Gold: How the Market Has Changed 17 comments
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David Coffin co-wrote this article.
The gold market is spreading both joy and fear lately. Those who have followed it for some time are more than pleased to see it working its way convincingly above the September Dollar price highs and out of a down trending channel that it has been bouncing around in since making all time highs last March. Both of those marks were cleared easily Thursday and trading is stable in overseas markets, itself a good sign as gold is notorious for giving back gains from large price spikes.
As predicted earlier, this latest move seems to be generating technical buying and we imagine those holding the significant short interests in the market are feeling increasingly uncomfortable. Longs are uncomfortable too however. The gold market doesn't seem to be reacting to things the way it's "supposed" to. We find this unsurprising, for the reasons outlined below. There has been plenty of ink on the gold market lately, much of it from newcomers. While we have a contrarian's nervousness about that we also recognize that this is a different precious metals market than any in our memory. While that raises a couple of flags, it also opens up the potential for more large gains if things go our way. At the very least, it's likely to ensure a level of volatility that will generate trading opportunities even in periods when the trend might not be our friend. Some of the important ways this market has changed in the past few months are:
- It's (not) all about US:
The gold price most people watch is the US Dollar price. One of the most common and reliable explanations for movements in the gold price is inverse price movements against the greenback. We've talked about this often enough ourselves and our renewed bullishness early this decade was based on our expectation the Dollar would fall.
All that said, gold has had many periods where its correlation with the Dollar was only weakly negative or even positive. Lately, gold has moved with the dollar as often as not. This partially reflects the fact that buying is coming from non US sources and that it is being treated as a currency (i.e. store of value) in its own right, not just an "anti-dollar". We still think the Dollar has downside and that gold's negative correlation to the dollar will return, but its relative currency neutrality is giving comfort to buyers until that happens.
- It's not "gold bugs":
We don't think most, or even much, of the current buying is based on hard money apocalyptic beliefs. Yes, there are plenty of financial calamities to go around and that is a good reason for some insurance. Still, we classify most recent buying as "portfolio allocation" by larger investors with broader holdings who have decided it's a good value store in a world with enormous volatility. In short, it's being driven by new investment demand.
We realize there is a lot of hand wringing over this and plenty of concern that jewelry and other traditional buyers were pulling back from the market. They usually do when the price runs, but that's not the point. While gold bugs have been precious metals' staunchest defenders, they were never going to be the reason for gold to see dramatically higher prices. We'll probably get some hate mail for that one but, really, it's just common sense.
If a group of investors fervently, completely believe the gold price should be and will be (pick your favorite number) then it will be a self fulfilling prophesy if they have the capability to dominate the market. Gold and silver have not yet reached anything like the heights gold and silver bugs expect because, as a buying group, they don't have the necessary firepower to make it happen themselves. The money being directed at the gold and silver markets right now is coming from capital pools at least a couple of orders of magnitude larger than "traditional" buyers. If gold and silver are ever to see the lofty heights gold and silver bugs hope for, those new buyers had to arrive. For now at least, it appears they have.
- Long Live Paper:
There is not much doubt that, somewhat ironically, the rise of gold and silver ETFs are behind some of the newfound respectability of bullion. Traditionalists are suspicious of ETFs because it's an indirect form of ownership, but the simplicity and low transaction costs have helped draw in a lot of new players. ETFs are simply easier for most traders who do not and never will want to deal with things like storage and security. With daily dollar volumes in the biggest ETFs now running at several billion a day, they are also a way for the big boys to play. That's another reason those new pools of capital are now on the scene.
- Hard to Carry:
With so many assets deflating, gold is suddenly a preferred central bank asset again. Central banks only sold 75% of the gold they could have under the central bank selling agreement in 2008 and they may do even less this year. With countries in a race to zero with interest rates one of the main rationales for central bank selling – opportunity cost of a non interest bearing asset - has quickly faded. On the other hand, gold lease rates have been rising, with the one year lease rate at about 1%. This makes the margins too small for carry trades to be profitable enough to justify the currency risk so more of the central bank bullion is staying in the vaults.
One could add up all the above reasons and boil it down to gold being a momentum play. Indeed, we have seen many dismissive comments recently suggesting precious metals should be avoided because there are more momentum buyers showing up. That is just another way of saying people are buying it because it's what has worked in this market. We're more bemused about the momentum comments than anything. Last time we checked "buying it because it worked" explains about 80% of the trading on the world's stock markets and is the basic concept that underpins virtually the entire mutual fund business. Admittedly, momentum plays don't come with timetables so one has to be vigilant and watch for major turns in the gold price but that is nothing new.
This still looks like a move with legs and we have seen little in the markets to convince us some portfolio insurance is a bad thing or that the Dollar will suddenly go from strength to strength. As long as gold is trading on its own merits and its own accord, it matters less what the Dollar does anyway. Gold is getting support because new players recognize it was a good move to have some, whatever their beliefs may be about fiat currencies. There will be plenty of price movement both ways, but the fun's not over.
One only has to consider markets like tech and housing to realize momentum buying can go on for a very long time. That comment too may be disquieting to some. Doesn't that mean a bubble could form some day? It's possible, but a bubble is not a horrible outcome – if you own it first and have the sense to take profits along the way.
