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Jon Nadler

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The INGredible Takes Place

By Jon Nadler       Printer Friendly Version Bookmark and Share
Oct 27 2009 8:52AM

Good Day,

We can dwell on yesterday's happenings after we take a quick scan of the markets as they stand on this crisp Tuesday morning. Gold, still nervous, and still trading at under the $1040 level (namely, at $1038.00) - trying really to get up off the floor and dust itself off. Silver, down another 10 cents, breaking the $17 level, also still hoping for a recovery, following its worst drop in a month. Platinum and palladium, down a bit more. The former, at $1325, the latter at $327. The dollar, off a tiny fraction, but still orbiting very near the 76-mark on the index. Oil, up a third of a dollar, but not looking very strong.

At the end of the day, it will be concluded that trying to assign yesterday's turn in the markets to one single factor is an exercise in futility. However, if we allow for a combination of developments as having played a parallel role in what took place, we have a realistic chance of coming up with an explanation. That said, the markets (i.e. the players within them) have to yet convince us that this tectonic shift in sentiment is genuine, and that it is sustainable. A correction, this appears to be. Not a very significant one, as yet. If a trend reversal, then we could have locomotives followed by freight trains, coming full speed at various (dollar) shorts as well as (gold) longs in these markets. Now, then:

On the very day when Marc Faber was heard on Bloomberg radio pontificating about the target towards which the world's numeraire currency for trade is headed (zero!) in his opinion of course, something went wrong. Very wrong. Around the midday hour, the Dow transports broke, the S&P broke, the dollar-euro broke, and commodities broke.

If we can find the straw that broke you-know-what in the market haystack, well, that might very well be the announcement by ING to sell its insurance unit, pay back rescue funds, and get back to the business...of banking, as separate from 'other' activities. In so many words, you are witnessing the beginning of the resurrection of the essence of the Glass-Steagall Act.

The dismantling of ING- according to the FT- is one of the toughest interventions yet by Europe’s competition authorities, which waved through state aid to financial groups during the crisis but made clear these would be subject to scrutiny if they later appeared too generous. It is expected that the forced divestments will have repercussions for state-aided banks in Europe and the US as well as in the UK.

If the financial world needed a signal that the way forward will indeed be different, well, it appears to have received it yesterday. On that signal, many a market undertook a one-eighty on Monday.

Whether or not we will find out later if any central bank was out there with a fishing net, scooping up some very soggy dollars, that remains to yet be learned. We actually think the dollar has some more trials and tribulations to overcome near that 75 mark before the all-clear signal sounds. But, the end of the world as we know it, that, will not be. And, yesterday could indeed mark the pivot point from which we go forth.

We also think gold could still make some quick repairs here, especially if the news that Russia is scrapping its planned gold sales for 2009 due to the very news being leaked, is seen as another opportunity to pump up the metal by momentum funds. Guess Russia will just have to surprise the markets when that 'magic' level is once again reached - in its calculations.

At this point, let us can turn it over to others who are in possession of clean magnifying glasses and sharp scalpels, and let them speak for what happened -any may yet happen- from their own unique angles.

We start off with a gold bug. Ned Schmidt. As previously stated, we will not see eye to eye with him on long-range targets, but is take on where things stand right now is well worth your scan:

"October 2009 has developed into a truly glorious month. For the first time in history the average monthly price for US$ Gold will exceed $1,000. Certainly all are celebrating such a wonderful event. Perhaps the most important aspect of this remarkable event is that the purveyors of price suppression and manipulation theories can now turn off the lights in their caves. Reality has crushed their misconceptions. If an $800 bull market is price suppression, give me some more!

The most glorious aspect of this breakout is the spawning of all sorts of fantasy calculations. The move of $Gold to a new high for some reason has revealed until now hidden relationships that justify any number for the future price of $Gold. These till now undiscovered relationships are allowing the creation of forecasts for Gold of more than $5,000, and even some in $6,000 range. Such forecasts can be verified by multiplying the price of $Gold on your birthday by the ratio of the length of your femur to the length of your largest toe."

Over to Elliott Wave, and their diagnosis (complete with the usual abundance of geometry) of the greenback and gold following yesterday's pyrotechnics:

"Let the “fireworks? begin. The initial move up from the bottom should be sharp, as over-leveraged dollar bears, and they are legion, scramble to cover their positions. 

Initial resistance surrounds 77.50, the former “breakdown? level, but if there is strong enough short-covering, prices could vault through this area. The other important aspect to a dollar bottom is the implication to all the other markets that have been moving opposite to this senior currency.

The start of a major dollar rally should roughly coincide with a turn down in stocks, commodities, oil and the precious metals. So there are likely to be important trend reversals across nearly all major markets. The U.S. Dollar Index has no business being near the overnight low of 75.20 again if prices have indeed made a major bottom.

