All About Gold…
While in the trading
community most of us are aware of the “stealth” gold market that has
been going on in gold and gold shares for months now, it is probably not that
evident to the average Jane or Joe on Main Street. The mainstream press does a
lousy job of truly getting at the root of what is really going on in the world
of economics, and that is fine; it is not really their job to turn us all into
economists. Nonetheless, it is important to understand some of the reasons gold
may be experiencing the upward trajectory that it has. While I am quite
convinced of my analysis and others that I read, one always needs to be aware
that you may be wrong. The result is a healthy build-up in my portfolio, but
not so much where it threatens my well being.
Starting at its most basic level, gold has always
been seen as a store of value, and while that perception has fluctuated wildly
over the years, the perceived value of gold typically rises when a handful of
developments occur, either individually or collectively:
1. Inflation
2. Eroding value of currencies
3. Political instability
4. High deficits
1. Inflation:
Inflation? How is that possible? Greenspan and the Fed keep
beating the drum about deflation. Well, that is true, but in their zeal to
fight off deflation (an excuse to print money and lower rates to salvage the
economy in my opinion) they have sown the seeds for inflation within a few years
time. The big money, or smart money likely sees this and is acting accordingly.
2. Eroding value of currencies:
Let’s face it, it is no surprise that the dollar has been in
a major down-trend for some time
(see my commentary 9/8 commentary), however, what is more
troubling is the current race of all of our major trading partners to devalue
their currencies so we can continue to afford their exports. This is
accomplished by cranking up the printing presses and lowering interest rates.
3. Political instability:
No analysis needed here. Iraq, The Middle East and potentially
North Korea.
4. High deficits:
This is more a function of the Iraq situation than anything else
and a larger than average percent of GDP that includes defense/government
outlays.
Let me be clear. I am not making any predictions
here, I will leave that to the analysts. What I am trying to demonstrate is a
compelling story to own gold/gold shares. The difference is we are not trying
to predict the future value of gold, the charts have already spoken. Rather, I
am trying to offer some tangible reasons, other than technical analysis to hang
in there for the long haul.
What about the large short position in gold by
the commercial traders, isn’t that a bearish sign? Well, up until Friday that
is what I had been led to believe too. Frankly that may still be the case,
however an article I read on Friday shed some new points to consider. The
article was written by Steve Saville, here
are some of his comments:
“For example, the Commercials
were relentlessly net-long gold futures during the bear-market years of
1996-2000 and have been relentlessly net-short since April of 2001. Furthermore,
as the gold price has trended higher since April-2001 the commercial net-short
position has also trended higher. In fact, on 2nd September (the cut-off date
for the latest Commitments of Traders Report) it was at an all-time high of
164,000 contracts.”
“Interestingly, while the
Commercials currently have a large net-short position in gold futures they also
have a large net-long position in Swiss Franc futures. This, in turn, supports
our view that gold will peak before (perhaps months before) the US$ bottoms.”
“As an aside, the commercial
net-short position in the gold market is mostly offset by a net-long position of
around 120,000 contracts accumulated by large speculators. This net-long
position represents about 12M ounces of gold, or about US$4.5B of gold at
today’s price.”
“However, at the present time
it is extremely unlikely that the Commercials have 12M ounces of physical gold
at their disposal, so what happens if the large speculators that have built up
the 12M ounce net-long position decide to demand delivery of the gold? In this
case the Commercials would either have to step into the market to buy the gold
or get bailed out by central banks. The point is; if the large speculators are
well financed and have a lot of conviction then they, not the commercials, have
the upper hand because they have the ability to demand delivery. The
large specs might have no intention of demanding delivery but we would certainly
not want to be short gold right now.”
Forget the attractiveness
of the investment prospects, what excites me more is the viability of gold
stocks as intra-day trading vehicles. In recent months,
Newmont Mining (NEM)
has become a staple in my arsenal each day. While it is not a great stock off a
1-minute chart, trading it off the 5-minute charts provides good range.
Gold Fields International
(GFI) is similar.
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As always, feel free to send me your comments and questions.