If there were any shorts left alive after yesterday's massive short-covering an options-related orgy, well, it was hard to find them in New York. Spurred by the symbolism of the Indian central bank purchase of 200 tonnes from the IMF (a topic we covered in some detail in yesterday's comment) but less so by manifest dollar weakness (at least as regards yesterday's action), the bulls beat a hasty path filled with galloping noise, all the way to the $1096 figure (during the overnight hours). This is being written well before the opening bell, thus we will not be able to fill you in on the developments to be seen today until possibly much later, if at all. Conference duties call.
At any rate, as of the last data round-up, the dollar was lower -at 76.13 on the index- undermined by sentiment that the FOMC meeting later on today will yield more dovish talk on rates. Spot gold was seen at $1088.90 basis spot bid, still showing a $4.60 gain that was the sum of equal parts of dollar weakness and market buying action. Trying to guess what the closing levels will end up being, is an exercise best left to Madame Sylvia and her assistant palm-reader/crystal ball gazer. The target ducks are all neatly lined up in the 'long' column for the moment. Charts have been shredded and new ones are impractical to draw every minute.
Silver was 15 cents higher, quoted at $17.36 (leaving enough players questioning what it is really doing, not trading at $23 or $25 or $30 -as would be expected by perma-bulls who assured everyone that the yellow and white metal would be making headlines of the same type, on the same day- see analysis on the silver price, below). Platinum traded $2 higher at $1359 and palladium rose $5 to $330.00 per ounce. The focused spotlight is exclusively on gold. In this bullfight, the odds are now mounting that for every gored torero there could also be a slain bull, eventually. This is not the non-lethal Portuguese version of the bullring spectacle.
Oil was hovering above $80 per barrel, also aided by the commodities feeding frenzy in full bloom among spec funds. However, the thunder was still being stolen by gold (which actually wagged the FX tail yesterday, as opposed to the 'normal' market universe order), a market which is now being applied warm and wet labels that read 'unstoppable' and 'a new paradigm.'
While in uncharted territory, while overbought, and while technically still capable of the $1100/1130 reach (as outlined in both Friday's and Monday's comment), the metal is sending technicians, speculators, and newsletter writers back to the drawing board - oh, about every half hour. As expected, volatility was not and will not be in short supply, with $25 to $50 dollar order of magnitude moves making a possible appearance at this stage.
What follows is a round-up of quotes and comments on the status quo and the possible future, as interpreted by a wide range of observers within the industry. No, it is not a regurgitation of perma-bull hype. That propaganda is very easy to locate. Much of the perspective is completely shared with our steadfast and long-standing view that this market is utterly disconnected from its fundamentals, and that the nature of the game has been fund-defined, and based on a dollar carry (and possibly misplaced expectations which will unwind, just as the yen carry did, not that long ago. You are familiar with the results. We call them the 'economic crisis of 2008.' Here goes:
Over at then LBMA conference in Edinburgh, our representatives heard informal participant survey talk that gold could be trading at 1086 a year from now. Little did yesterday's participant sentiment factor in this morning's $1096 early reality. In so many words, the fund-push has taken the resident pros by surprise as well - 12 months ahead of time. However, sideline talk was also exhibiting signs of caution and 'what if' alerts that reveal a trade that is less than comfortable with recent vertical markets. For example:
James Steel, precious metals analyst at HSBC, said on the sidelines of the conference that conditions looked good for gold over the next 12 months. Our outlook for the dollar is for dollar/euro to go to $1.50 again, which would imply the gold market will remain well bid, he said.
Although we're not in the inflation camp, we do believe that quantitative easing will have a sufficiently stimulative effect to boost commodity prices globally and weaken the dollar, which would further reinforce gold prices, he Steel added. [Translated into plain English, James' view is that the dollar carry has some life left in it and unless the Fed pulls that big plug, the party may continue.]
Over to GFMS, and its take on matters:
Philip Klapwijk, chairman of metal consultancy GFMS, said the LBMA forecast was certainly possible, especially given the recent strength of gold prices, but added that the picture was not all rosy for the metal. (The forecast) presupposes that we are going to see significant dollar weakness, and that inflation concerns will grow significantly, he told Reuters. If the market were to go to those levels, it would face major obstacles along the way in terms of other elements of supply and demand -- particularly in terms of scrap, and jewellery demand. Record levels of scrap gold returning to the market in the first quarter were a major factor pulling prices down from above $1,000 an ounce in February.
Other analysts have pointed to a lack of physical demand for jewellery -- typically the main source of gold demand -- at high prices and a plateauing of demand for exchange-traded funds as potential risk factors for prices. Nonetheless, this market is not at this point in time driven by fundamental factors, said Kevin Crisp, the top banana at the LBMA, yesterday.
Over in actual physical market-land, the reality show season offers more of the same. Namely, little demand from traditional buyers. Gold has now been hijacked by momentum funds and has found itself in their massive jaws since the first day of September. Which leaves us with:
India's gold imports during October fell 39% on year to 27 metric tons, and industry officials expect imports to remain subdued during the last two months of 2009 due to record high prices. Prices continued to weigh on demand, though there was a slight improvement in demand during the Diwali festival, Suresh Hundia, president of the Bombay Bullion Association said Tuesday. There were no imports of silver in October, he said.
