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Shiny Bubbles

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 13 2009 4:38PM

Good Afternoon,

Gold prices recaptured the $885 level on Monday, as the trade returned from various egg hunts in search of the one golden one they most care about. Efforts to push gold past $900 met with sufficient resistance to avert them for today, albeit the background conditions that saw a significant drop in the dollar (off 1.12 on the index, at 84.63) and a crude oil price that held above $50 made for a bit more emboldened buyers than those who emerged last week.

Two of the arguments we do not buy for gold's behaviour today, are the GM bankruptcy and the financial sector jitters. First, the news of General Motors' imminent filing for bankruptcy appears to be baked into this month's market cake. Gone Motors by June 1. Not many are going to worry about the overall state of the US economy on the GM news - especially since it's been floating around at least since the beginning of the year.

As for the banking sector, if we read the news correctly, it appears that investors are actually expecting financial firms to perform quite well when their earnings are revealed later this week. Financials actually turned the Dow around today -what with a 25% pop in Citigroup stock and all. If anything, the financial sector news dampened gold's morning spirits and erased about $10 from earlier gains.

New York spot gold dealings rolled into the afternoon hours with a $13 gain, quoted at $892.00 per ounce. Silver showed a 37-cent gain at $12.70 per ounce. The real action today was in the pgm group metals pits, where speculative fund buyers set the platinum market ablaze this morning. The metal surged by $52 to $1238 on...last week's news? Yep. Reports of strong car sales in China and buoyant global stock markets were last week's news. Palladium followed suit, but managed only a $6 gain to $238 per ounce. That the latest pop in the noble metals is bearing some unmistakable spec fund fingerprints is hardly in debate. That such pops do not end well, normally, is another obvious piece of non-debatable news.

The Japanese yen fell to a six-month low against the US dollar and analysts are interpreting the drop primarily to a palpable easing in the global crisis. Japan, however, along with the ECB, are is studying unorthodox measures to get the domestic economic ball unstuck and rolling. Over in India, gold buyers quickly turned apathetic when bullion prices rebounded from recent lows. In effect, the locals are telling us that they will be once again interested when prices get down to the $845 area. Keep in mind that two weeks from tomorrow, the most auspicious date to load up on bullion rolls around on the Indian calendar. Thereafter, there is little on the horizon to offer from the gold offtake camp.

At any rate, India's absence from the gold market table may not be the factor du jour in this post-G20 environment. Bloomberg reports that "Investor Jim Rogers said he prefers oil over gold as he believes the International Monetary Fund will sell its reserves following the recent rally in the precious metal. “The IMF is trying to sell its gold,? Rogers, chairman of Singapore-based Rogers Holdings, said in an interview with Bloomberg Television. “The IMF is one of the largest holders of gold so you’ve got this huge supply overhang. Whether they sell it or not, the world is expecting them to sell it.?  Mr. Rogers correctly seized on the psychological impact of the recent spate of official sector gold mobilization talk. Its not the tonnage (as yet); it's the intent to use the tonnage at all, that has some analysts scaling back on gold price projections made during the ultra-gloomy first quarter of this year.

Something else that has some observers worried about becoming a spherical latex object, is gold itself. India's Business Standard finds that:

"A couple of reports in the American press revealed that more individuals are selling their broken and unwanted gold jewellery as the yellow metal’s price soared, while the recession blues refuse to go away. Back home, we have had a number of queries from investors considering whether or not to invest in gold via exchange-traded funds (ETFs).

Such queries are not surprising at a time when gold is selling near $900/ounce (six years ago it sold for around $325/ounce). Not to mention the leap to over $1,000 an ounce in February. But it is not as if investors are minutely tracking the gold price. It is the presence of Gold ETFs and gold stock funds that makes them all the more aware of the performance of gold.

As on April 2, 2009, Gold ETFs delivered a one-year return of 27.01 per cent as against the diversified equity fund category return of -36.76 per cent. Currently, gold ETFs lie at the top of the heap on just about every performance table other than 1-month: 3-month, 6-month and 1-year. So even if one does not track the precious metal, just looking at the performance of these funds gives you a clear indication of the price. The failure of gold ETFs in the 1-month returns was due to the recent correction of 7.16 per cent (Mar 20, 2009 – Apr 6, 2009).

