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No Country for Old Strategies

By Jon Nadler       Printer Friendly Version
Aug 15 2008 3:09PM

Good Afternoon,

The only logical way to describe the gold market's story over the past two weeks is to refer to plain numbers. Superlatives have become scarce over the last few hours. At the start of last Friday's session, gold was $100 higher than the lows it hit in the early morning hours today. Two Fridays ago, the metal was quoted at $910 per ounce. This week's sheer massacre in values will represent the largest such decline in 25 years for the yellow metal. If you prefer pictures to words, here is the one-month gold chart for the NY closing prices:



A $31 meltdown in value during the overnight hours brought gold to the $775 level far faster than even the most pessimistic expectations we had seen of late. Once the $800 level was breached on Thursday evening, at 19:40 hours NY time, the metal went into a tailspin the magnitude and viciousness of which was frightening. While gold will make every headline in today's financial press as it undergoes this now nearly vertical slide that puts even its 2006 drop of $200 into the minor leagues, the bigger story unfolded in the silver market where the white metal lost more than 12% of the value it finished at on Thursday afternoon. Words like 'overdone' or 'oversold' began to no longer apply once the metals penetrated the key psychological round figures that lay at $800, $14, $1400 and $300 for gold, silver, platinum, and palladium.

Friday's New York session continued to be dominated by long liquidation and margin calls and was last seen down $22.20 at $783.50 as participants added to the growing pile of bloody towels thrown onto the market's floor since the first of this month. Investment guru Marc Faber was the first important commodity figurehead to now officially call the fact that "Prices have made a peak." Mr. Faber does not yet know if $1033.90 was the final such pinnacle or just an intermediate one, but he concedes that values are likely headed lower. Silver continued much lower, losing $1.38 at $12.76 today. The sharp descent also continued in the PGM complex where platinum shed $117 to $1357 and palladium fell $24 to $281 per ounce.

The prime movers remained the US dollar (which vaulted above 77.25 on the index and knocked the euro to 1.467) and crude oil (leaking value like a crippled tanker down $2.90 per barrel to $112.15) and they precipitated the stampede for the exit door among funds, to the point of crushing any bystanders. We had written months ago that the more than 14% plunge in dollar values we had witnessed over the last year could end up reversing course by as much as one half under certain conditions. The greenback has now gained nearly 6% in just the last month. For another illustration of all of this, just look at the UK pound. It was pounded into the ground following an 11-day losing streak against the dollar - the longest such dip in 37 years (!). Today's improving consumer sentiment numbers and improving NY manufacturing activity and US industrial production (biggest gain in 10 moths) figures only added fuel to the dollar's recent Olympian-strength sprint. The greenback has now risen for five straight weeks on falling oil and on the obvious slowdowns in Europe and Asia. The skies cleared in a big way for consumers and for the economy when oil prices started to show that they are not invincible.

Attribute these moves to whatever causes you like, but do not live in denial. The markets have shifted into a new phase, its participants have voted, and they are telling you that the growth worries have shifted to economies outside the US. Expectations are that (albeit not in a straight line) the dollar will continue higher. Thus, most of what you have heard from the dollar's morticians up to very recently can now be gently discarded and sent to the shredder. The technical breaks on the greenback's charts speak about as eloquently as those on the gold chart above. The dollar doesn't matter? Guess again. Remember the wise words of one Paul van Eeden, who -long ago- defined the situation as "there is no such thing as a gold price." - referring to the only thing that does matter: the value of the US currency.

While you are reassessing your speculative strategies over the weekend, do not forget to ask your friendly bottom-picking newsletter vendor to confirm (once again, for the n th time) that "this time, this really is IT." We doubt they might stick their neck out one more time. It would be good to hear from the Aden sisters as to how they see this market now, as their $819 December gold cross has been shut out for the week by the action during the last 48 hours. Also, let's see when Mr. Hulbert senses capitulation among market timing newsletters. Maybe we can read something along those lines on Monday? In the interim, other sources are revising short and medium term forecasts as fast as they can keep track of the proverbial falling knife. To wit, last night, before the $800 level had yet been breached, a fresh analysis from Goldman painted the following picture:

 " Goldman Sachs slashed its forecast on gold prices on Thursday, citing overvalued bullion and expected strength of the dollar against major currencies. The U.S. brokerage said it lowered its 3-month gold outlook to $745 an ounce from its previous view of $890 an ounce.
"The US dollar has recently begun to show initial signs of strength as the fundamental picture for the dollar has improved substantially in recent weeks," Goldman told clients in a research note. Goldman said that according to its model, gold had overshot its fair value over the past few weeks and the metal is now trading near its price estimate. Goldman also cut its gold forecast to $810 from $905 on a 6-month basis, and to $740 from $810 on a 12-month basis.
The dollar has recently soared against the euro -- which fell below $1.48 to its weakest level since February. Meanwhile, the price of gold has tumbled in the past 30 days. It traded at $812 an ounce on Thursday, sharply below its recent high of $987.75 set on July 15. A higher greenback makes dollar-denominated gold more expensive for investors holding other currencies. Gold is also used as a hedge against the falling U.S. dollar. Last Thursday, UBS investment Bank also cut its one-month gold forecast by 15 percent to $850 an ounce from $1,000 an ounce, citing improving risk appetite, stronger equities and a firmer dollar.
Last November, Goldman told investors to sell gold in 2008 to take advantage of the falling prices as the dollar steadied, and it named the strategy as one of its top 10 tips for this year."

Someone made money on that tip - albeit in fits and starts - since mid-March, and certainly since mid-July.

Remain nimble, remain quick. Summer doldrums, these sure are anything but.


Happy Trading, Pleasant Weekend.



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.