Gold Reaches 28 Year High - Yet Sentiment Remains Lukewarm

Gold surged $15.80 to $806 in New York on Friday. It has traded sideways to slightly down in Asian and European trading and was trading at $803.50 at 1200 GMT. Gold climbed 2.8% for the week and silver advanced by 2.4%. Gold is now outperforming all major stock markets on a monthly, YTD and yearly basis as seen in the table below. Gold also rose strongly in other major currencies on Friday and was trading at £385.50 GBP (up from £380.40) and €554.95 EUR (up from €547.50). It remains near record nominal highs in terms of GBP and EUR respectively.

The ailing dollar which hit new lows against the euro overnight, near record oil prices and the developing and deepening housing and credit crisis are all supporting the surging gold price. Citigroup's (C), the world's biggest bank, write off of up to $11 billion of sub-prime mortgage losses, on top of a $6.5 billion write-off last quarter shows that recent revelations have been the tip of the iceberg and the worst of the housing and credit crisis is yet to come.

Gold's trend remains up and the path of least resistance is to the upside. In the short term gold remains slightly overbought but the massive gold short positions are exposed to losses in the billions and the shorts will likely take opportunities to close their short positions on any dip in the gold price which will be supportive of gold. The 5 week moving average is at $774 and this should provide strong support and be used to buy on the dips.

Bloomberg reports that sixteen of 28 traders, investors and analysts surveyed from Sydney to Chicago on Nov. 1 and Nov. 2 advised buying gold. Seven said to sell, and five were neutral. A majority of analysts surveyed Oct. 25 and Oct. 26 anticipated last week's gain. The survey has accurately forecast the direction of prices in 114 of 184 weeks, or 62 percent.

John Dizard, writing in the FT Monday, ('Treading the foothills of a gold bull market' ) outlined why he believes that we remain in the early stages of the gold bull market with a long way to go yet. Primarily this is because the mass of investors have yet to partake in the gold bull market and because the Fed is going to have to reinflate further which will be bearish for the dollar and as gold remains an important monetary instrument it will be bullish for gold. "So, even at about $800 an ounce, the real gold bull market has not begun."

Despite gold reaching new record 28 year highs above $800 the sentiment towards gold remains lukewarm at best. Most of the UK, Irish and international financial press and media barely covered or ignored this significant development at the weekend. This, and the fact that the investment public remain unaware of the gold price and the merits of investing in gold are classic contrarian indicators which show that gold remains in the early stages of its bull market. When gold is covered as headline news in newspapers on a daily basis and articles appear regularly about the merits of investing in gold and how to invest in gold, then it will be the later stages of the bull market and an indicator that it may be time to sell. When stockbrokers start telling their clients and the wider investment public to buy the gold ETFs, it will be time to sell. When there are gold and commodities supplements alongside property supplements in major newspapers it will be the time to sell. When the topic du jour on the dinner party circuit is "how great my gold investments are performing," it will definitely be time to sell.

Bull markets end in mass participation and mania and we are a long way from there yet. Besides this obvious lack of animal spirits and wholesale bullishness towards gold, it is also important to remember that gold remains undervalued. Gold will have to at least reach its inflation adjusted high of $2,200 per ounce (as oil and many other commodities have already done) before it could be considered fair valued or over valued.

Boris Sobolev of the Resource Stock Guide wrote perceptively: "What if, however, we are wrong and gold is now, in fact, making a final spike to its all time high of $850 or higher. The aftermath, as after the top in 1980, could be severe and it would be time to sell? Is this a real possibility?"

No, the situation today is completely different:

• In August 1979, Paul Volcker became the chair of the Federal Reserve and started to fight inflation by radically raising interest rates. Today, Chairman B. Bernanke, in an effort alleviate the pain in the ailing banking system, is aggressively lowering interest rates. • 28 years ago, the United States was the biggest creditor nation in the world. Now, the opposite is the case – U.S. is the largest debtor. This, along with the Fed policy, is causing the dollar to fall to historic lows.

• Gold may appear to be overextended but this is not the case in real terms. In fact, gold should be around $3,000/oz in order to reach its inflation adjusted highs. Only then will there be a real reason to worry about a possible end of the gold bull market. We reiterate that the gold bull market has a long way to go. Don't be afraid to miss the boat – there are many opportunities ahead. Hold your positions and buy the dips.

Forex and Gold

The dollar remains under pressure and remains near record lows versus the euro at 1.4456 and at 2.0801 versus sterling.

The dollar continued to weaken against most currencies last week. The dollar index declined 0.9% to 76.34. For the week on the upside, the Canadian dollar increased 2.2% (to an all-time record), the British pound 1.3%, the Swiss franc 1.0%, the Danish krone 0.6%, and the Euro 0.6%. On the downside, the Norwegian krone declined 0.9%, the New Zealand dollar 0.3%, and the Japanese yen 0.2%.

Monday morning the U.S. dollar was down to 76.46. Support is at last Friday's new all time record low at 76.22. Below this is again uncharted territory for the U.S. dollar.

News that Qatar, one of five Gulf oil producers that pegs its currency to the dollar, would track future U.S. Federal Reserve interest rate moves only if they suited conditions in its domestic market is dollar bearish.

Qatar, Saudi Arabia, Bahrain, and the United Arab Emirates followed a 25-basis-point Fed cut by lowering some interest rates last week along with Kuwait, which tracks the value of the dinar against a basket of currencies including the dollar. The central bank of neighboring Oman, which also maintains a dollar peg, declined to comment on Sunday when it would follow the Fed's latest move. Central banks in the six oil producers are torn between tracking U.S. monetary policy to deter bets on the appreciation of their currencies and curbing inflation, which is running at decade highs across the region.

This is a clear threat to the petrodollar and a possible move to price oil in euros or a basket of currencies, as mooted by some in OPEC, would put the dollar under even more pressure and challenge its global reserve currency status.

Oil

Oil prices fell by 1% on Monday in Asian and European trading after last week's surge to new records because of tight supplies. The potential for economic fallout in the U.S. from a worsening credit crisis and by easing tensions in the Middle East were cited for the fall. U.S. light crude for December delivery fell to as low as $94.61 a barrel, but was later trading down 93 cents at $95. London Brent crude fell 70 cents to $91.38.

Disclosure: Author has a long position in some of the above-mentioned securities