Friday, May 12, 2006

 

'Sentiment Remains Extremely Poor' For US$

A wrapup on a busy week for money and metals. "Gold prices fell Friday, but ended the week with a gain of more than $30 an ounce. The metal rallied sharply this week above $700 an ounce to 26-year highs, fueled by fund buying. The dollar was mixed Friday, gaining ground against Japan's yen and paring losses against the euro following a report that showed the U.S. trade deficit narrowing in March."

"After climbing more than 6 percent over the past three days, June gold futures pulled back to settle at $711.80 an ounce on the New York Mercantile Exchange, down $9.70 on the day. The contract moved as high as $732 an ounce in electronic trading, the highest futures level since September 1980."

"Elsewhere in metals, July platinum settled up $22.90 at $1,318.50 an ounce, extending Thursday's strength to touch a record at $1,340. June palladium lost $1.65 to settle at $398.35 an ounce, after trading at a four-year high of $409.July silver dropped 70 cents to settle at $14.235 an ounce after reaching a 25-year high of $15.20 on Thursday."

"The Philadelphia Gold and Silver Index was down 4.4 percent at 158.77 and the CBOE Gold Index retreated to 160.96, down 4.7 percent, this after touching a lofty 175.05."

"The Amex Gold Bugs Index stood at 368.03, losing 5 percent. Among individual standouts, shares of Randgold Resources fell 12.1 percent to $21.69 and Hecla Mining lost 9.3 percent to trade at $5.49."

"The dollar fell to one-year lows against the euro and British pound on Friday despite an unexpected decline in the U.S. trade deficit. In afternoon New York trading, the euro rose to $1.2914, up from $1.2839 late Thursday in New York. The British pound jumped to $1.8932 from $1.8792 the day before."

"The dollar also dropped against the Japanese currency, falling to 110.03 yen from 110.63 late Thursday. In other trading, the dollar bought 1.1979 Swiss francs, down from 1.2123 late Thursday, and 1.1093 Canadian dollars, up from 1.1011."

"A report from the U.S. Commerce Department that the gap between what the country sells abroad and what it imports narrowed to $62 billion in March, the smallest deficit in seven months, failed to boost the dollar against the euro, which has been trading strongly all week. Traders said the widespread bearishness on the dollar made it hard for the U.S. currency to sustain any strength, despite the positive news."

"'Sentiment remains extremely poor,' Marc Chandler, global head of currency research at Brown Brothers Harriman said."

"The Canadian dollar fell against the greenback on Friday, hampered by disappointing economic data, weaker commodity prices and uncertainty over the likelihood of a Bank of Canada interest rate hike this month. Weaker oil and gold prices, key drivers behind the currency, coupled with a surprise drop in Canada's March trade surplus, conspired to push the loonie down."

"Statistics Canada said the trade surplus narrowed sharply in March to C$5.14 billion, shy of analysts' forecasts of C$6.05 billion."

"'What's influenced price action today has been position squaring, short covering and Canada losing on the crosses,' said Jack Spitz, director of foreign exchange at National Bank of Canada. 'Canada's been quite a loser against euro and yen and, in fact, sterling.'"

Comments:
Check out this three month chart of the swiss franc.
 
Actually it's the dollar in terms of the SF. It's easier for me to understand that way.
 
Turk, Interview, worth a listen...IMO


http://www.howest.com/goldradio/index.php/mediaplayer?audio_id=310
 
That is a great post, John. I like how they said that copper was essentially a bubble.
 
The Gold Price - A "Spike" or Something Else?

Just cracks me up how quite a few of those over at Ben's HB blog think PMs are a bubble. Missed my opportunity to blast'em earlier today... maybe tomorrow.

p.s.: Wouldn't touch the copper market with a 10ft pole. China cane make or break that market on a whim.
 
Missed my opportunity to blast'em earlier today... maybe tomorrow.

Don't miss another opportunity, tj. You must crucify those fiat-loving heathens upon your cross of gold. Some people just don't understand the phrase "this time it's different". It's up to you to set them straight.
 
John in VA,

Heh heh heh... I was WONDERING whether you lurked over here or not! ;)

BTW, did you see my comment a few days ago? If gold's such a bubble, why isn't this blog more popular??

A price spike and a few published articles hardly qualifies as bubble stuff. You'll have to do better than that.
 
