Good Day,

Today's market news and analysis roundup begins with the -by now- 'normal' observance of yet another price record having been achieved by gold. During the hours preceding the New York session's opening, spot gold touched the $1150 level (plus 30 cents) as the US dollar broke under the 75 mark on the trade weighted index once again. The metal remains overbought and continues to dart around in uncharted territory. Other commodities also climbed, with oil rising back towards $80 a barrel and copper to 13-1/3 month highs near $7,000 a tonne, as the US currency traded at 1.493 against the euro. This morning's main trading focus was on US CPI figures and US housing starts.

Gold traders were looking for CPI-based clues as to the next direction of trade, both due to its effect on the currency markets and on bullion itself, which is often seen as an inflation hedge. But, at this juncture, we rather feel that any news is translated into bullish-eze. Low inflation pressures are traditionally a negative for gold prices, said HSBC analyst James Steel in a market note. If, however, weak inflation data are seen as allowing the Fed to continue to pursue easy monetary policies, this may be seen as supportive of gold.

As it turns out, inflation figures came in higher than expected, rising 0.3% - driven mainly by an increase in energy and commodity prices. Core CPI was seen at 1.7% over the past year. The inflation data should of course help gold, but the dollar turned up slightly after the news release, although sources we polled were not sure whether to point at the inflation numbers or the very poor housing starts figures.

Spot gold bullion started the midweek session at $1146.30 basis the bid, up $5.70 per ounce. Silver was ahead by 23 cents, quoted at $18.65 per ounce, while platinum and palladium gave back some gains, with the former falling $4 to $1453 and the latter opening flat at $373 per troy ounce. Rhodium was once again higher, quoted at $2330.00 per ounce. At opening time, the price of crude oil was seen adding 70 cents to $79.84 while the greenback was tracking at just under 75 on the index (74.97) and 1.496 against the euro.

Within the first two hours of trading, a new high in spot prices was seen near $1152.90 per ounce. Our most generous projections for the upper range in gold prices ($1030 + $100) during this second half of the year have now been overcome by the metal's ten week-old spike, and this took place as the result of neither inflation nor geopolitical developments. The dollar carry trade, as applied to the commodities sector, remains the suspect of choice (as you will read below).

More analysis on the recent Indian central bank gold purchase from the IMF showed up in our inbox - this time, from BNP Paribas Fortis/Virtual Metals Group. Highlights follow, and they echo the very sentiments you have previously read in these columns. Namely, that central bank reserve policy will continue, that it will feature purchases as well as sales, that it will remain bank and need-specific, and that there is no need to make too much out of the story, when viewed in the overall context of holding levels and management policies:

The RBI had no pressing need for 200t of gold from the IMF - but the IMF has a pressing need to sell its 403.3t of gold to fund its activities. By coming to the assistance of the IMF in this way India achieves a couple of things. It ingratiates itself with the IMF, within whose powerful corridors this gesture will resonate in years to come. The purchase also means that the India/IMF gold pact is a useful signal to other central banks, who also might wish to make a nod of support in the direction of the IMF - it signals that- it's all right, you can buy gold, no-one will think it absurd if you do it via the IMF.. And even after this 403.3t has been sold, the IMF will still possess 2,813.7t. Having sold some, it will be that much easier to sell more in the future, if the IMF management thought it sensible.

Could it be that India has bought gold now in order to encourage others? -or at least pave the way for similar deals in the future? Among the other central banks who might wish, one day, to please the IMF by taking off its hands (at market prices) some surplus-to-requirements gold the leading candidate is China, for obvious reasons, given its huge foreign exchange reserves and rising superpower status. So far China's official sector purchases of gold have been limited to taking it from local mine production and scrap- a much cheaper method than buying either IMF or open market gold.

Interestingly enough, the IMF.s managing director, Dominique Strauss-Kahn, was scheduled to visit Beijing on 16th-17th November .There's little doubt that the IMF's spare gold will be a topic under discussion. Strauss-Kahn's trip may be no more than a warm-up preliminary meeting. He will have some persuading to do, if he wants the People's Bank of China to take some IMF gold. The unofficial (but influential) view within Beijing's establishment seems to be that buying at these kinds of prices makes little sense.

