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Jon Nadler

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Buy The Rumour, Buy The Fact

By Jon Nadler       Printer Friendly Version Bookmark and Share
Oct 6 2009 4:25PM

Good Day from rainy London,

An all-time high of $1044.80 (some $11.00 above the March 2008 highs) in gold prices was recorded in hectic trading in New York today. Polled trading sources cited an amalgam of "rumour-based US dollar weakness" and Australia's surprise hike in interest rates, as the prime catalysts for the now historic spike in prices that followed yesterday's already robust move in values.

At the end of the day, a hefty dose of gold's stupendous intra-day strength and the dollar's major swoon came from nothing but intrigue and innuendo. Swirling rumours that oil-producing nations were, or are, secretly plotting to dump the dollar as a settlement vehicle for oil payments, lit a giant bonfire under the gold trading pits, and almost gave the gold bugs a tangible manifestation of their wildest dream come true: the one involving a coffin and the US dollar. Underscore: almost.

Bloomberg News threw some well-deserved ice on the white-hot bedtime story, and it read something like this:

"Saudi Arabia has not held talks with China and other countries on dropping the dollar as the currency for pricing oil, Saudi Central Bank Governor Muhammad al-Jasser said, denying a report in the U.K.’s Independent newspaper.

The Independent report is “absolutely incorrect? and there has been “absolutely nothing? of that nature discussed between Saudi Arabia, the world’s biggest oil exporter, and other countries, al-Jasser told reporters in Istanbul, where he’s attending an International Monetary Fund summit. The dollar pared losses after his remarks. The London-based newspaper said today that Gulf oil producers and nations including China, Japan, Russia and Brazil had held secret talks on a nine-year plan to phase out the dollar in oil trade, and move toward pricing the fuel in a basket of currencies plus gold. It cited unidentified Gulf officials and unidentified Chinese bankers.

“I don’t give credence to this story,? said Simon Williams, a Dubai-based economist at HSBC Holdings Plc. “Short- term, it’s highly unlikely that oil will not continue to be priced in dollars.? Saudi Arabia, a key U.S. ally, pegs its currency to the U.S. dollar like most other oil-rich Gulf nations, and has resisted calls for a move away from the dollar in oil pricing as the U.S. currency lost value in recent years.

Other countries cited by the Independent as being involved in the secret plan also denied it. Japanese Finance Minister Hirohisa Fujii said at a news conference in Tokyo today that he “doesn’t know anything about it,? when he was asked about the newspaper report. Russia’s Finance Ministry isn’t holding talks on replacing the dollar for oil sales, Interfax news agency reported, citing Deputy Finance Minister Dmitry Pankin. Kuwaiti Oil Minister Sheikh Ahmed Al-Abdullah Al-Sabah told reporters today in Kuwait City that Gulf Arab states have no plans to drop the dollar for oil pricing."

Even the most dollar-pessimistic sources we polled, following this morning's heavily rumour-laden media blitz about the topic do not envision a possible estrangement from the US currency as the price benchmark for oil before 2018 (!) rolls around, if then. So, if anyone thinks that the IMF meeting in Istanbul is but a ruse for euthanizing the greenback, we say - think again.

If anything material ever becomes manifest along these lines, it might be an alternative to settle payments in one's currency of choice, rather than a wholesale replacement -at all of a sudden, next Monday, at 10:05 AM- of the hitherto dominant payment method. Trade the rumour, if you like. Many obviously did. We will stick to reporting the facts -when/if they see the light of day, whatever the tenor and substance of the content may be.

One such factwas actually cited by Bloomberg this morning, it was perfectly tradable, and it read - plain and simple, as follows: "Stocks rose around the world and commodities rallied as Australia unexpectedly increased interest rates, the first Group of 20 nation to do so since the recession began, amid evidence the recovery is gathering momentum." The Aussie dollar thus instantly became a quarter of a point more attractive vis-a-vis the US dollar and garnered traders' "attention".

If this move however is a precursor to the eventual and inevitable round of interest rate hikes in other currencies as well, then it becomes a question of at which point the Fed also pulls the same trigger that the Aussies pulled last night - and, at such a juncture, there may not be as much cheer emanating from the equities and commodities trading pits. In the interim, for so long as the dollar's management team lags behind the rest of the central banks in doing what is needing to be done, the trade to be made will remain obvious. Lest currency market intervention by one bank or another takes precedence.

Some have opined today that Mr. Geithner should have pounded a Khrushchev-like shoe in Istanbul this weekend and driven home the point that there is, in fact, no real, credible currently available alternative to the US dollar, be it for global reserves, or for oil trading settlement. Since the man did not even gesture forcefully when standing at the podium, the door was left open for the type of cheap shot that the currency was subjected to, this Tuesday. Let's call it jawboning in need of steroids.

New York spot precious metals dealings opened Tuesday's session with further gains, building on Monday's rise after the aforementioned Aussie rate increase and as dollar-replacement rumours filled the financial press. Spot gold climbed and additional $9.50 and came to within striking distance of the all-time high it etched into the record books during the March 2008 Bear Stearns crisis. Silver added 36 cents to Monday's closing values, rising to $16.98 per ounce. Platinum gained $15 to $1309 an ounce, while palladium lost $1 to open at $298.00 per troy ounce.

By the afternoon hour, it was clear that the 'warning' we noted in yesterday's GoldEssential daily update regarding the probability of a push to new highs in spot gold, was going to not only materialize, but then some. As of the latest price check (16:00 hrs NY time), the market showed the following net changes on the day: Spot gold - up $23.70 per ounce, quoted at $1,040.90 basis spot bid. Spot silver - up 68 cents on the day, quoted at $17.30 per ounce. Spot platinum - up $21 per ounce, quoted at $1,315.00 bid. Palladium spot - up $7, quoted at $306 per ounce. The 'other side' of the trade showed the US dollar off by 0.39 on the index, trading at 76.31, while oil was up $0.67 at 71.08 per barrel. 

The obvious question that arises now is: Did gold really rise by $24.20 on today's session? In today's case, the answer is mostly: Yes. Somewhat.

As you will note after referring to the following link, only $5.60 of the upward move is actually attributable to being US dollar weakness-based. The remainder or $18.10 of the overall move is to be chalked up to the dominance of buyers versus sellers in the bullion marketplace.

Kitco Metals has devised a new index -the Kitco Gold Index - and you, our readers, were among the very first ones to see it live before it made its debut on our homepage just a few hours ago:

Please take a moment to study the details of how this index was constructed, and how it functions (by hitting F5 on your PC-based keyboard, you can refresh the 24-hour live chart at will). One of the most relevant conclusions that using this index will reveal, is that the 'real' value of gold (taking the USD out of the picture) finds itself very near 794.61 per ounce, and that such a number is far beneath the dollar-based nominal price (at $1,041.40) that everyone obsesses about, on a daily basis, especially on a day such as this one. You can take the index out, up to 1 year, 5 years, or 10 years, in addition to studying the more recent price action. A graphic representation of the 24-hour timeframe is included here:

You may call such a figure (in blue) the 'fair value' or "currency basket-based value" of gold for all intents and purposes. It will also provide for interesting days, when we could well see an increase in the dollar price of gold, but an actual decrease in the 'Kitco Index' value as employed by this new tool.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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.