Actually, this was only my second visit, TJ. And I'm not really anti-gold; I think it can be a good speculative play for people who like speculative plays. But I do think it's becoming a bubble. I see a lot of the same dynamic playing out in precious metals (and other commodities) now that played out in the real estate bubble. I stay away from gold because I can't find a credible valuation model. Will gold go higher? Almost certainly. Perhaps much higher. But I'm convinced that hedge funds are into it in a big way, in search of yields, and that cab drivers are starting to pile in as well. I know that you think the public is still largely unaware, so we'll see how it play out. My guess is that we're weeks away from a Time Magazine cover with some dude hugging a gold bar and the words "Gold Fever!" splashed across the cover. Then it will really be time to head for the exits :-)

I had a friend who was heavily invested in gold in the 80's and you know, it felt a lot like it does today - safe bet, can't go wrong, reasons A, B, and C for why the sudden run-up was justified. You had to be crazy not to be in gold. Then it tanked. And he got killed.

In any event, I wish you well with your investments.
 
John in VA,

Now see... you're exactly the type we need here so that we don't engage in too much "confirmation bias". I like reasoned debate with smart people, because that's the only way you really learn things. If I am wrong, I'm hoping someone will (in the course of debate) present me with something I didn't know to enlighten me.

Unfortunately for you, you've not done so! ;)

If you're willing, I'd like to engage in a point-by-point discussion to see if one of us can convince the other. Interested?
 
I am interested, TJ. I'm not trolling this blog, just interested in a good debate. Also, I'm open-minded enough to be talked out of my position, but not without a fight :-)

My position nets out to this: precious metals are not necessarily a bad investment, but a bubble is now developing in PMs and a number of other commodities. This is the result of the same phenomenon that drove the RE bubble: too much liquidity in the system, compounded by hedge funds desperate for big returns. On the latter point, the money flows into hedge funds have grown severalfold over the past five years and as a result, many of the formerly profitable strategies (like convertible arbitrage) have become too commonplace to produce decent returns. A flattened yield curve has effectively shut down the carry trade. In fact, here's an excerpt from S&P's April report on hedge fund performance:

"Rising interest rates, a skyrocketing commodity market and a benign credit market drove performance throughout the month."
Standard & Poor's figures also show a very strong month for managed futures funds, with the index up a massive 6.36 per cent during April, and an increase in returns of 9.66 per cent compared with April 2005.
This increase comes following a month of record metal prices, with both gold and copper bringing investors high returns.



Ironically, commodities speculation is now feeding itself. Most of the recent articles you read about inflation fears point to rising commodity prices, and the most common justification for rising commmodity prices is.... inflation. So commodities drives producer and consumer price inflation, which drives more money into the "safe haven" of commodities (esp. PMs).
A glance at the 2-year chart for GLD shows a troublesome parabolic rise -- never a good sign. This is the same thing we saw with dot-coms, RE, tulips, etc, and it almost always results in a mirror-image coming down from the peak. This strongly suggests that a great deal of "hot money" is now flowing into gold, and the gains will draw in more money. Interestingly, I came across this in the Melbourne (AU) Herald Sun:

Angus MacMillan, minerals strategist at London-based Bache Financial, said: "It is becoming a very dangerous situation. The further up it goes, the more dramatic the reaction will be."

"The (London Metals Exchange) has to run markets that are orderly and liquid -- these markets appear to be neither."

Copper and zinc prices have doubled this year as investment funds bet on rising prices caused by a shortage of supply.

The price of gold is up 68 per cent in the past 12 months, with analysts predicting it could break through the record $US850 an ounce set in January 1980 within the next 18 months.

Independent analyst Peter Strachan, the author of StockAnalysis, said the resources sector was suffering from a lack of investment in exploration and infrastructure.

"It's really come home to roost," he said.

But he warned the current boom could have disastrous consequences and would not rule out a crash on the scale of the October 1987 sharemarket meltdown.

"The markets for these commodities are now very strongly in the hands of hedge funds and speculative funds," he said.

"I think it will all end in tears."


"It will all end in tears" -- I've heard that before...

Lastly, let me say that it is not my position that there's no fundamental reason for an increase in gold and other commodity prices. Inflation is a real concern, and developing nations are consuming more resources. However, my position can be summed up by the words of Warren Buffet (on commodities):

Buffett: "I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.
 
want an easy way to value gold?

1. just check the 100+ year dow/gold ratio

2. commodoties and stocks alternate bull and bear markets. gold has only been in a bull for about 5 years, bull markets usually last 17 years, abouts.

3. if you believe gold is the only true currency, think of all the paper money thats been created the last 20 years. check out the M3 numbers.
 
