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The Treasury Department reported yesterday that net capital inflows were $101.9 billion in September. Compare this figure to a record U.S. trade deficit of $66.1 billion in the same month and you can understand why the US dollar is strengthening in the face of a negative long-term outlook.
Yesterday the price of gold rallied by more than $10 an ounce and silver busted above $8 an ounce Overnight gold reached new 18-year highs. That gold and silver have broken higher as the US dollar strengthens is impressive.
The big question is whether or not the commercials will aggressively sell into continued gold strength or bite the bullet and start covering for losses. If the latter proves the case expect $500+ an ounce gold soon, but if the former comes to pass – that being the commercials selling into strength – expect a lot of recent newcomers into the gold market to be crushed when upward momentum in the metal stops…
I have long been a strong advocate of precious metals ownership to hedge against US weakness. In fact, despite apprehensions over a potentially massive price correction in the near term, I still think it makes sense to own/buy gold at today’s prices if you are not already an owner.
However, as others look at the daily price movements and grow optimistic, historical events are starting to ring more loudly in my head:
On December 2, 2004 – after weeks of fearing that a correction was due – I came to the difficult conclusion that “I would be a seller of some physical silver if, and more likely when, the price of silver reaches/surpasses its 2004 highs.” (Dec 2, 04) Silver reached a new high later that day and I sold some of my silver (in hindsight I had wished I had sold more). Less than 1-month later the price of silver was trading 25% lower…
Is 2005 going to turn out any differently than 2004? Maybe.
Gold Bull
Citing China/India demand, inflationary concerns, Russian gold reserves, and other events as the reason why gold’s rally will hold is about as useful at this point as saying Beta is better quality than VHS. To be sure, the price of gold and silver are not ruled by the supply/demand fundamentals of other commodities (at least not yet), but by paper. For example, if demand for gold is y and the commercials suddenly sell y+1 in unbacked paper gold contracts, guess what - the price of gold goes down. Such is why the commercials could be getting scared: they keep selling paper gold but prices keep rising! Thus, in order to gain control of the market again the commercials figure they must sell even more paper gold, despite the fact that anyone with common sense can see that the gold market is a dangerous sell.
For the record, although defaults and record gold prices are what I see at some point in the future, I would nonetheless be a seller of some psychical gold just below $500 an ounce, and a potential seller of some silver if new 2005 highs are made. I note the word ‘potential’ with silver because my stake has already been reduced to the point where most of my silver is reserved for sale at a significantly higher price. It would take a serious price crash to turn me into an outright buyer.
As for all the traders that are now making the big easy money in gold stocks…the second you start thinking trading stocks is ‘easy’ is when you risk losing a bundle the next second. . I have no idea what gold/silver stocks will do in the near term, but I do know that even if you extrapolate $480 ounce gold into the future you still can not build a case for undervaluation.
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The commercials covered 8,509 contracts last week. This number was almost 50,000 less than what I, and the historical statistics, suggested. And yet gold is up by nearly $20 an ounce since the latest COT…
If gold is going to duplicate recent history and reach new highs in December – something it has done in each of the last three years – something must soon snap. By ‘something’ I mean one of two things:
1) The dollar rally must soon be halted.
2) The commercials must admit defeat.
Sure, a burst of energy in silver could give gold a psychological boost, as would say any hedge fund related collapse. Nevertheless, since July the commercials have shown willingness to aggressively short gold during any and every price rally and the US dollar (index) has been on a tear. It is difficult to see gold sustaining strength into December unless one of these two variables begins to vary from their recent path.
As for terrorism, rogue copper traders, GM bankruptcy fears, and - most surprisingly - the Fed’s quiet news that M3 will no longer be published, these notable stories are a positive psychological force as gold continues down its path back to the ultimate safe haven investment. However, unless the USD begins to also listen to these and other stories it is difficult to contend that the historic breaking of the commercials back is upon us.
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