But still the allure of gold has never been more tempting as in today’s volatile markets. The more important issue isn’t whether an investor should consider investing in gold, but rather the logic behind doing so. Gold has been historically viewed as a safe haven. But that bit of wisdom does not seem to hold ground anymore. Thanks to Gold ETFs, the metal is now more of a paper asset whose value is increasingly driven by the demand and supply of paper gold on financial markets.

Consider this: In March 2009, NASDAQ Dubai launched the region’s first Sharia-compliant tradable security backed by gold. Named Dubai Gold, it is the first ETF to list on NASDAQ Dubai. Meanwhile, reports state that in the first six weeks of the year, the buying by gold chasers drove more than 200 tons of gold bullion into SPDR Gold Shares, the world’s largest gold-backed ETF representing more than 1,000 tons of gold.

Gold ETFs have driven up investment demand because of the ease with which individuals may invest in the commodity. As a result, gold is now clearly subject to the same volatility as other financial assets, as investors’ interest flows in and out. Moreover, gold certainly did not appear to be a great hedge against falling stock prices. Remember, when the global financial panic was at its peak in October 2008, gold prices were at their recent lows. International gold prices peaked in March 2008 and, from then till the end of October, gold fell by about 25 per cent.

Gold is no longer physical wealth but a paper asset whose value can fluctuate widely. No doubt, gold does have its value as a hedge against the dollar and a great option in a worldwide monetary collapse, but it does appear to a lot of market watchers that the price is currently overvalued. We could well be in a gold bubble, which is just as ephemeral as the stock or oil or real estate bubbles were. Waking up to gold one of these days could be like waking up to stocks or real estate in 2007.

But for every cautious or cynical observer, there are plenty of optimists making predictions of the highs that gold could reach. U.S-based Swiss America Trading Corporation came out with an editorial piece in March which listed 70 economists who, on an average, predict that gold is poised for a dramatic surge and could touch $2,000 an ounce. The justifications varied, the most common being gold as a hedge against anticipated inflation and gold being globally liquid which is of paramount importance with the debasing of currencies in developed economies.

But as a coin dealer in the US was quoted as saying: “If someone says he knows whether it’s a good or bad time to buy gold – run away. Because if he knew that answer, he wouldn’t be working for a living.?

Run away, indeed. Anyone with an inventory of anything (be that unsold numismatics, or unsold bullish market 'research') comes under that category/stigma, under which realtors fell a couple of years ago. A suspect one, at best.

And, note our motto, which goes: "If you are buying gold for the right reasons, then there is no such thing as the wrong time and/or price. All that matters is that you have the proper percentage of it present in your long-term portfolio." Whether or not a bubble develops and/or pops, your sleep patterns will not be disturbed by gold's daily and weekly gyrations. Last time you checked, did you find that you had bought your life insurance policy with the intent to cash in on it really soon?

Meanwhile, look for fresh tries to get bullion back into the $900-$920 range while Indian would-be buyers become sellers instead, once more. Certainly makes for fresh editorial ammo. On the other side of this mini-mountain, look for slippage under $885 and at tilt towards lower value ranges if the momentum trade vanishes from the scene.

Hilarious items in the forum and hard money urban legend camp grapevine, once again: 1) Short-term gold lease rated are negative because the government wants prices to remain suppressed. Because, you know, the US government has nothing better to do. Of course, the fact that real-world user of gold have no customers wanting to buy their product, and that the banks that have the gold (and a glut of it , at that) are looking at storage and insurance costs on same costing them real money - well, those little details have absolutely nothing with the situation. Hey, it's a lot more exciting and romantic to talk about gold in the context of a 007-style plot full of intrigue and secret phone calls. Of course, try to debunk such drivel and you are instantly lumped in the 'against us' camp.

Outrage du jour: Somali pirates ask for apologies (!!!) after the death of some of their 'colleagues' and vow 'revenge' in the wake of US and French rescue operations. Because, you know, we are supposed to leave them alone to extort money potentially from every passing ship off their coastline. This is the world as it stands today - upside down in some respects. At least as far as that of some imbecilic Somali drug lords calling themselves 'pirates' goes. Blackbeard must be spinning in his grave. Now there was a proper pirate. One without commission from a sovereign nation.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
Direct: 1 (514) 875-4820 ext. 1360
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