During January-October, the country imported 166.8 tons of gold, down from 359 tons in the first 10 months of last year, according to BBA data. If prices remain at current levels, then imports will continue to be slow. During November-December, we could import around 30 tons, mostly for export purposes, said Bhargava Vaidya, director of B.N. Vaidya & Associates. Last November-December, India imported around 40 tons of gold.
However, he said, Gold prices are near their peak now. I don't see much of a run from here. Spot gold prices in India may not rise above 16,500 rupees, Mr. Vaidya said.
Next up, the view from someone who does see inflation making a reappearance as we go forward, but sees something else possibly in store for the yellow metal. Like the possibility that it (and silver) are fully or near-fully priced, as is. Let's take a look at a couple of Q's and A's that capture the zeitgeist in gold (and to some extent in silver) at the moment:
It's been a dollar vs. gold story ever since the economy ran into trouble last fall, according to Blackmont Metals and Mining Analyst Richard Gray, who sees inevitable inflation down the road. The trouble is there are no real applicable precedents we can use, he explains, noting the prodigious amount of stimulus money flooding the economy.
In an interview with The Gold Report, Richard discusses major drivers behind gold's price rise, attributes of successful juniors and why he thinks gold's upside scenario is maybe $1,100 or $1,200.
The Gold Report: Gold's on a roll. What's your take on what's driving the gold and precious metals sector right now?
Richard Gray: I believe there are two real drivers behind the gold price: the fear trade vs. the U.S. dollar, and the potential for inflation. I tend to minimize the overall impact of supply and demand. Given what we've seen over the course of 2009, investors are looking for an alternative investment to the dollar. If you go back to when the overall economy ran into trouble last fall, ever since then it's been more of a dollar vs. gold story and that's still true today.
TGR: Do you think there's a high probability that once we start to recover we will hit inflation?
RG: The trouble is there are no real applicable precedents we can use. With all the stimulus money that's been injected into the system, it would seem inevitable that inflation will be an issue down the road. On the other hand, you could also argue that all the value that was destroyed (particularly in the last 12 months), won't be regained by all the stimulus money in the world. That's the argument for people who say inflation's never going to be an issue because the stimulus money isn't anywhere near what was lost in the last 12 months.
Personally, what I've been telling clients is that gold around $1,000 is probably a reasonable place to be looking long term. I don't think gold's going to take off and go to $1,500 or $2,000. I think the upside scenario is maybe $1,100 or $1,200 and then somewhere in a range between $900 and $1,100 is probably where the gold market is healthy and where the economy, as it compares to the gold market, is also reasonably stable. The fear trade is going to be here for a while and inflation might have an impact later on. But in the meantime we are not calling for a dramatic move up or down.
TGR: Gold has gone up about 21% this year. Silver has gone up 61%. Is silver being driven by other elements?
RG: Yes. Silver is somewhat of a unique metal. The simplest way to put it is when the economy is good, it trades closely with the gold price-usually on a 50:1 ratio. During these times it is treated more like a precious metal, a metal you invest in to protect your money. When the economy is weak, like the second half of 2008, it trades more like a base metal, where supply and demand has more of an impact. We saw the ratio rocket up to 80:1 last fall. Right now we're at 65:1, which is right in the middle of the bull market and bear market scenario here and that probably fits as well.
For all the same reasons you can say gold could go to $1,500 or $2,000, you could also say silver could go to $30 or $40; but I just don't see it because silver mines will start popping up all over the world if silver goes through $20, and you're going to get an increased amount of supply-more so than gold. A lot of silver is going to hit the market, and I don't think the demand side can really take it all up and keep that price high.
And, finally, a confused and uncertain contrarian sector, as tracked by Marketwatch's Mr. Hulbert:
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of Tuesday night, the HGNSI stood at 53.8%. Since the HGNSI's record high level is 89.6%, the current reading certainly does not appear to be saying that bullishness is at too high of a level.
The difficulty with this line of reasoning, however, is that this 89.6% record was set many years ago. Over the last couple of years, in contrast, the HGNSI has generally gotten no higher than the 55% to 65% range during gold market rallies. From this perspective, therefore, the HGNSI's current reading of 53.8% is more problematic, since it is getting dangerously close to those levels that marked the high points of previous rallies.
This analysis doesn't mean that gold can't continue rising, I hasten to add. It instead simply means that, if gold does continue to rise, it will be without the strong support that sentiment had provided gold's rally up until recently. The bottom line is the same as what I reported in the October issue of the Hulbert Financial Digest: The easiest money in gold's rally is now behind us.
We cannot say what to watch for, later on today. Perhaps the FOMC, perhaps the tentative emergence of profit-takers, perhaps a fresh stampede. Best advice is to keep watching. Unless, of course, your own objectives have been met. In which case, remember that 'profit' is not a four-letter word. Its opposite, however, is.
Until tomorrow, back to Pamplona on Wall Street. Or, Calgary, if you prefer.Jon Nadler Senior Analyst