Gold Explodes, Silver Shines, What's Up with Natural Gas?

Gold breaking out is either the reflation trade version 48.148 or "uh-oh something bad is coming down the pike" trade ... gold has been in a big descending triangle getting narrower and narrower; when those break out in either direction it is generally a big move.

May - June 2009: $900 - $1000
July: $910 - $960
Aug: $930 - $970

Based on Wednesday alone, the direction appears to be up ... +2.1% thus far in the yellow metal but to be sure we want to see it get north of $970. Volume on the gold ETF (GLD) is massive - well over 20M shares when almost all of August has been under 10M. Silver (SLV) continues its strength that we highlighted Tuesday, up another 2.6%+.

One reader highlighted gold last week - I forgot who, but kudos to the early call. Now we have to figure out what the message of the market is with these 2 metals aka what are HAL9000's algorithm's signaling to its microchips.

EDIT 3:10 PM: Gold Miners ETF (GDX) exploding - up 7% on nearly 3x normal volume. (hat tip reader on that one too) HAL is on the move.

p.s. anyone know what is going on with natural gas ? the ETF is down 8%?? UNG!

Long Powershares DB Gold Double Long in fund; no personal position

Comments

[Roger Knights:]

Gold may be responding to the election results in Japan. The winning party's leader (or one of its leaders) had called for a reduction in Treasury buying and an increase in gold buying.

Reuters reported over the weekend that China’s state-owned enterprises (SOEs) have sent letters to Western banks who are their counterparties on certain derivatives that they may default on them, leaving the banks with a huge loss. This black swan may also be moving the price of gold.

Or perhaps there's a rumor that the ingots in Fort Knox have chocolate centers.

Sep 03 07:35 AM

[Roger Knights:]

"but to be sure we want to see it get north of $970."

Currently 986. Surely much of the steepness of the rise is due to short covering.

Sep 03 07:37 AM

[buyitcheap:]

UNG is losing premium and driving toward its NAV which is around $8.4

Sep 03 07:47 AM

[ManAboutDallas:]

If you really, truly believe gold is a "bubble" I suggest the only bubble is between your ears.

Got pin?


On Sep 03 07:40 AM DJIA5000 wrote:

> gold is a bubble, but that doesnt mean it will go down now, investors
> who lost their shirts in stocks (many miners included) pile into
> gold with whats left. But in the end they will lose everything as
> well, physical GC is illiquid market (otherwise you have at least
> 100oz) and all this crap with small gold bars, eagles, pesos, roubles
> is crazy: the bid/ask in this quantities is up to 20%, if one buys/sells
> american eagle 5 times its like losing all the value in it.

Sep 03 07:59 AM

[basehitz:]

As you are aware, Hugh Hendry and Robert Precter are USD bulls and think the market is headed south. Last year, the playbook was - SPY down = USD up. Intraday charts still show that now. On longer durations, the dollar bears/gold bulls point to Banana Ben actions inevitably trashing the dollar as “cure” to the debt. I agree. Still, traders using a short term mindset won’t care if the USD is trashed 3 years from now. If they’re selling stocks, they’ll want to hide somewhere. Notice also Treasuries have been moving higher this last leg of the market run, which is new and suggests that some traders are already positioning for the market fall.

Maybe it’ll be different this time, but I’m gonna assume they replay last year’s playbook. That is, a market selloff ramps UST and USD, which temporarily pulls down commodities. Since I do not buy that we’ve fixed the banks, or the US serious structural problems, I want to use that as an opportunity to buy a basket of commodities and producers.

Sep 03 08:16 AM

[doubleguns:]

Get stops on your paper gold/silver. This run could be fantastic but if the market tanks we will see a repeat of last year.

PM were sold by the truck loads to raise cash for stock losses and margin service. Dollar was king for a couple of months and could be again. Dont expect that to last very long. After panic and more stimulus by little Timmy dollar is trash, PM is king.

If this plays out grab all the PM you can when its down. ALL YOU CAN!!!

Sep 03 09:03 AM

[SCN4:]

UNG is tanking for 4 reasons...

1. Because the natural gas market is soft and trending down on fundamentals. To much gas, maybe not enough storage, and no weather events to push prices up.

