Overnight trading in Asia and Europe helped push gold prices to their year-to-date pinnacle of $968 amid a rising tide of trend-following buyers and a flood of hot money from speculative funds. Whilst the yellow metal has broken above significant resistance at $952 and is now testing the conviction of some shorts with attempts to achieve and maintain a close above $960, we -as our counterpart in London did today- feel compelled to raise some additional caution flags.
While the jury is out of whether inflationary expectations manifest at the present time will prove justified, the underlying absence of Indian demand and the growing piles of scrap metal the country is happily adding to give some basis for being wary. Most of all, it is the alacrity with which speculative money now finds its way into the market and the type of buyer underlying the momentum that has us concerned. One can hardly expect disciplined corrections out of frenzied rallies.
New York bullion prices opened their post-holiday session with a $19.50 gain this morning, quoted at $961.10 per ounce. Specs bought the metal on a background of a fresh surge in the dollar (up to 87,42 on the index) and news that Japan's economy contracted at more than a 12.5% rate last quarter. Oil fell to just under $37 per barrel as demand worries keep it under persistent pressure. The euro skidded to $1.26 following the rise of jitters about economic conditions and bank exposure in Eastern Europe as well as on the potential for the EU having to bail out some member nations, should conditions worsen. News that German investor confidence had its largest jump in 15 years, failed to bolster the euro.
Silver gained 14 cents per ounce, opening at $13.81 and the remainder of the complex saw fresh increases as well, with platinum rising $16 to $1077 but palladium falling $1 to $214 per ounce. Not that automakers are suddenly doing all that well. In fact, Daimler recorded its first loss since 2007, Fiat was seen fishing for money, and GM and Chrysler will go to the US Treasury today, hats in hand, and loaded with promises, once again. The economic calendar offers statistics on manufacturing activity and home building this morning. Also on the agenda is a speech by St. Louis Fed Pres. Bullard.
A scan of Mineweb stories and analyses on current conditions reveals excitement as well as apprehension in the thinking of its own erudite writer, Lawrence Williams. He sizes up the current macro environment, and following a listing of the world's troubles asks:
But where does all this leave the investor? Not in a happy position. The logic of further financial collapses and bank failures would be to knock the markets down and down, which in turn takes wealth out of the system and decimates pensions upon which an increasingly aging society is dependent.
Buy gold may be an answer to protect oneself, but as we saw last year, gold too can be vulnerable as in times of reduced liquidity funds and individuals have to sell any liquid assets to cover their positions. But then gold is probably not as vulnerable as other assets - again as we have seen over the past year. Those who were invested in gold at the beginning of 2008, for example, and did not sell during the year, at least maintained the value of their holdings while virtually all other investment options crashed, although this was not true of most gold stocks.
Now we are seeing professional and institutional investors moving into gold in a big way just to try and protect their, and their clients' wealth. As we have pointed out here frequently, gold ETFs are seeing an unprecedented inflow of funds, although there are those out there who would say it is better to hold physical gold than any form of paper gold because of a growing distrust of financial institutions and paper solutions.
And perhaps rather gold than other precious metals - notably silver. Silver would be sure to be dragged up on gold's coattails, but perhaps not as much this time - even though history tells us that silver's volatility leads it to perform better than gold in percentage terms on the upside and worse on the downside. We are in a different situation with silver not really a monetary metal any longer. Industrial demand pressures on silver may well mitigate any price rises here.
Gold's performance, though, is perhaps also dependent on investment demand outstripping a fall off in the jewellery market and an increase in liquidation of such holdings into the scrap sector. If the big Asian economies like India and China, where mark-ups on gold jewellery are minuscule compared with the West, falter significantly then reduced demand and increased supply from this sector will need to be soaked up by the investment sector. At the moment this seems to be capable of doing this hence the recent gold price strength, but unless sentiment changes in India in particular, where buyers seem to be waiting for lower prices, the fall in gold purchases there may limit global gold price growth. If liquidity becomes a problem in the North American markets again, this could also dent upward movement.
But overall, physical gold, gold ETFs and selected gold stocks would seem to be the best wealth protectors out there. As commentators have pointed out, prices may remain relatively volatile, but currently the overall price trend tends to be upwards movement, followed by stabilisation, before the next upwards resistance levels are tested. Gold does look to be steadily climbing back towards the psychological $1,000 an ounce level but it has had trouble sustaining increases beyond this level in the past. Perhaps it will be third time lucky for the gold bulls.
Perhaps, so. And, perhaps there is something to be said about the psychology of $1K gold and the angst it reflects at this time. However, we should ask you to be totally objective and also note the words of one of the other gurus in this turbulent niche of ours: Paul Walker. He, of legendary GFMS and long, curly locks offered up as a betting chip. Paul recently offered the following equally positive yet admonitory words to an audience gathered in Indaba
Things look very positive for gold in the short term, but the longer-term outlook for the yellow metal that has performed drastically better than others over the past few crisis month, is now more worrying than a year ago.
Speaking at the Mining Indaba in Cape Town, as the gold price fell back below $900, Walker said that the anticipated strong performance of gold in the short-term would plant the seed for imbalance to occur over time and for a correction in the price going forward.
He said that in the last few years, with the exception of 2003 and 2004, investment demand had to take every ounce of gold produced off the market in order to sustain or increase the gold price. The reason for this was that there was simply not sufficient physical demand for gold in terms of fabrication.
Walker said in this context, it was important to remember that investment was not a finite thing and that the investment argument would not continue in perpetuity.
If you are an investor with a five to ten year outlook, then I would caution that a correction is going to take place some time, he said. Walker said that one could argue a positive outlook for jewellery demand, but the expectation of upside in gold will change and that is going to put the gold price under pressure.
We will then see substantially lower gold prices, he said. Walker said that in the interim we were in for a rollercoaster and significantly higher gold prices. But in the long-term things look worrying and more so than it did last year.
GFMS' outlook for the global economy in 2009 was extremely pessimistic and this brought a desire for wealth preservation that boded well for gold, he added.
Two expert minds, similar joy, and similar concerns. This is an extremely valuable model for individual investors to try to adopt as well. Especially the ones who send e-mails to all of us writers and try to pound it into our collective heads that there can only be one type of road for gold. One with a giant ONE WAY sign at the onramp, and one without any DANGER: CURVES AHEAD BUMP or ROAD ENDS signs present.
Watch for closing above $960, be mindful of collapsing oil, wait for concrete economic news. And, to use an old cliche, keep those seatbelts low and tight.