I'll chime in simply to say that there is a powerful rationale behind investing in metals. And that rationale isn't speculative. It is driven by validated, painfully real dynamics. This rationale makes for an important difference between recent housing moves and metal moves. While there are many individual investors who (no doubt) simply invest in the "trend" without understanding its basis -- the big money in metals continues to be institutional and governmental. Those who point to metals and see a bubble, aren't understanding the larger forces at work.

Those who keep their money in US dollars are the ones engaging in wild, baseless speculation. Because while all the evidence in the world suggests that the dollar is heading towards the abyss, the majority of Americans cling to an unfounded belief in its immortality without providing a single rational argument to support their position. Metals investors aren't engaging in a speculative bubble. Our government is, and has been since 1971.
 
Wow. Excellent discussion on this topic. Thanks, all posters.
 
John in VA,

Good start, but I'd already read all that. Strachan identifies the fundamentals underlying the boom but provides absolutely no support for his assertion of "disastrous consequences". Buffett's comments in particular can be taken as supporting both sides, since he doesn't address where metals are in the cycle.

Here's something for you to read. It's two years old, but good stuff nonetheless:

Commodity Numbers FAQ

I particularly like this quote: Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets.

Hedge funds are whales, and whales can't play in a koi pond. Of course, you can imagine what would happen if they tried... and you wouldn't want to miss out on that now, would you?
 
remmeber this, the spike in gold and silver is no doubt related to the silver and gold short positions being covered. people like jim puplava and david morgan have said that there is much more paper ounces short than there is actual physical silver(I don't know about gold) out there. I think that may be a rise in gold. remember this also, the wealth is flowing to the countries where gold is no barbarous relic.

like someone said above, the amount of global assets in gold is almost nothing.
 
Here it comes. Another major correction today triggered by a strengthening USD. Amazing how dollars are still considered a "flight to safety"; that notion will take a while to go away, won't it? Still, it points out that when the USD does eventually tank it'll probably take all other currencies & debt instruments with it, regardless of nationality. Except PMs, of course!
 
Excellent debate John and TJ.

I tend to agree with John a bit more, but I do not believe PMs are in a bubble. But much of the run-up of late is driven by speculation.

One hears alot of talk about intrinsic value. Well, if anything has intrinsic value it is housing, but yet prices are dropping rapidly because the market was long overbought and driven by speculation.

In the end, gold is like everything else....there is a buyer and a seller.

PS - I will grudgingly admit that my current bearish view on PMs are likely a result of 'missing the boat', at least the latest run-up. Much like the majority of the bears on the HB blog.
 
I'd never deny that there's speculation at work. The roller coaster movements are to be expected.

My perspective is ultimately that of a long-term, buy-and-hold strategy. In that regard, I ignore these ups-and-downs (except for timing purchases) and focus on the fundamentals.

Fundamentally, speculation is not driving the underlying trend. Guess this just dovetails with my belief that a depression is inevitable, and that a depression will seal the fate of the dollar.
 
Lots of good debate on this topic. I tried to post a reply earlier, but the server hung and my response got hosed. Anyway, I don't have time to respond to everything (and thanks, tj, for the FAQ - I'll read it tonight).

commodoties and stocks alternate bull and bear markets. gold has only been in a bull for about 5 years, bull markets usually last 17 years, abouts

I haven't been able to find an 17-year bull market in gold going back to the early 1800's. There was a run-up from about 1973 to 1980, but the latter portion of that can truly be characterized as dotcom-like bubble, with prices going almost vertical. Also, with respect to your countercyclical comment, how do you explain the fact that both gold and stocks have been in a bull market since around 2002-2003?

there is a powerful rationale behind investing in metals. And that rationale isn't speculative.

There's both fundamentals and speculation - as Buffet said, the first attracts the second.

the big money in metals continues to be institutional and governmental.

No doubt, but how do you explain the sharp downward movement today? It certainly wasn't banks and governments.

all the evidence in the world suggests that the dollar is heading towards the abyss

That's a bit of hyperbole, don't you think? I'm not here to defend the dollar or Fed policy, and the dollar may decline further, but an abyss?

Buffett's comments in particular can be taken as supporting both sides, since he doesn't address where metals are in the cycle.

Come on, tj - you could be a White House press secretary with that spin! :-) Look at the context: agricultural commodities not in a bubble, but... metals have had a huge run, fools get in late, fundamentals attract speculation. Clearly he was saying that commodities are in a bubble. As for not knowing exactly where we are in the cycle - how can anyone know? That's the unpredicable nature of bubbles. Robert Shiller called housing a bubble several years ago and he was right but it still kept climing. PMs may also go much higher before reversing.

a depression is inevitable, and that a depression will seal the fate of the dollar.

