Gold prices moved higher overnight, and continued to climb following the New York opening bell. Should the pace remain as good as it is this morning, we could be in for another test of the $930 area of resistance before this week, or perhaps trading day, is finished. A combination of safe-have and inflation hedge buying has supported values in and around $900 of late, despite sharply falling fabrication demand across key centers.
The latest demand domino to fall was Dubai, which reported a 60% slump in demand last month. Gold's major gateways to India are closing one after the other, and local demand appears to be no better despite aggressive promotions and bargain-basement pricing. The culprit remains the high price of the basic ingredient in all of those unsold items. That, and falling property prices, job rosters, consumer confidence, and incomes.
The gold supply-demand and resulting price equation now shifts towards determining whether the investment offtake can successfully keep prices aloft at or near these levels. In the opinion of one alleged member of the 'evil cartel - Goldman Sachs- gold is set to achieve a second period (duration not given) of four-digit prices within 90 days.' Depending on which camp you are in, such a forecast is either a sly call to lure the sheeple into a market that they will then heavily sell into, or a capitulation of some kind. We say, neither. But that's just us.
New York spot dealings saw a high of $920 shortly after the open, a 1.45% gain from the previous close. Not to be left behind, silver rose 29 cents this morning, reaching $12.83 per ounce. Platinum added a healthy $22 to climb to $987 and palladium rose $5 to the $200 mark. US initial unemployment numbers contributed to the surge in metals, as the nasty statistical reality was seen as dollar-negative at least in the short-term. We are not convinced that today's amalgam of bad news is a sure-fire formula for immediate dollar selling, given the quest for liquidity and the still-present degree of risk aversion. That said, we could still have gold aim higher at this time, as we expected in our previous articles.
Exhibiting stubborn doggedness, the ECB left rates unchanged at 2% this morning. Analysts were almost unanimous in their post-decision comments, characterizing the lack of accommodation as a major disconnect on the part of the central bank as regards European economic reality. The euro traded at a two-month low following the announcement, as traders saw future economic damage offsetting any strength being conferred upon the common currency by the maintenance of the highest rates among the G-7.
Across the Channel, the BoE wasted no time in slashing its rate to 1%, the lowest in...let's see...315 years? The race towards a nearly global zero interest rate environment appears to remain on track, despite reluctant runners such as the ECB. One of its Council members suggested that one ought not perceive a zero or near zero rate situation as a reflection of a central bank having run out of options or of its monetary policy having become ineffective.
President Obama stressed the urgency of the passage of his stimulus plan by painting a US socioeconomic picture containing the word catastrophe in the absence of such an approval. This leaves the US Senate with little choice but to sign off on the plan, lest it risks being the subject of subsequent finger-pointing or worse.
Some newsletter writers who were on the receiving end of pointing fingers in 2008 have become the comeback kids in January. Marketwatch's Peter Brimelow finds them not only performing well, but being confident of a future of doom and gloom which fits their specialty to perfection. Who are they? What is their vision? Peter explains:
Well, yes, 2008 was a pretty unhappy year generally. But the odd thing was that it was unhappy for many of the hard-asset letters, too -- what in the 1960s were dismissed as gloom and doomers (until things got gloomy and doomy that time around as well).
Several of these letters were among the 10 worst performers in 2008 according to the Hulbert Financial Digest. See Dec. 23 column
But now they're back.
Top performer for January: The Dines Letter, up 32.7% vs. negative 8.14% for the dividend-reinvested Dow Jones Wilshire 5000. Number two: the International Harry Schultz Letter, up 32.1%. Number five: The Ruff Times, up 9.5%.
Of course, this isn't going to dig these letters out of the holes they got into in 2008. But if you're a new subscriber, who cares?
I'm particularly interested in International Harry Schultz Letter. Despite its appalling and paradoxical portfolio performance, I named it 2008 Letter of the Year because of its extraordinary prescience in predicting, more than a year early, an imminent financial tsunami. See Dec. 28 column
Schultz' latest issue just arrived. It's full of cheerful items such as how to guard against an anticipated rise in home invasion robberies and technologically-enhanced government surveillance (make sure kids don't become victims of Facebook/ My Space craze by splashing their personal info on Internet.)
But in the short run, Schultz writes: gold is a bit overbought, stocks are a bit oversold. Overlay Dow Jones Industrial Average and you see a rally due.
He continues to hold to a 20-year V-formation forecast, with not just stocks but investor buying power declining and the rebounding, interspersed with 1-2 year counter-trends. He advises: Hold approx half of your assets in Swiss/French/German/Dutch (or other First world non-U.S. dollar) government bonds, and approximately half in a mix of blue-chip gold shares and physical gold bullion (best bought and stored in Switzerland, Canada, Australia, Hong Kong or Singapore).
Schultz has been particularly alert to the possibility of deflation. He now says: I seem to see deflation getting a stronger grip in early 2009, partly due to the consumer buyer's strike, despite a possible upside breakout in commodities, rising gold and slipping bonds. It will in any case probably gradually morph toward high or hyperinflation later in '09. 2010 looms as a mega inflate-year. Only if deflation gets out of control in early '09 due to government failure to increase money supply enough, and/or business/ bank sectors collapse in a sea of bankruptcies and lawsuits, will inflation be delayed.
On gold, he writes: Mathematically it will need a U.S. $2,300 gold price to equal the $800 gold peak of 1980. So, gold is cheap today, is well under half its 1980 worth in inflation-adjusted dollars.
He cites one technical indicator: Basis on French Curve chart projection, gold will reach $3,500 by 2012, then fall to $2,500 (29%), then rise to $10,000. There are a lot of projections around by some able technicians.
If we go into Weimar inflation, the sky is the limit. But, we will play it a stage at a time, by the charts, because being overconfident about any future prices has been the undoing of many souls.
Two recommended stocks: Harmony Gold Mining Ltd. and Franco-Nevada Corp.
Money guru David Tice, meanwhile, is more moderate, and calls gold a great deflation hedge on Bloomberg this morning. As we have repeatedly said, any time the word 'hedge' can be used in connection with gold, we are happy. Should gold fall in a generalized price implosion, it ought to fall less (thereby effectively rise) than other caving assets. For the moment, however, its price gains are reflecting a perception that goes beyond the trough and into the the period of Weimar inflation that many are convinced will follow. We are not members of that group. Weapons training courses come first. That, and Volcker-watching.