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Currency markets may be volatile this week amid heavy U.S. data, speeches
4p ET Sunday, November 28, 2004
Dear Friend of GATA and Gold:
This essay by Dan Denning of DailyReckoning.com is
a few days old but still notable for adding to the
puzzlement of contrarians about the prevailing
opinion about gold. Is it that gold is explosive,
or that it is due for a sharp and relatively brief
decline before resuming a powerful rise?
Denning does seem to represent the prevailing
opinion, which was also the prevailing opinion at
the New Orleans Investment Conference a couple of
weeks ago -- that gold will go down before going up
again. So does that require contrarians to bet that
gold will go UP in the short term and DOWN in the
long term? And if one is investing more for the long
term and is not using a lot of margin, does it
really matter, especially as central bankers around
the world are already diversifying out of the dollar
or musing opening about it?
Maybe the better question about the precious metals
is simply: Amid turmoil in the currencies and in the
world generally, just what is a better alternative
than real stuff in a safe place?
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Gold and Gravity
By Dan Denning
Tuesday, November 23, 2004
Is the gold price giving us a repeat performance of
October's fake-out in the oil market? My suspicion
is that gold is acting a lot like crude did last month
... running up to fresh highs -- and making headlines
all the way. ...
But this isn't the main event. Not yet.
The day of reckoning for America, her deficits, and
her dollar, is surely on its way. Investors who haven't
yet bought gold as protection could be forgiven for
thinking they've missed their chance. But we may
see gold make the inevitable run up to $450 -- as
early as next week -- and then experience a serious
correction and consolidation.
For that, investors still not holding gold should read,
"last chance to buy before the bull is untethered. ..."
First, note that as gold has screamed up since the
summer, gold mining stocks have failed to confirm
the move. Just as it happened with the oil sector in
October, the underlying commodity has gotten way
ahead of its producers. For instance, gold put on $5
-- 1 full percent -- between its Tuesday close in
London and its Wednesday close in New York this
week. Yet the two biggest gold producers in the world
did not follow. AngloGold eked out a 0.56 percent gain
on the day; Newmont mining, the world's largest gold
producer, managed a 0.71 percent gain.
Is this quibbling? Well, no. Newmont climbed as high
as $49.96 in intraday trading Wednesday. But when
you take a closer look at the chart, you see that it
even though it closed up for the day, the second half
of the session was all downhill ... until it reached
$49.55. In short, Newmont made a bid for $50 and
couldn't make it. The largest gold stock in the world
is failing to confirm gold's bullish move. Why?
The answer is "earnings gravity." If you want to buy
Newmont at p/e of 50, be my guest ... and many
investors will. But until the bullion price moves much
higher -- and starts making its way onto the income
statements of the gold producers -- the dearth of gold
shares means you have too many investors chasing
too few gold stocks and paying too much for them.
The total market capitalization of the gold- and silver-
mining sector in the United States is less than $136
billion. By comparison, Microsoft's market cap is
$296 billion. The equity upside of gold is limited until
the bullion upside gets much, much higher.
Of course, there is the chance that the next
"psychological level" for gold is $500 -- that being
simply such a glorious number that traders can't
resist it. Kevin Kerr at Outstanding Investments
believes the technicals support gold all the way up to
$475 in short order. This move would be aided and
abetted by a huge increase in speculative longs in
the futures market AND a surge in liquidity inspired
by the launch of GLD, the New York listing for the
World Gold Council's bullion backed gold fund. ...
Several hundred million dollars could flood into GLD
as soon as it's launched. The stock will enable U.S.
institutions to take a position in "paper gold." Wall
Street's appetite for such financial chimeras is
growing at what seems an exponential rate. Last
week cash inflows into exchange-traded funds
exceeded U.S. equity mutual fund inflows for the first
time that I can recall -- and this during a week when
more than $1.3 billion came in from the cold of the
money market to the stock market sauna!
Moreover, such a flood of funds into GLD would be a
vindication of the idea of "paper gold," at least in the
short term. The idea behind GLD -- and its London-list
equivalent GBS, which has successfully matched the
price of gold since its launch in January 2004 -- is that
they introduce liquidity to the gold market and create
institutional demand for the metal. Up until now, U.S.
pension funds and institutions -- which is just a fancy
way of saying mutual funds, banks, insurance
companies, and brokerages -- had no easy way to buy
gold through the stock market. They had to do it
through futures contract, or buy bullion. And legally,
U.S. pension funds weren't allowed to own commodities
Few institutions want to buy bullion anyway, because it
never pays a dividend. It's essentially a savings account
with zero interest, although if the dollar is getting worth
less and less ... then things priced in dollars go up ...
and pure inflation becomes one way to explain the rising
It's like a can of Coke that used to cost 25 cents now
costing 75 cents or a dollar. Has the Coke gone up in
value? Or has the purchasing power of your money gone
down? Owning bullion when the currency inflates is one
way to profit -- in terms of paper dollars, at least.
The question today is whether there is pent-up
institutional demand for "paper gold" that is bullish for
bullion. A lot of institutions could allocate a small
percentage of their cash to gold, perhaps as much as
5 percent. And with gold rising in dollar terms -- and in
terms of British pounds now as well -- there would be no
"yield penalty" to pay. The gain in bullion prices would
match, or exceed, the yield on U.K. gilts or U.S.
Treasuries -- plus you'd have the safety of owning
nature's own currency!
With paper gold, like GBS and GLD, accepted and
flourishing, "earnings gravity" on gold stocks may no
longer be a check on making money in the yellow metal.
With GBS and GLD, so the theory goes, you get more
liquidity in the equity side of the gold market. And
whichever way the gold price goes in the near-term, the
launch of the new Amex Gold Miner's Index (GDM)
should also be great news for options investors if and
when those vehicles become "optionable" -- especially as
it's composed of more volatile junior exploration stocks.
I made the enhanced liquidity argument myself -- about a
year and a half ago, when gold was much less popular.
Today is different. Gold is "hot." But is it "hot" in the way
that, say, Britney Spears in a skin-tight red rubber suit is
"hot?" Or is gold warming up because it's at the centre of
a major shift in investor sentiment about asset allocation
and the need for diversification?
With gold making 16-year highs and the dollar making fresh
lows in euro and yen terms, I'm more inclined to take recent
developments as a sign of a near-term top in the gold price.
In contrarian terms, whenever the crowd is all on the same
side of the trade, the trade is nearly over.
In this scenario, GLD launches ... goes a-googling its way up
briefly ... and then plummets to earth at the rate of 32 feet
per second per second when the lustre of the first buy
That's when we should buy it. And that's when you should go
hunting for gold stocks again -- buying them at a much lower
price. Or you can do what I'm telling my options readers: Sit
tight with your long gold positions, and buy put options on
them for a near-term correction in the gold price.
In the long-term -- but before we're all dead -- I'm still
mega-bullish on gold. But markets rarely move in straight lines.
Just ask anyone who bought crude oil futures over $55 a barrel
And with so much sentiment so universally bullish on gold,
even the staunchest gold bull should keep both feet planted
firmly on the ground.
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