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Jon Nadler

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Gotta Take That Sentiment(al) Journey...

By Jon Nadler       Printer Friendly Version Bookmark and Share
Sep 17 2010 9:38AM

Good Morning,

Gold’s sentiment-al journey continued virtually uninterrupted overnight as the ‘another day; must mean another record’ mentality remained manifest among spec funds. In effect it has become rather difficult to discern whether such daily gains (absent any substantive news of the really worrisome kind) are fueling sentiment or whether sentiment is fueling the subsequent gains. Nevertheless, the self-feeding loop sent prices to within $2 of the $1,286 target that some technicians had labeled as part of a ‘flag & pennant’ formation on the charts.

At any rate, the gold market opened the final session of the week with significantly pared gains from the levels attained in the wee hours; spot bullion started off with only a 60 cent gain, quoted at $1,276.10 the ounce. The metal turned negative ($1,274.50 was seen) within the first five minutes of trading as nervousness and book-squaring/profit-taking made an appearance on the volatile scene. A brief firming in the US dollar (back up to 81.28 on the index) and crude oil still under $75 per barrel added to jitters in the complex.

Today’s headlines will most certainly be built on mainly two words: “gold? and “record? – but if gold is that inflation-combating panacea that it is thought to be (a correlation which, amazingly, by the way, stands only at a positive 10% historically) then the real headline to possibly be taken into consideration by latecomers to the gold party ought to be the one that might not make the news marquis this morning: “US Core Inflation Rate Change: ZERO?

Nothing should be discounted as a possibility at this point. Equal, though uncertain, odds that $1,300 or $1,250 could be visited before the weekend might still be factored in here. Rules thought to apply, no longer really do so. Like the one that historically points to India buying gold right around this time of the year. Sources told us overnight that –for a fourth day- locals postponed shopping sorties to local gold outlets as they remained unconvinced about the sustainability of 19,257 rupees (per ten gram) gold price tags.

Silver, which touched a spot offer price of $21.03 overnight also opened with more muted gains this morning. The white metal rose 6 pennies on the open, quoted at $20.86 the ounce. No respite in the speculative fund-fueled rise for platinum; it started the day off with a $17 gain and a quote of $1,624.00 on the bid side (albeit it had seen a $1,637.00 print earlier). Palladium dropped $3 out of the starting gate, and was last bid at $546 (after it made a sortie to fly over the $561 mark early this morning).

Once again, there is enough level-headed and sober perspective on offer amid the euphoria, but, no one appears to be very interested in tuning in just yet. To wit, while in accord that current conditions may justify present values and possibly higher ones in the yellow metal –and for a while longer, at that- Deutsche Bank analysts who spoke to Kitco News’ Debbie Carlson yesterday also offered this bit of caution to investors: “In what it [DB] calls a “mean reversion exercise? gold, along with other commodities, have the most to lose from potential future mean reversion.  If gold’s mean returned to the long-term average real price over the next 10 years, it would lose “a huge real adjusted 7.9% per annum.?

It is precisely this ‘reversion to the mean’ that was alluded to by this writer in the presentation on gold’s fundamentals at the Kitco eConference earlier this week. Lest we all now believe that markets have totally broken loose from such time-tested phenomena, consider…every other asset that has invariably done so. Consider also that when gold was but $252 an ounce, erudite studies, publicized by none other than the World Gold Council, attempted to convince would-be gold investors (a rare species at the time) that ‘reversion to the mean’ – in terms of gold versus equities or vice versa –was inevitable. Indeed, it became reality, just as the overshoot of prices since 2007 has now pushed that equation into a place where the opposite extreme is apparent.

Aside from ‘reversion to the mean,’ one could also consider the valued considerations of veteran market observers such as Ned Schmidt – a gold bull of significantly higher caliber than most (his eventual, final targets have gold possibly touching $1,781 per ounce), whose ‘fair value’ indicator shows bullion at $838.00 (not a misprint missing a zero) and that the ‘downside risk’ traces down to $775-$975. The same ‘downside’ that at least one interlocutor opined should be eradicated from the vocabulary being used to talk about gold, effective immediately.

Mr. Schmidt notes that “Gold is so popular amongst the hedge fund barons that Business Week put this story on the cover. Admittedly, hedge fund barons have more money than this author. That acknowledged, their record of pursuing manias has produced some real turkeys. They got on the covers of magazines with technology stocks in 1999, and in 2007 they were featured for their ‘astute management’ of mortgage debt.?

Mr. Schmidt also noted that –during a week when Mr. Soros rang a second alarm bell for gold bubbles, THE BUBBLE had been in doubt, but the price action of past week seems to confirm gold is in one. Gold moved up more than $30 in about one day. That push came largely during the hours of trading for U.S. futures. Price action was largely fueled by speculative funds buying on margin. Use of margin, and other debt, is what transform a mania into a bubble.?

Bubble, or no bubble, the optimism among bulls –according to Marketwatch’s Mark Hulbert- is hovering at levels higher than recorded average readings over the past 36 months. If gold does go higher, notes Mr. Hulbert, “the rally will have to be built on a foundation other than [just] sentiment.? Like, say, some real supply/demand fundamentals of import?  

ABN Amro analysts note (but will anyone take note?) that “some bearish sentiment is beginning to creep in. The London daily pm fix gold price averaged $1,194/oz in Q2 2010, while the average gold production cash cost was about $560/oz, resulting in a margin of over $600/oz. And since the start of 2008 gold has outperformed other major asset classes, appreciating by 49%, while equity markets and some other key commodities, notably oil, remain in negative territory over the same period. For the price to rally much further then the market may well require a large shock.?  Quick: name the ‘shock’ upon which this week’s price gains were achieved. “Funds shock? is more like it.

Closing out the week, here is a buried bit of news of potentially more import (in more ways than financial) than most of the spectacular headlines. Bloomberg reports that “China, the world’s worst polluter, needs to spend at least 2 percent of its GDP per year -- 680 billion yuan at 2009 figures -- to clean up 30 years of industrial waste.?   Others, put the required cleanup expenditure range at closer to 4 percent of Chinese GDP.

Back in 2006 at least one environmental accident took place every other day (!) in the country. Ten thousand (!) new vehicles are added to Beijing’s traffic every week. Staggering economic growth? At what price? Do not –for a minute- think that such a developing mess will not affect other parts of the world. The Chinese ‘miracle’ could become the global ‘nightmare’ quite easily. Here is a case where ‘reversion to the mean’ is not only less than desirable, but also less than adequate. And, alas, unlikely to actually take place.

Have a pleasant weekend.

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.