JWG

Why Gold is Likely to Keep Moving Higher

For Michael Kosares:

Great article. Two questions.

First, why do you regard the producers as "forced" to buy out their forward hedges? If they deliver their production to satisfy their short positions over time, they are not losing money; they are not even making less money than they expected when they planned out their hedges. At most they have a case of seller's remorse, no? So why are they "forced" to buy out the hedges?

But perhaps the producers aren't "forced" to buy at all. Perhaps, after years of selling forward into a market they regarded as overpiced, they are simply capitulating at last to the general bullishness. In other words, they are buying in their hedges simply to participate fuly in the generally-expected further price appreciation from here. If so, then what we are seeing is the commercials, traditionally the most skeptical players, capitulating to the general buying frenzy. You may call it new demand, but once they're in too, who's left to buy?

Which brings us to my second point and question. One simply cannot translate fundamental analysis to a justification of a price level without considering the amount of speculative money in the game. With enough hot money, the price departs from any rational relationship to fundamentals. You can argue that fundamentals will reassert themselves eventually, and that is true, but as Keynes said, the market can remain irrational longer than you can remain solvent.

So what I miss in your article is any analysis of how much of all this "demand" is speculative. If the Chinese central bank switched some reserves from dollars into gold, I would guess that they are likely to lock the gold up and forget about it. That is real demand. But producers buying in their hedges is a trading activity, which reverses the moment they perceive that the upward trend is broken. And what about that mountain of money (including a lot of mine!) in ETF's like GLD? I'd bet that most of that money is in pretty weak hands (like mine!).

So if you post for us again, I'd like to see some more effort to understand how much gold is being bought for speculation, compared to normal trading volumes, real consumption, changes in bank reserves, etc.

Thanks

GC

Gold and the Dollar: Value is in the Eye of the Beholder

Or laisser faire, for that matter.

Metal Price Suggests It's a Good Time to Be in Gold Stocks

The first chart is the ratio of "Barrons' Gold Mining Index to the underlying cash commodity (gold)" The second is "oil/OSX" and its x-axis is annual, "since 1997". It's all in the article...
AC