Travelin' Riverside Blues

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Gold prices breached the $825 and then the $800 level with ease today, dropping to a low of $783.80 in the mid-morning session hours. Overnight declines in the global equity markets derailed any expectations of a quick abatement in the slew of margin calls to be received by various participants. The $135 damage to the price of bullion was achieved inside of a single week. The same week that was the worst ever for gold's natural enemy: stocks. There goes that counter-correlation.

This cratering has to be viewed not only in the context of what happened to commodities as a group (describing 'it' might yield a fruitless search for superlatives of the negative kind), but also in the frame of reference that projected gold prices some 50% higher under such conditions - at a minimum. For now, maintenance of the $800 level is the first task, while the objective appears once again to have become $775. India may be happy to learn of this development.

One of our readers sent in an e-mail this morning, in which he concludes that: " Mr. XY and Mr.YZ, and all the other grumpy old men who stock their bomb shelters and caves with Krugerrands while they await the Apocalypse should be chastened to see the Apocalypse arrive and find that people are seeking refuge in much-maligned "fiat currency."

As we've previously discussed, gold and gold stocks will, of course, rise again. But I suspect that will be AFTER the fear of economic collapse subsides ... once governments have poured so much liquidity into the world financial system that inflation, not deflation, is apparent ... and once people start to feel wealthy enough, and safe enough, to buy gold jewelry again instead of selling it.

The GOMs (Grumpy Old Men) will never disavow their religion, of course, despite current proofs that "God is dead." Even Mr. XX, who not long ago, proclaimed "The Bull Market is Still in Effect," then soon started backing toward the door, realizes that he is only right until he is wrong ... and he now advises a healthy dollop of cash along with a little gold."

If one thought that newsletter readers forget what they have read by the time the next issue is published, one ought to take note of the fact that making forecasts for the sake of being 'in the club' has its dangers. The 'club' has often been wrong, and will continue to bat the same averages as it always has. Almost 50%. During a really lucky year. Fear not, the next positioning has already begun. We are now being asked to forget the current situation as it is an 'extraordinary' one, and one in which gold cannot do what it wants to. We are also being asked to look ahead - way ahead- at the time when all of the current measures yield hyperinflation, Weimar-style. Guaranteed. Fine, but the nagging question remains: "What happened to the here and now? and "How come you got this one so wrong when you guaranteed the very end of days?"

Adding to the commodities gloom, the obvious realization that if the global economy will have to go through what apparently lies ahead of it, hopes for demand for 'stuff' will have to be sharply revised - and not upward. For instance, one of the casualties of the fallout from this financial mushroom cloud could be nearly 50 percent of the junior and exploration mining companies. Inside of the next 12 months. Survival of the fittest takes on a whole new meaning these days, as it basically boils down to the available cash stash in corporate coffers. News that US industrial production fell the most since 1974 only reinforced the motivations of metals sellers.

Silver broke through the $10 mark this morning, and fell hard -reaching $9.69 at last check. The low came in at $9.21 during the day. Simply astounding. Platinum continued to narrow the gap that separates it from gold and fell $80 to $888 per ounce, while palladium dropped $19 to $171 in the continuing noble metals slump. Rhodium gave up another $600 to sink to $1810 per ounce. London's Investec cut its platinum projections to $1,629 for 2008 and $1,350 for next year. Current prices may well be below the marginal cost of production, but demand is nowhere to be found - certainly not in the all-important automotive sector. Meanwhile, oil was telling us a huge scarytale of a story, complete with rising inventories, and a current tick at just under $70 (!) per barrel. Happy motoring.

Blacktober rolled on around the globe overnight, and it made the goriest of any possible upcoming Halloween scares look like a scene from "Bambi." As earnings reports hatched numbers as ugly as any prehistoric creature, central banks around the world probably wondered if they should have waited for their release before coming up with rescue package numbers. Good thing that the word 'unlimited' was inserted into bailout communiques, as the next set of extended hands is already knocking at the door.