2. The NG market is in a state of steep contango, with the front month trading around $2.65, and the next month out trading at $3.92.

3. The UNG roll procedure means that every month over a 4-5 day period, they must sell the prompt month, and roll into the next month out. Do the math and you will see how this impacts the (NAV) net asset value.

4. Lots of people who to not understand how this market works are getting and trading on emotion and hype.

That being said, it is pretty much doing exactly what you would expect it to do, if you understand what is going on with the market, as well as the fund's clearly stated objectives and protocols.

One more thing, because they are no longer issuing new shares, the fund is trading as a closed end fund, which is the reason that the premium to NAV has spiked to the 20% range in recent days.

For those that are interested, John Hylnad was interviewed on CNBC last night, and had a few interesting things to say.

Sep 03 09:05 AM

[Mad Hedge F...:]

bvm. Just as it is prudent to top up your flood insurance ahead of the hurricane season, investors are loading up on gold ahead of the treacherous September-October stock trading period. Yesterday’s $22 move up shows that attempt number six to run the yellow metal up to a new high has begun. Silver happily tagged along for the ride, tacking on 70 cents to $15.49. Historically, September is the best month of the year to own the barbaric relic, showing an average 3.5% gain over the last 20 years. The onset of the Indian wedding season, Ramadan, and the run up to the Christmas and the Chinese New Year jewelry buying binge are all conspiring to give gold a boost. A tip off this was coming was the big put selling seen for the shares of the gold ETF (GLD), and Kinross (KGC). One good way to play gold at this late stage might be the shares of highly leveraged unhedged producers like Rangold resources (GOLD), Jaguar Mining (JAG), and royal Gold (RGLD). Confirmation that the markets are moving towards risk aversion can be found in the euroyen chart, which hit a one month low at 131, after double topping at 140.50. If gold does break, it could tack on 20% very quickly to $1,200. Keep those American gold eagles.

Sep 03 10:29 AM

[Mad Hedge F...:]

cvn. Just when I get comfortable with my view on Natural Gas, I get a scratchy, reverberating cell phone call from one of the major formations telling me that I’m being way too bullish. Gas won’t bottom at $2. The free fall will continue until it hits $1. National storage will be completely full imminently top out, and when it does, the producers will have to shut down completely. Since these guys are leveraged up the wazoo, this will trigger a string of bankruptcies, and the majors will fall like dominoes. A hedge fund bust won’t define this bottom, as these guys are all playing from the short side. UNG can’t step in as a buyer of last resort, as the SEC won’t let it issue more stock, and the current shares are trading at a ridiculous 20% premium. One thing we do agree on is that the bottom will look ugly, whatever the spark is. Well, it takes two to make a market. Conclusion: keep NG nailed to your screen, as the widow maker is where the volatility lives.

Sep 03 10:30 AM

[GMiki1:]

On CNBC this morning someone referred to those "new UNG shares" so I presume UNG has been granted the right to go ahead and issue. But, anyway, UNG is being sold off on panic as much as anything else. The EIA numbers were fairly benign as one trader said. I think an upside surprise is waiting later in the fall. But we'll see. (I hold some but not enough to panic myself.)

As for gold--it's not a bubble. I like what Martin Armstrong said in his last missive from jail--people misunderstand gold as an inflation hedge, it's a vote of no confidence in government. That's why it doesn't really trade inverse or along with anything else--it just seems to. Gold fundamentals are strong in re supply and demand especially with China stepping up gold purchases, even jewelry. As for India, yes, gold sales have been down, but apparently gold buying isn't just for safety and exuberance, it's for avoiding the taxman.

Sep 03 11:00 AM

[Barbarous R...:]

Look to play natural gas from the long side as soon as storage is full -- likely early October.

But please don't play it through UNG. By buying UNG you are not buying spot gas -- you are effectively buying gas further out the curve. The recovery is already baked into the NAV of UNG through future contract rollovers. And you are foolishly paying a premium to NAV for this "opportunity". Don't be fooled.

Play the gas recovery through gas-weighted service stocks (i.e. land drillers, pressure pumpers) or E&P companies. The stocks are unlikely to be hit as hard in the near term (they will look through the gas market bottom), and they have huge leverage to the recovery.

