Tuesday, February 14, 2006

 

Dip In Gold Price Draws 'Fresh Buyers'

Lot's of news in the precious metals sector. "Gold prices bounced on Tuesday, after dropping to a five-week low earlier on heavy selling by speculators and fund managers, as the dip attracted fresh buyers, dealers said. Platinum recovered from a slide below the psychologically important $1,000 an ounce level, while silver and palladium gained after tumbling to their lowest in several weeks."

"'The market is quite thin and choppy. What we have been seeing is exaggerated moves in both directions,' said Peter Hillyard. 'In the past, if somebody was selling 20,000 or 30,000 ounces of gold, the market would move 30 or 40 cents. Now it moves two dollars. When it moves two dollars, somebody else gets a little nervous, and they sell and it moves another two dollars.'"

"Dealers said mounting expectations that the U.S. Federal Reserve would keep raising interest rates after 14 straight rises to 4.5 percent had previously triggered liquidation by funds and speculators, as gold could become less attractive. Oil prices, which extended a two-week retreat to below $60 a barrel, dampened sentiment somewhat. Gold is often seen as a hedge against inflation."

"'Market conditions will remain nervous and there is a general sense of uncertainty over the next big price move,' Barclays Capital said in a daily note."

"Harry Schultz's take on gold's recent action: 'Was the gold price drop last week caused by being over-touted (in the media) and overbought, and with a bearish chart parabolic curve and bearish up wedge? OR by the gold cartel? Yes! Both. The price fixers have chartists too (they run two of New York's biggest banks) and they know when any market..is oversold, technically. So they know when to place their bets.'"

"Schultz went on to give the clearest statement I've seen from him of the theory, widespread among investment letters but recently endorsed in a report by France's Credit Agricole bank, that the official sector has been intervening in gold and other financial markets: 'They (the so-called Plunge Protection Team) subsidize the U.S. stock market when it sags to a major chart support area, which dare not break least weakened public confidence cause a crash. And they know when gold has risen to an overbought level, so they sell it short. They usually make money maneuvering for their de facto CEO, the U.S. government...They also usually make money on their gold shorts, by buying back after substantial falls."

"Schultz's strategy is to trade: 'You should sell when THEY do, or BEFORE, if possible. We told GRCU subscriptions to take profits a full week before this latest fall, in bold terms.' Schultz warns of gold 'mini-crashes,' which don't sound so mini, he means 50 percent-80 percent corrections in the gold stocks."

"But long-term, his view is very clear: 'We're in a major gold bull market thanks to excessive bank and government credit and money creation...$600 is our next target, then $900, on the way to $2,000.'"

And some mining news. "Unhedged, debt free and with $118 million US in cash burning a hole in its pocket, Silver Wheaton (TSX:SLW) is on the hunt for acquisitions, the company told analysts Tuesday. 'We're always looking at opportunities, but we certainly hope it will be sooner rather than later,' said Ian Telfer, a Silver Wheaton director."

"The quest for growth follows an agreement in which Silver Wheaton agreed to pay Goldcorp $150 million US in a deal that will increase production by more than 100 million ounces over the companies' 25-year deal regarding the Luismin mines in San Dimas, Mexico. 'This is a spectacular deal for Silver Wheaton. It will be getting basically an additional four million ounces a year going forward for $150 million,' Telfer said."

"The world's top palladium producer, Russia's Norilsk Nickel, revealed higher-than-expected palladium and platinum reserves on Tuesday, the first time it has disclosed such data to the market. Measured and indicated mineral resources of the division located on the Taimyr Peninsula indicated an additional 141 million ounces of palladium and 40 million ounces of platinum, it said in a statement."

"The statement did not include PGM reserves and resources from Norilsk's deposits on the Kola peninsula in northwest Russia, where another division of the company is based. Norilsk has said it intends to produce 2.90-2.95 million ounces of palladium in 2006, down from 3.133 million in 2005, and 690,000-700,000 ounces of platinum, compared with 751,000 ounces in 2005. It did not explain the expected decline."

Comments:
Central banks do manipulate gold; that's one reason they hold so much. In the old days they used the media to spook the futures by leaking rumors of CB unloading. It is frustrating, but part of the market.
 
With this $2000 gold prediction, is that time to dump holdings? The economy will have to be in really bad shape to support more buyers than sellers at that level.

The consumer market for gold would become prohibitive so jewelry producers could not make up for much of that buying. Perhaps the USD would drop significantly against other currencies that would allow other countries to still consume gold.

It would have to be central banks dumping their USDs for the tangible metal for this price to hit.

Am I looking at this correctly?
 
"The economy will have to be in really bad shape to support more buyers than sellers at that level. "

Yes. But with an unprecedented national debt, a retiring boomer generation, a bankrupt social security, a housing bubble crash, the loss of our manufacturing base, increased competition from the developing world, oil prices increasing, inflation looming and equity markets plagued by increasing amounts of insider selling and naked shorting -- I think that's quite probable.

"The consumer market for gold would become prohibitive so jewelry producers could not make up for much of that buying."

