November 8, 2003
$400 an ounce bandwagon losing momentum

Last week the World Gold council noted that the gold market had a cluster of stops in and around the $380 an ounce level. Treating $380 an ounce as support and the psychologically/technically important 7-year high mark of $393 an ounce as resistance, a $13 trading range was observed. Gold spent most of last week bouncing violently inside of this range.

Gold began this week by busting below $380.  As expected, the stops began being taken out in rapid order (at Monday’s close December gold settled at $377.10 an ounce - the high for the day was $385.50).  However, gold has since rebounded and was holding around $380 an ounce early this morning

At 8:30 AM this morning the BLS released their October reading on U.S. jobs.  This much anticipated report confirmed what most had suspected: the U.S. economy added jobs in October (also, Sept payrolls were revised higher to +125K from +56K and Aug was revised from -41K to +35K ). The better than expected jobs report immediately put pressure on bonds, and gold. 

At first, ‘pressure on bonds and gold’ seems like a contradiction. After all, gold is well regarded as a hedge against inflation.  However, gold has rallied back to pre-Iraq levels in recent months not because of inflationary fears per se, but because of fears surrounding the U.S. dollar.  And while there is certainly a link between inflation and the price of the dollar in relation to foreign currencies, theses items of interest are not treated as one in the same. Rather, and following recent thoughts from Greenspan and Snow, inflationary pressures would be a welcomed addition to the U.S. economic recovery, while a slumping dollar would not.

Following the jobs report the Dow looks ready to tackle 10,000, and the Nasdaq is a stones throw away from 2,000. By contrast, gold market participants are no longer dreaming about $400 an ounce, but about how many stops are left to be taken out; how many speculators are left to be shaken from positions which were purchased because they believed the dollar was doomed. 

Incidentally, the dollar may still be doomed, and gold may still be in a long-term uptrend – it just may not happen overnight.  Nevertheless, the developing fear for goldbugs today is no longer that the dollar will strengthen, but that gold cannot be a hedge against something that is no longer a threat.  If, and more likely when, inflationary pressures arrive, they will be easily controllable, or so the story goes. 

Does the action in gold today represent a excellent opportunity to buy (more) gold?  In my opinion yes...but not until the weak hands and $400 an ounce buyers are completely shaken out. Is this a vague conclusion for vague times? 
Well, it is no more or less formless than what should prove to be a temporary insight: ‘goldbugs are afraid of inflation’. 


 

a