Sep 03 12:21 PM

[Boxed Merlot:]

On Sep 03 07:40 AM DJIA5000 wrote:
> … all this…is crazy: the bid/ask in this quantities is up to 20%, if one buys/sells
> american eagle 5 times its like losing all the value in it.

I taught 5th -6th graders the difference between face, numismatic and intrinsic values when gold, silver and copper coinage was replaced by less “valuable” base metals. American eagles have a benefit of “currency,” which though far from providing equality between “current” valuation between face and intrinsic values, does effect its numismatic over other coinage / bullion (within US geo/politcal jurisdiction) in that taxation – regulation charges are supposedly n/a. I could be wrong, but that’s my understanding. Your particular dealer will probably try to get whatever the market will bear, but that’s the marketplace.

Sep 03 12:34 PM

[Alan Young:]

As of the end of Wednesday, $NATGAS was in a waterfall collapse, and the NAV of UNG was $8.35 -- still about 12% below market price.

Sep 03 12:45 PM

[mr clark:]

gold is definitely a bubble, u dont see people consuming it in their daily lives as with oil, nat gas, food, even real estate... if this were a panic rush to hard assets we would see the dollar break support and oil/gas/commodities popping as well

trade it but dont marry it jmho GDX a nice easy scalper

nat gas is manipulated to create an industry washout, so the big boys can come in and buy on the cheap, buy in October is my view... also may be some geopolitical moves here putting more pressure on Russia, we'll see...

Sep 03 01:27 PM

[investorinPA:]

For those of ya who enjoyed the pic of "Honest Ben" Bernanke, how about one of "Buns Bernanke"? Not a good day for the ole Fed Chair when China starts buying 50 billion in IMF bonds and Gold is up near 1000/oz

contraryriches.blogspo...

Sep 03 11:20 PM

[Jerusel:]

bobbybutt

You think this is the end of golds advance? Do you realize how small the current gold market is? Around 1% of consumers have ever owned gold bullion in modern times.

This is not historically the case though. Never have humans, in general, held so much confidence in fiat money, which suppresses the demand for gold. Every historical case of a government monopoly in money through a fiat monetary system has ended in a huge disaster. As long as mass inflation is allowed, fiat monetary systems will fail. Never has debt, created mostly because of our fiat monetary system, as a percentage of production been so high. You are witnessing the expansion of the greatest debt bubble the world has ever seen.

What do you think is going to happen to the price of gold when (and they will) humans lose faith in ink and paper? Considering gold's price is inversely proportional to the confidence in fiat money, I think I have a pretty good idea. There will be some irrelevant fluctuations over the next few years, but when the dollar reserve currency standard fails (and it will) hold on to something solid, which is gold and silver.

Sep 04 04:32 PM

[Carlos Lam:]

On Sep 04 01:44 PM bobbybutte wrote:

> will gold go to about 1030 ?perhaps
>
> Will outperform good US stocks that pay dividends NO
>
> In 1988 Gold was 50% off 8 year highs at around 480 its double now
> 21 years later that about 3 or 4% annual compounded
>
> In 1988 Ko was payinga 3% div ,today the stock is up 17 times and
> the annual dividen yield would be over 30%
>
> Gold wasnt near all time highs either
>
> The Etfs are why gold rose and the foolish will pile in at 990<br/>
>
> what wise peopel do in the beginning fools do at teh end

People aren't buying gold necessarily instead of a stock that pays dividends. People are buying gold because they're afraid to hold the US dollar. When your national government spends $2 TRILLION more per year than it takes in, accumulates unfunded liabilities of about $100 TRILLION, and keeps promising more goodies to its populace, you gotta figure that the currency will be debased at some point. In sum, people are buying gold as insurance against currency risk.

BTW, I still see many "cash for gold" signs around town and in other cities. This tells me that gold is NOT in a bubble: jewelers and smelters know their business; they wouldn't go to the trouble of advertising and purchasing scrap if they didn't forsee higher prices in the future. When I start seeing news stories about whizkids making huge profits by buying & selling gold and when "gold for cash" signs start popping up, I'll know that there's trouble for the yellow metal.

Sep 05 11:00 AM