That's certainly one possibility, but historically it doesn't always happen that way. Gold often becomes a more popular (status-driven) metal for jewelry as its price rises. During the 80's gold craze, jewelry stores did booming business. People purchased gold not only out of increasing consciousness of its luxury value, but because jewelry began to be seen (IMHO foolishly) as an heirloom investment.
 
OT - I came across this while reading a Q&A session at financialsense.com and found it very interesting. Just thought I'd share it:

"You know it’s interesting but the US gives their pilots gold British Sovereigns so if they’re ever shot down, and they need to go anywhere they have gold coins with them. So, what does that tell you about money?"
 
"Fresh Buyers" -- I guess that would be someone like me. I've noticed that there are at least a couple of gold ETFs, GLD and IAU. Is there any reason to choose one of these two over the other? They seem pretty similar to me (e.g., same expense ratio).
 
(The economy will have to be in really bad shape to support more buyers than sellers at that level.)

didn't you get here by way of the housing bubble blog?
 
("Fresh Buyers" -- I guess that would be someone like me. I've noticed that there are at least a couple of gold ETFs, GLD and IAU. Is there any reason to choose one of these two over the other? They seem pretty similar to me (e.g., same expense ratio). )

I guess IAU is a little less expensive so it is left out. I'm not 100% correct though.
 
correction, IAU is I guess more expensive.
 
out at the peak:

The economy will have to be in really bad shape to support more buyers than sellers at that level.

Price is exclusivity, and everyone wants it. Come on, why else would anyone buy $150 jeans???

If even a fraction of the money that goes into housing or stocks went into metals, you would be wishing you would have bought gold for $2000.

p.s.: OT, but anyone know what lit a $300 fire under rhodium?? Check that 30-day chart at Kitco.
 
goose_egg,

just spread on both GLD and IAU, I own both. It is hard to say, on some days, IAU is higher for the same underlying asset and sometimes GLD is higher, but they are within 0.5% of each other so there is not much of a difference.
 
Thanks for the responses, everyone.

I did indeed arrive here via the housing bubble blog. Over my in-laws' objections, we have sold our house in San Diego (or at least are in escrow), and I am looking to diversify a small portion of our holdings beyond CDs & treasurydirect. BTW, believe it or not, the buyer is putting 20% down and it doesn't sound like it's with proceeds from a previous sale. Almost unheard of these days.

An additional aside: Let's say doomsday strikes. I assume the feds could declare a bank holiday as long as they wanted. Could they freeze your treasurydirect assets too? Could they declare a holiday for internet banking too? Could they even freeze Paypal? Is there any way to preserve access to assets short of loading up your safe at home? (I don't really expect things to get that crazy, but I am curious.)
 
goose_egg,

what you described is all possible, if we ever get to that desperate of a such situation. But when that happens, money is the least thing you shall worry about. Securing food supply and guns will be on the top of the list.

And no, it is extremely unlikely what you described should happen. This country may revolt.
 
Let's all start digging bunkers, storing food, and surrounding our houses with razor wire.

Some people need to get a serious grip here. The country is not going fall into anarchy, where those with a few gold trinkets will ride out the storm while laughing at their neighbor's foolishness.

There are only two scenarios where AU hits $2000 in the near term. One is a sudden dollar crisis. This is something no one wants, especially those countries like China that could cause it. The second is a speculative bubble where investment demand totally swamps out retail demand for gold.

The tiny size of the overall gold market makes a bubble a distinct possibility.
 
Anarchy? No. Currency crisis, followed by extended financial system distress?? A greater possibility than most would like to admit.

History is loaded with examples -- most recently Argentina -- where having an alternative, stable & universally recognized currency on hand can make the difference. People throughout the world have found that USD bought them things their own country's currency would not. If the USD craters, what alternative would US citizens (especially immigrants) recognize? Gold!

IMHO, you should always keep cash & a few liquid alternatives available anyway... plenty of natural disasters (like Katrina) can lead to temporary, limited anarchy.
 
Sorry to confuse you guys, yes I believe the US economy is going to nose dive (I sold my house, etc). I'm long on GLD and IAU as well as silver.

The $2000 price just seemed hard to bite at this point. (But I'll be happy about it.) If this pans out, would you guys dump a lot of gold and try to invest in something else?
 
If this pans out, would you guys dump a lot of gold and try to invest in something else?

No. Gold is money and we'll soon be back on the gold standard. Why trade my hard earned yellow loot for some fiat paper that will will be inflated to worthlessness, ala the Weimar Republic. I plan to keep my gold until the day I die, then my will has provisions for me to be buried with my hoard.
 
Out at the Peak:

The $2000 price just seemed hard to bite at this point. If this pans out, would you guys dump a lot of gold and try to invest in something else?

IMHO, $2000 will be the start of the bubble, not the end.

The time will come, though. Prime real estate & quality stocks will be selling for pennies on the dollar. Both will eventually rise from their depressed levels and generate income all the way up.

p.s.: Kudos to you & goose egg on your tough but smart housing moves.
 
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