According to Wei Benhua, former deputy head of the Chinese state administration of foreign exchange (SAFE), in an interview by the Chinese business magazine Caijing: At present we should not buy. Instead we should wait for the IMF to sell gold next time, when the price of gold drops to a relatively low level, say, about $800 per ounce. Although China's announced purchase in April this year wasn't quite the shift into gold that gold bulls had been hoping for, the symbolism of China, India and Russia all adding to their gold reserves will inevitably be construed as implying that gold is not just an official asset of the past, but relevant today and possibly the future.

There's no denying that some central banks are sounding keener than they were. Just two days after India's announcement the Sri Lankan central bank governor made his comments relating to Sri Lanka3 accumulating gold in recent months. Yesterday, Mauritius announced it had purchased two tonnes of IMF gold. The amounts here are not large but it is the sentiment that matters. But, although the landscape has been modified, we do not see a return to the days when central banks maintained very large gold reserves, measured as a proportion of their overall foreign reserves. Overall the sector currently has 30,000t - so, even a large purchase such as the RBI's is a drop in the bucket.

One day Indian voters might look back and criticise the RBI for having bought its 200t at the top of the market; but for now, its action will surely discourage those central banks who were thinking of selling. The only negative from the official sector at the moment is simply that things can't get much better. For now the implication is that central banks, which have supplied an average of 311t/year to the market since 1994, will be a neutral influence in supply/demand terms.

In the short-term, with European banks seemingly content to hold back from sales, central banks might even be net purchasers. The bottom line is that the gold price rally has got everything going for it right now - few official sector sellers, some official sector buyers, a low-interest rate environment, and a weak US currency. It's a perfect storm. The only question really, is whether this storm will have blown itself out by this time next year.

On to another topic that is still hotly contested in various circles: the who-says-what and who-buys-what - or not niche as a sign that wise and/or rich individuals are ahead of the crowd and/or are telling us something. We've all heard of the tip of the hat to gold as given by John Paulson. We've heard the heated and sometimes opposite in nature remarks on gold or the dollar, coming from other closely-watched gurus such as Jim Rogers, or Marc Faber. But, where does another oft-mentioned name -Warren Buffett- stand on the 'gold thing' these days? The man who not that long ago made a great play in the silver market, should surely be in the thick of things as regards gold these days, no? Apparently, not quite.

The National Post's Peter Koven reports:Warren Buffett's latest filing should provide food for thought, especially for gold bugs. The filing, made public Monday, shows the stocks held by Buffett's company, Berkshire Hathaway Inc., at the end of September. It indicates that the world's greatest investor isn't loading up on gold or precious metals. Indeed, he lists no mining companies among his holdings.

 Buffett doesn't necessarily hate commodities-the filing shows he's bought into Exxon Mobil Corp., the oil and gas producer, and continues to hold shares in ConocoPhillips, another energy company. But he doesn't appear to be a fan of gold at all. The omission of gold is telling, because, in many ways, the yellow stuff would seem to fit with Buffett's worldview. He has frequently spoken of his belief that inflation will rise in years to come as governments try to deal with large and rising amounts of debt. Gold would seem to be a natural refuge.

 But Buffett appears to have his own strategy for dealing with inflation. In addition to his purchases of Exxon stock and his massive new investment in the railroad company Burlington Northern Santa Fe Corp., he has doubled his investment in Wal-mart Stores Inc. and bought shares in Nestle S.A. He continues, of course, to hold major stakes in financial services firms such as American Express Co. and consumer products companies like Coca-Cola Co. 

 

His theory seems to be that the best protection against inflation comes by investing in companies that have the ability to pass on price increases. A company can have pricing power if it controls a scarce resource (Exxon and Burlington Northern) or if it owns a favored brand (Nestle and Coca-Cola) or because it's the biggest and most effective competitor in its field (Wal-mart). All those companies occupy large places in Berkshire's investment portfolio. But no gold miners.
 

Meanwhile, Marketwatch finds that some money managers and investors who might have thought that the near 60% rally in equities witnessed since March is a somehow broad and inclusive kind of rebound, might want to take a second look at the driving components of such a powerful rally. There is less to it than meets the eye. Once again, not surprisingly, the usual suspects make an appearance:

 

The growing leadership of energy and materials in the broad market is raising questions about how much of stocks' latest gains are being driven by a weak dollar and commodities prices, which some believe are just another asset bubble. Recognizing that those concerns have recently gained traction, Federal Reserve Chairman Ben Bernanke said Monday that dealing with asset bubbles is the most difficult problem of the decade. After a speech in New York, however, Bernanke said it is now hard to tell whether there are large misalignments in financial markets.

