November 13, 2003
$400 an ounce bandwagon gaining momentum

"I believe if New York continues the uptrend, gold should reach $400 at the end of this year," said one dealer in Tokyo  Reuters.

-- Forget about ‘end of this year’ -- how about by the end of today?

Last week, following a better than expected jobs report, I speculated that the $400 bandwagon was losing momentum. This week, following a surprisingly strong rally in gold, it is worth commenting on why $400 an ounce gold is an important trading level. 

To begin with, speculating that last Friday’s jobs report would send the price of gold tumbling was not much of a stretch. Rather, earlier in the week a better than expected ISM report on manufacturing sent the price of gold tumbling as the U.S. dollar and equity markets rallied -- why shouldn’t another better than expected economic report stimulate a similar outcome 4-days later?

However, last Friday’s decline in gold turned out to be brief as market speculators held firm and the U.S. dollar began to retrench. All of a sudden, the economic recovery theme began losing out to the overvalued dollar story…

This week gold has been on a tear thanks largely to weakness in the dollar.  Also noteworthy is heightened terrorism fears following a series of bombings in Iraq, and investor anticipation of a break through $400 an ounce. Regardless of the actual cause, the effect of gold’s rally is clear: $400 is a big round number that will awaken animal spirits.  In other words, $400 will represent either a launching pad for gold or mark the beginning of a massive sell off (speculating that $400 will be struck and nothing will happen isn’t being done by anyone).

Incidentally, the $400 an ounce level is not without historical significance.  Rather, from the late 1980s until 1996 $400 an ounce served as a top to many rallies.  Since early 1996 – thanks to steady increases in producer hedging, increased sales from central banks, and the seemingly infallible dollar (along with some conspiratorial points of view) - $400 has not been seen. 

Big Drop or Rally?

After last week’s debacle, I don’t think my speculations about what type of price action $400 an ounce will unfurl are worth much.  Even so, remembering what happened to gold when the march through $300 an ounce took place in 1999 following the Washington Agreement could be useful; even goldbugs that have long turned grey know that the 1999 rally represented a rare short covering dance the likes of which had not been seen in more than a decade.


Will a 1999 type rally occur when $400 an ounce is broken?   I would say probably, yet I also think - baring some unexpected shock - that $400 an ounce will be retested on many occasions before it holds, just like $300 an ounce was retested many times until early 2002.

Also participating in the latest gold market rally is silver.  The poor mans alternative to gold was up a quarter yesterday (on a spot basis).  That nearly 5% jump in silver goes almost completed unnoticed by the mainstream financial world suggests to me that even larger daily increases are ahead. Quite frankly, I think there will be more of a panic out of U.S. dollars than has already transpired at some point in the future, and until such a panic arrives gold/silver have not put in their best days…

Am I biased? Undoubtedly – I own gold and silver.

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