A depression is a deflationary phenomenon. Those who had cash during the GD were in great shape. A depression would be terrible for gold prices and other asset prices as well - they would all depreciate vs. the dollar.

Hedge funds are whales, and whales can't play in a koi pond.

I would say the opposite is true -- hedge funds can and do play in koi ponds and sometimes they crush the koi and splash all the water out. Hedge funds are not all whales. In fact, there are thousands of them and many are relatively small. And they play in all kinds of markets, especially currencies and commodities lately (see my citation from the S&P hedge fund report). Moreover, they do so using extreme leverage, and this can result in a lot of volatility.
 
all the evidence in the world suggests that the dollar is heading towards the abyss

My sentiments, too. True fiat dollars have only existed for the last 35 years, and history shows they all fail eventually.

A depression is a deflationary phenomenon.

Not necessarily. We're clearly facing a future where scarce resources will rise while wages and other assets will fall.

A depression would be terrible for gold prices and other asset prices as well - they would all depreciate vs. the dollar.

Gold isn't a commodity, it's the world's oldest currency. There's no history to support your statement.

Hedge funds are not all whales.

When the media discusses the impact of hedge funds, they're talking about the whales. The little guys involved in metals aren't worth mentioning, since their influence on the market pales beside that of more traditional funds.

The S&P report fails to break gold out from copper, etc. The gold market simply doesn't have the volume to drive industry-wide hedge fund profits, but copper and other base metals do.

hedge funds can and do play in koi ponds and sometimes they crush the koi and splash all the water out

Again, if this were to occur in metals, we'd be talking thousands of dollars already, not hundreds.

Clearly he was saying that commodities are in a bubble

Buffett doesn't mince words. If he wanted to say that, he would have. Instead, he cleverly avoided doing so, choosing to describe the cycle every boom goes through... again, without divulging where exactly in the cycle he thinks oil & metals may be. He also does not say "precious metals", either. All he acknowledges is that there was a terrific move.

There are few if any fools in PMs; they're still in stocks & real estate. Any hedgies out there are definitely not fools, either.
 
Any hedgies out there are definitely not fools, either.

It depends on how you define "fool". They're clearly not stupid people, but they are huge risk-takers. I really liked the book "Ugly Americans" (Ben Mezrich) about hedge funds employing currency arbitrage in Asia in the 1990s. It discusses, as a sidebar, how trader Nick Leeson singlehandedly bankrupted the most venerated bank in England, Barings (the Queen's personal bank). It also describes how one trader risked every penny of his investors' money - over $250 million - on a single speculative bet.
 
Gold isn't a commodity, it's the world's oldest currency. There's no history to support your statement.

Gold's not a commodity? You'd better tell the commodity traders. What about silver? It's also been used as currency. Is it not a commodity?

When the media discusses the impact of hedge funds, they're talking about the whales. The little guys involved in metals aren't worth mentioning, since their influence on the market pales beside that of more traditional funds.

The S&P report fails to break gold out from copper, etc. The gold market simply doesn't have the volume to drive industry-wide hedge fund profits, but copper and other base metals do.


tj, where are you getting this notion that hedge funds are not getting into PMs in a big way? You say it, but you don't support it. Look at these citations:

cnn.money, 12 April:
Hedge funds posted a strong first quarter, thanks to the continued boom in energy and hefty gains in the metals markets.

Strength in metals, including gold and copper, accounted for the gains in these funds, and a continued boom in energy also helped. That momentum continues in the current quarter. Gold futures surged past $600 last week on fears of inflation, while silver hit a 23-year high Monday.


www.gold.org, 21 Jan 06:
Hedge funds are betting on a solid rise in the price of gold in 2006 as traders look to decrease reliance on bonds, stocks and currencies, Bloomberg reports.

In an indication of the confidence the market holds in the yellow metal, large speculators have increased bets the precious metal will rise by three-fold in five months.

In July, hedge fund managers held 49,022 contracts in gold futures. By December, this figure had boomed to 154,522.


vainvestor, today:
"We have had a busy day on the precious metals market. Earlier we saw some profit-taking in gold and the metal traded briefly below $690/oz.

"However, we have seen strong buying interest from hedge funds and dealers," said TheBullionDesk.com’s James Moore.


Reuters, March 15:
Commodities such as gold, platinum and copper have raced to new highs, boosted by demand from China's red hot economy and buying by hedge funds and other speculators.
 
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?