying gold as a hedge. The average production cost of gold is only about $235 per ounce. Give the miners a little time and they will produce a lot of gold to be sold at $500 or better.
I have made the same point as Uncle Jack this way; scores of countries are now routinely increasing interest rates thus increasing the cost to carry gold. I do not use the PPI because it is extremely volatile, but using the core CPI, real interest rates are causing a real cost to hoard gold. Gold cannot go up year after year at a rate that matches compound real interest rates. Of course, if you can sell to a bigger fool, it does not matter, but once the cycle breaks, the price will fall dramatically.
Roger, in regard to correlations, there is normally a strong correlation between oil and gold. This too has diverged. The divergence sets up an arbitrage for the hedge funds, they can sell gold short, buy oil and know that the spread will eventually narrow. Believe it or not, strong gold is artificially inflating the price of oil. Heating oil, airplane fuel, and crude oil supplies are well above historical averages and yet the price went up last week (I know it was because of the unexpected cold weather in December). The good news is the invisible hand of Adam Smith will take charge to slow the consumption of oil all the more and eventually it will be oil that is dragging down the price of gold.
Another divergence is between gold stocks and gold. It appears that some players are shorting gold stocks and buying gold ETF’s. Once the turn comes, the gold stocks will fall a greater percentage than the ETF’s that track the actual metal price.
The European Central Bank sold tones of gold recently; it only takes one extra ounce to drive the price down hard. Manias can go a long way but I never want to depend on finding a fool at just the right time.
Good discussion and, who knows, the FOMC could offer a surprise this week. The response of gold to a hawkish interest rate statement could settle the issue.
I am not rooting for $800 gold because I don't think that can happen without bad things happening to the US stock market.
Isn't this a little like saying, I'm not rooting for team A this week because, even though they are the better team, if they win then that means they beat my team?
Gambling on emotions or favorites can be a dangerous way to play.
Uncle Jack I'm not sure I am following your comment.
My point is that I think gold has the capacity to go a little higher. It seems like some other folks are rooting (my opinion) for much higher gold.
If it comes, ok I'll deal with it then but much higher gold will hurt equities. If equities roll over I will take action regardless of what I think.
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