OMG: Oh my, Gold!

Quotable

“The Commission is clearly in favour of a rate cut," a spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said. "The Commission is against debt restructuring.

The new Irish government’s bid for lower interest payments has so far been blocked by Germany and France, which want Dublin to drop its veto on harmonising the corporate tax base in Europe in exchange or raise its own low corporate tax rate.

In Germany, a senior lawmaker in Chancellor Angela Merkel’s conservative party said a further cut in the rate on emergency loans to Greece, already reduced by one percentage point in March, would be justified if it carried out further reforms to reduce its debt risk.”
                                          Reuters



Commentary & Analysis
OMG: Oh my, Gold!

That sure didn’t take long. Gold pulls back to $1,500 and we’re already asking whether it is a bubble on the verge of popping.

Compared to other assets, gold isn’t too bubblicious. But that sure doesn’t mean price cannot drop significantly. This morning I listened to a Reuters interview with two commodities analysts discussing their individual outlook for gold – one a bull, one a bear.

The bear led things off, citing what might change among the major drivers of gold prices. He correctly listed what I would say as the three main drivers: US dollar via low interest rates, quantitative easing, and demand from emerging market central banks due to swelling surpluses in their capital and trade accounts. Naturally, if these trends change direction then gold’s appeal likely changes too.

The bull cited all the same reasons, naturally, as justification for a continued climb in the price of gold.

And there it is: choosing between two extremes, just as Jack discussed on Friday.

The bull didn’t offer an up-side price target for gold … only that he feels nothing has changed to stop it from running higher.

The bear offered up $750 an ounce as his downside target.

Whoa … wait a second. Gold down to $750? That’s more than 50% off current levels. [Perhaps unrelated, but there is also something else currently going for 50% off that you might want to check out when you have a free moment.]

Back to gold – could that analyst be anywhere in the ballpark calling for a move down to $750?

Yes. Sure.

But the bullish analyst sticking to his guns has a point – what has changed besides perhaps investor sentiment?

Yes, I know sentiment can influence fundamentals, etc etc … but quantitative easing is still in play and we don’t yet know what the Federal Reserve has up its sleeve if the US economy is not hitting its growth in stride once QE2 expires; plus, the US dollar remains the funding currency of choice in what has become a very speculative trend for asset markets. Again, I’ll redirect you to Jack’s Currents Currents from Friday if you’re looking for an alternative scenario.

If anything, gold is tied to a general distaste for fiat currencies and should remain supported if developed market central banks don’t adopt a monetary-policy-normalization mindset – a lid remains on US interest rates; and there are some serious threats being tossed around the eurozone that could quickly undermine the euro (more on this later in the week).

This morning a reader of ours passed along his technical outlooks for the US dollar and gold. As he noted, his outlook for gold is almost perfectly dependent upon his outlook for the US dollar. And for whatever reason, he sees the US dollar index running to about 107 by the first quarter of next year. As for gold, he would then expect a corresponding move to $500 an ounce.

Yes, you read that correctly.

But I don’t necessarily think the US dollar and gold will be a perfect inverse trade, in the way the US dollar and the euro are nearly perfectly negatively correlated. That means $500 an ounce certainly is not on my radar screen right now even if something drastic changes in the eurozone that kills the euro and supports the US dollar.

But I realize I am just splitting hairs here. Right now, if I had to pick an extreme, I still side with the bullish arguments favoring gold and many other commodities. An old market adage goes something like this, “Sell when everyone else is buying, and buy when everyone else is selling.”

Everyone was selling last week. Perhaps it is time to buy.

But one thing is for sure – this is a time to keep your exposure and leverage in check. I plan to discuss why when I cover some items about market psychology tomorrow in Commodities Essential, specifically a recap of where we might find ourselves along the trend cycle.

Have a great week.

  • Buckscoder

    Au at 750? 500? Why not 250? I start laughing whenever somebody tells me au is in a bubble. What is in a bubble is fiat money. That’s why to dig for au costs you around 800 usd an ounce. So, if you buy au bullion at say 1500 usd, it is cheaper than your favorite cell phone, where the cost of manufacturing is way lower in relation to the msrp, calculated in percentage.

    I won’t say it can’t drop lower. We are in May and some selloffs are under way. I could even imagine au dropping to 1300 or 1200. Yes, 1000 would still be possible. While unlikely.

    The problem with the fiat currencies is the debt, floating around the world. The US for itself counts actually several trillion usd debt. Nobody ever will pay that back. The only way to bring that down is via inflation. That is what the FED is doing. Then there is also a limit to rise interest rates. Because that will increase the debt even more and faster.

    Well, whatever. I bought my au 5 years ago or so. 480 usd for my first ounce. Do you believe it will drop down that far ever in history? I tell you, I sleep very nice, because I have my own central bank with a heart of gold, which no man can “print”. Down the road until now people always told us that au is in a bubble. That au is a bad investment. Etc. etc.

    As you missed a target, I can give that to you: 5k for one ounce within this decade. If it goes higher, you can start trusting people who babble about bubbles, lol.

  • Oluwole Oke

    Well it’s on!

  • Share Trading

     I
    always like to buy physical gold.But there is a lot of problem to store
    this gold.Can i invest in gold through demat/ETF options.In this there
    will be no need to buy physical gold.From where i should have to start this?