We’re starting to see a little “action? in the precious metals sector. Today’s [Gold] decline to $1037.30 eliminates the fourth-wave triangle pattern in the manner that we were originally counting. The break first of $1046.50, wave (c), then $1042.10, wave (a), increases the odds that gold has topped and started a significant down phase.

In order to confirm this assessment of gold’s new downtrend, prices should come under $1011.30, the previous wave i (circle) high registered on the night of September 30. Any break there will allow us to eliminate the alternate potential, shown on the second 240-minute chart above, which has prices ending wave iv (circle) after tracing out an “(a)-triangle (b)-(c)? pattern.

Based on the pattern development over the past several hours, we are turning near-term bearish gold in anticipation of continued selling pressure. A sell off to below $1011.30 will confirm that Primary wave C (circle) is underway, with the downside target still “below $680.? If prices rise above $1060.47 at any time, it will likely mean that wave v (circle) up to a new recovery high was underway, with a potential target of $1083-$1093."

Next up, a fund guy. Not a gold fund guy. And more math. As well as a bit of statistics. Written before the Monday events. Seen on Bloomberg:

"Gold’s record-setting rally “appears stretched? and investors shouldn’t count on a falling dollar to sustain the surge, according to Brian G. Belski, Oppenheimer & Co.’s chief investment strategist. While gold has risen as the dollar has dropped this year, the link “is being driven by momentum as opposed to traditional investment dynamics,? Belski wrote today in a report. The ties between price moves in the metal and the currency have been relatively weak since 1970, he added.

The CHART OF THE DAY tracks the price of gold for immediate delivery and the Dollar Index, a gauge of the currency’s value against the euro, yen, pound, Swiss franc, Swedish krona and Canadian dollar. Belski calculated that gold and the dollar had a correlation of minus 0.2 in the past four decades. If the two were polar opposites, then the so-called correlation coefficient would approach minus one. It would be one if they moved in lockstep.

Gold did especially well when the dollar was also gaining, the report said. The metal’s price rose at a 41 percent annual rate on average in the first two years after the currency hit bottom. The average gain for the entire period was just 8.8 percent. “A speculative bubble? may be developing, Belski wrote. Consumer demand for gold has tumbled and mine production is little changed, and these trends don’t “appear to support current price levels,? he added."

In the minutes following yesterday's closings, Mark Hulbert chimed in, over at Marketwatch. He watched the market. He wrote:

"The yellow metal's drop Monday was not as big a surprise as it might otherwise have appeared to be. That's because gold timers, after several months of skepticism that formed a wall of worry for gold's bull market to climb, earlier this month decided on balance to jump on the bullish bandwagon. This meant that, from the viewpoint of contrarian analysis, gold no longer had strong sentiment winds blowing in its sails.

Indeed, the October issue of the Hulbert Financial Digest emailed to subscribers on Oct, 15, argued that "at least from a contrarian point of view, the easiest money in gold's rally is now behind us." Ominously, gold timers on average are no less bullish today than they were in mid-October, despite the recent hiccups. The average recommended gold-market exposure among a subset of short-term, gold-timing advisers currently stands at 53.8%, unchanged from where it was on Oct. 15.

That exposure level is right in line with where gold exposure stood on each of the previous occasions over the last two years in which gold's rally failed. All this suggests to contrarians that gold still has some downside work to do before enough skepticism returns to provide a strong sentiment foundation for a resumption of gold's uptrend."

And, finally, the words of a mining company top banana or two. You can almost feel the excitement building. If these are miners, they must be making those Ned Schmidt projections based on arms, legs and toes. Not these ones. Wonder why. Something called fundamentals, as opposed to fund- a -mentals...

Mining Weekly has them opining that:

"The recent gold price spike, which had seen gold trading at above $1 000/oz, was unlikely to be sustainable in the long run, as this had largely been driven by short-term factors, Harmony Gold chairperson Patrice Motsepe said in the group’s 2009 annual report, which was released on Monday. The gold price had reached a record above $1 070/oz in the middle of October.

Harmony CEO Graham Briggs added that the gold price, in rand and in dollar terms, had been on a rollercoaster, with the prices not moving in unison. He told shareholders that the rand strength had seen the rand gold price decline to R231 000/kg in the past five months of the year ended June 30, 2009, down from R320 000/kg before. In the medium- to long term, Harmony is using a gold price of $750/oz and R225 000/kg for planning purposes. Motsepe said he expected the rand’s volatility to continue."

The gents in question still see a chance for gold to be pushed up to $1100 in the near-term, but...

Back to the screens. US data still to come. Volatility still to come. Nerves starting to show.

Until later,

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.