There is no shortage of predictions to be found on the economic front these days; just tune into any TV channel (okay, maybe not the Cartoon Network). Rumor has it that Joe the plumber is starting an advisory service and newsletter. Hey, at least he knows all about copper, lead, zinc, and stainless steel. Be advised that keeping some pea-sized grains of sodium chloride nearby would be a very good thing to do. Everyone recalls the firm predictions of $200 oil, $2,200 gold, the $2 euro, $50 silver, and $3,000 platinum. How could they not? we are talking about forecasts made in May and June of this year...

As for where we stand now, we will let Barry Sergeant of Mineweb update the landscape for you:

"During a season of unrelenting fear, risible if it were not so overwhelming, gold bullion has locked the bulls into the stadium, and left.

On Thursday, the dollar gold bullion price lost USD 40 an ounce, within minutes, shortly after trade started up in the Americas. The price plunged through the USD 800 an ounce level, before bouncing up a bit, and then fell again, for losses of more than USD 50 on the day. Looking at headlines over many months, gold bulls outnumber bears by at least 10 to one, but bullion has persistently declined Tsunamis of encouragement in the form of endless calls to move once again above USD 1,000 an ounce.

That magic number - USD 1,002.95 to be exact - was cracked in March this year, at the height of the Bear Stearns crisis on Wall Street. Since then, the credit markets crisis has only intensified, especially after the collapse on 18 September of Lehman Bros., also on Wall Street. The credit markets crisis has moved, like a hellfroth, over all other markets: investors, consumers and governments are numb with terror, at worst, and pulverized, at best.

There have been endless sensational headlines, but, make no mistake, price movements in markets, which can be objectively observed, have shown a relentless flight from risky assets: only the degree varies. Among the major traded commodities, gold has performed relatively well; among precious and base metals, it has underperformed the least.

But the takeaway point is that during a season of unrelenting fear, risible if it were not so overwhelming, gold has seemingly failed to live up to not only price expectations, but, more important, it has failed to convince as a safe haven asset, or as an alternative monetary asset, or as the "anti-dollar".

The numbers show that the safe haven prize goes to the dollar, followed by the yen. Leaving aside the cost of raising debt, which can be characterised as a negative rise, prices for everything else have been falling, be it equities, commodities, or property. The dollar's rally, which kicked in on 15 July 2008, has also been counterintuitive, given the hundreds of billions of dollars that the US government will raise in the form of Treasury bonds to finance the would-be rescue of the country's financial services system.

Seen from a cash flow viewpoint, however, the flight to safety has identified US Treasury bonds as a natural home for cash when other assets are liquidated. These interest-paying dollar instruments are backed by the biggest economy in the world that, by definition, would be the last to go down if the entire global economy falls over. Even in that putative post apocalyptic world, dollar denominated paper would likely open the gates in the exit from Armageddon.

The timing of the dollar's rally has also done nothing for gold. The greenback moved into a bear market in January 2002, and found a bottom in April this year, before its decisive upward turn in mid-July, from a near-bottom. For years, the dollar has exhibited an inverse correlation with most dollar commodity prices, and especially so with gold bullion.

All else being equal - which has certainly not been the case - the rising dollar has made gold bullion more expensive in other currencies, which is no small factor in developing economies like India, the world's biggest consumer of gold bullion for both investment and ornamental uses.

Gold bullion exchange traded funds (ETFs) - such as the NYSE-quoted SPDR gold trust which now holds USD 20bn worth of physical bullion - have become new investment stars, but have also shown that this new gold market has limits. There is also evidence that gold ETFs have been increasingly cannibalising investor flows that went, prior to the launch of the ETFs in 2004, into gold equities.

Where the rise or fall in the value of ETF units moves lockstep with changes in the gold price, listed gold stocks have been sold down the river, along with the wider resources sector. At the time of writing, while the dollar gold price was down by 23% from its March highs, the price of SPDR units were 22% off highs, but the average listed gold stock - and there are dozens around the world - has surrendered two thirds of its value."

Cash continues to seduce while stocks continue to reduce. In this environment, the metals might find it tough going. Safe-haven quest could reignite any day, but it first requires the presence of...a haven. Keep the ore(s) (as well as the oars) handy, as changes in direction may be required quite often.

Happy Navigating.