Disclosure: no positions
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This article has 17 comments:
Educate yourself & learn about the obvious manipulation of the GLD by the massively concentrated shorts of only 2 major US banks.
When the corruption finally ends, If the big boys want some, they will have to buck up.
Gold went up because some hedgies who survived 2008 looked for some derivatives where they can manipulate prices and GC futures was a right place for them, but it will not work as GC demand get's crashed day by day, PEOPLE HAVE NO MONEY.
Total value world bond markets: $45 trillion
There's lots of big money available to shift into gold.
info ? link??? can you cite the TWO U.S. Bank short info???
hearing about things and correctly identifying good info are two different animals. don't doubt you but don't accept incomplete / inuendo style investment thesis. can you provide details????
thanks.
On Feb 13 07:40 AM Truefire wrote:
> Keep an eye on the Comex. I've been hearing rumors of a diminished
> supply in the warehouses due to a massive call for physical delivery.
> Once the paper trade shell game is exposed, the physical holders
> will determine the price.
>
> Educate yourself & learn about the obvious manipulation of the
> GLD by the massively concentrated shorts of only 2 major US banks.
>
>
> When the corruption finally ends, If the big boys want some, they
> will have to buck up.
It is easy to agree with someone who reinforces ones views however.
I'll add that I am not taking my cash to the bullion dealer for now. Just sitting tight. Can't see any advantage in buying at current prices.
As my 40% gold savings were bought at keener prices than today I have a good margin to protect against drops in purchasing power of my cash pot.
Fingers crossed mind you. It is Friday the 13th !?!?!
On Feb 13 08:07 AM Ed's perspective wrote:
> re: educate yourself
>
> info ? link??? can you cite the TWO U.S. Bank short info???
>
> hearing about things and correctly identifying good info are two
> different animals. don't doubt you but don't accept incomplete /
> inuendo style investment thesis. can you provide details????
>
> thanks.
Can you tell me with certianty who has the gold? Central banks, Comex? ETF's?
Nothing happening today is garden variety.
On Feb 13 07:49 AM ROLEX18 wrote:
> When I changed US dollars to Euroes in the change place in the Old
> Town in Frankfurt/Main, the guy had many Gold coins on sale, I asked
> how much those cost, he said the price of fine Gold, I said it must
> be a good price, he said that nobody buys even at this prices., he
> said the "people have no money" and I believe him.
> Gold went up because some hedgies who survived 2008 looked for some
> derivatives where they can manipulate prices and GC futures was a
> right place for them, but it will not work as GC demand get's crashed
> day by day, PEOPLE HAVE NO MONEY.
Trillions of dollars are sitting in bank accounts and getting negligable interest paid. There will be a tidal wave of cash moving into gold when average Joe starts to realize the train is leaving the station.
The big money that is waking up now could have bought in at $700 just 18 months or so ago. Maybe they watch CNBC too much. These are the same people that laughed in my face back then. Gold got my attention about that long ago when 'this thing' went public. A quick check into the scale of the problem (thanks Roubini!), some verification, and a simple comparison to historical financial events, and it was obvious to me even back then that the printing presses would be cranking up soon enough. God bless the Internet. It took me longer to accept, confirm and act on what I was seeing than it did for me to find the data I needed. But I'm talking about weeks, not the months and years that others seem to be taking.
The reported scale of the problem has tripled since then (thanks again, Roubini!). I am really quite surprised at how long it's taken the rest of the planet to realize what is happening. I guess that makes me a Gold Bug.
Traders can trade if they want, but not me. I don't want to get caught offside. There'll be a time to sell, but this ain't it. Frankly, I spend more time watching Treasuries now than gold, because the next big event in the gold market will be foretold in the Treasury market. When the significant foreign central bank support of our Treasury market is recognized for what it is (print/swap/buy), reality hits the fan. If we have a major dislocation event, physical gold could "go into hiding" completely.
Watch the Fed manage its swap lines. Watch the Fed's balance sheet. Congressional activity merely helps bring awareness of the printing.
JMVHO.
Goldman told these guys to get into commodities ten years ago, the institutional buying didn't really start to accelerate until 2005
However, what happens to the fear level if, for the next 6 months, the US continues to shed jobs at 500,000 per month, banks keep going under or begging for TARP funds, bankruptcies increase and housing continues to slide ? Maybe a couple well-known corporations disappear into the abyss, too. What if it just keeps going like this (I believe it is very possible-- even likely) ?
At that point, does fear get the upper hand ? Or are we still talking about inverse relationship to the dollar ?
Ever hear of Profit Taking or Playing with the House's money? Gold is up some 35% in less than 4 months.
Annualize that move; I don't expect to see gold at $1500 by Oct.09. $1300 maybe but not $1500.
From $950 to $1300 is only about 37%.
If you believe that Profit Taking is never a good idea, then You will eventually get "squished". IMO
I did not want the increased Taxes, held on and got stomped. Granted, the Squish was on paper since I've held on to my CanRoys, but Its still a Squish.
That's why I Push Taking profits,