Since March, the price of crude oil has doubled to about $80 a barrel. The price of gold keeps breaching new highs, if prices are not adjusted for inflation, leading a rally among metals and commodities of all stripes. This does raise some concern, said Paul Nolte, managing director at Dearborn Partners. It's hard to say we're not experiencing a bubble. It certainly feels like it.

Year to date, the S&P 500 Index sector with the biggest percentage gains is information technology, up 53.5%. But after a 9% surge since the start of November, the materials sector is now the second best year-to-date performer, up 40.8%. Of the S&P's 10 sectors, energy is only the sixth best performer so far this year, but it is leading quarter-to-date gains, up 6.4%.

Marketwatch's own 'regular' economist Irwin Kellner seconds the above-mentioned findings and rings his own, uniquely-flavoured alarm bell:

Guess what? Bubbles are back for a return engagement. It was only a matter of time: The humongous volume of liquidity that the Federal Reserve and its central bank counterparts have injected into world financial markets had to show up somewhere. It's not in prices of homes, cars or most other consumer goods. Nor is it visible in wages.

No, Virginia, it's elsewhere. And it is but the latest in a long line of bubbles that stretch back to the 1620s, when Tulip mania struck Holland. Some years later, there was the South Sea bubble, followed by the Mississippi Land bubble, to name two of the more widespread bouts of irrational exuberance. More recently, as readers will recall, we experienced the technology, dot-com, Asian currencies and housing bubbles.

Today finds us confronting a number of bubbles all at once. Consumers are faced with almost nonstop increases in the cost of food, medicines and energy -- all at a time when most other prices are steady or actually falling. An even bigger bubble can be found in the stock market, where prices have jumped nearly 62% in little more than nine months. Oil's bubble is bigger still, since prices today are 2-1/2 times higher than their lows at the end of last year.

Then there is gold, where the motto du jour seems to be ingot we trust. The yellow metal has soared some 154% in just over a year, as people have fled dollars for what they believe is the safety of gold. As for the beleaguered buck, the air went out of its bubble earlier this year and it is now falling rapidly. That's when investors changed their focus from worrying about the state of the economy to concern that too many dollars were sloshing around in the financial system.

Based on the fundamentals, neither stocks nor oil should be trading at today's lofty prices, nor should gold, for that matter. Yet people are chasing their prices up, so anxious are they to buy. In the case of the dollar, it has fallen so much that it is now undervalued, in terms of purchasing power parity, yet investors continue to sell. Underlying this behavior is what I would call twisted logic. When it comes to the world of investments, rising prices cause people to buy while falling prices beget selling. This is exactly the opposite of what they do out there in the real world of goods and services.

Here, most of us look for bargains -- we tend to buy more when prices are low. When prices go up, we step back and buy less or none at all. For their own sakes, it is too bad that investors do not carry their real-world attitudes to the world of stocks, bonds and commodities. If they did, we would experience fewer, if any, bubbles no matter how much liquidity fills the financial system. And fewer investors would be buying high and selling low. 

Well, Irwin, some might heed your words. Many, however, will not. Turn on your XM Radio and listen to the plethora of gold-oriented commercials saturating the airwaves. Does not matter if it is the left-leaning Randi Rhodes show, or the angry right corner as heard through the voice of comedian Rush Limbaugh. Does not even matter if the show you are listening to is Bloomberg's or CNBC's morning round-up. The message is one and the same. The same, that is, as the one below:

Not Too Late To Cash In On Gold! As seen in the New York Post, Nov. 15, 2009

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priceisright.jpg(Presumably getting close now, though, with articles like this...)

There's plenty of luster left in the gold market. Despite a whopping 26.3 percent rise in the price of gold so far this year - to a record $1,123 an ounce set last week - Wall Street believes there is plenty of upside left. Which is good news for investors who haven't yet jumped on the gold bandwagon and feared they had missed the parade.

Yes, love the part about Wall Street believes. We could run a very long list by you, about all of the things that Wall Street believed had plenty of upside potential left in them - up to, circa the summer of 2007. It would sound just as convincing.

Jon Nadler

Senior Analyst