The Michael Fuljenz Metals Market Report: August 2011, Week 5 EditionGold pierced $1900 an ounce before falling over $100 an ounce on Wednesday, then recovering on Friday in one of the wildest weeks for gold and stocks this year. The roller-coaster ride continues today, Monday, with another breath-stopping $45 decline on the opening, then a sharp recovery. With the media trying to describe gold at $1900 as a bubble, it's important to remember that gold is still above where it was just two weeks ago ($1729 on August 15). The one-week rise from $1730 to $1900 was too fast, to be sure, but by bouncing back repeatedly and sharply, gold is testing a new, higher support level at $1800.
Last Week In Metals: Gold hit a new all-time high on Monday, then fell; then rose again. Stocks had a similar roller coaster ride. Gold's Wild Roller Coast Ride Last Week Financial journalists have to write something every day about all major markets. The newspaper editors have a "news hole" to fill, and the financial talking heads on TV have 60 seconds of otherwise-dead air to fill with as many words of concern and worry as they can fit into the unforgiving New York minute. As a result, reporters tend to generalize with statements like, "stocks fell today on profit-taking." Journalists tend to say the same things about gold, although their understanding of the gold market is often limited to ETF action. Here is how gold performed each day last week (using the London afternoon price-fixing, to minimize the daily squiggles), along with how The Wall Street Journal reported on the gold market the next morning: On Monday, August 22, gold rose $29 to $1888 and stocks rose slightly (+0.3%). The Wall Street Journal reported the next morning (in "Gold Even Reigns on Stock Market") that "Gold bugs just notched one more victory over the naysayers. SPDR Gold Shares, the giant gold exchange-traded fund, is now the biggest such fund by assets, surpassing the SPDR S&P 500 ETF, which tracks the Standard & Poor's 500-stock index." The gold ETF added $1.2 billion late Monday, to reach $77.9 billion vs. $74.4 billion for the S&P ETF. Bullion futures rose 2% to $1,888.70 in New York, up for the sixth consecutive trading day and 16% in August. "Prices have risen for each of the past 10 years and are up 32.9% in 2011, which would make this year the biggest percentage gain of the long bull market in gold, if the gains hold." On Tuesday, August 23, gold was essentially flat, down $1, while stocks rose 3%. The Wall Street Journal's Commodities author headlined this change as "Gold and Stocks Go Separate Ways." The author, Tatyana Shumsky, said that "Gold and stocks are moving in opposite directions to a degree unseen since 2008." She added: "The 30-day average correlation between gold and stocks has slumped to a three-year low of -0.9" (with -1.0 being the strongest possible negative correlation). She quoted an analyst who concluded that gold's correlation, historically, to the S&P 500 is "near zero...it never really goes strongly one way or another for a long time." (This conclusion is at wide odds with our weekly data since 2000!) On Wednesday, August 24, gold fell off the cliff (down $106), while stocks rose 3%. The Wall Street Journal reported the next morning (in "Gold Sinks 5.6% as Rally Hits Wall") that "Gold's glittering rise came to an abrupt halt on Wednesday as investors piled out of the metal." The article cited no specific negative news, implying that gold was in a bubble, waiting for a chance to collapse. The author compared this decline to the $143.50 plunge on January 22, 1980, marking the end of the last gold bull market. The article belatedly mentioned another 27% margin increase by the CME Group, which operates the Comex gold futures market, as a possible trigger for the huge temporary decline. About 440,000 contracts (the highest this year) traded on Comex, indicating a liquidation of speculators and highly-margined traders. On Thursday, August 25, gold fell another $41 (over 2%) in Europe and stocks fell 2%, showing a pretty close daily correlation. Then, gold rallied late in the day. The Wall Street Journal's coverage ("Gold Snaps Losing Streak") said that "traders viewed the market's steep declines as an opportunity to buy." Whoa! All of a sudden, traders are not trend-followers but contrarians?! This sounds like a Las Vegas gamble between those traders who are "hot" (following a trend) and those who "are due" (contrarians)! Weekend Reflections Often Make more Sense than Watching Daily Swings Over the weekend, the Journal and its sister publication (Barron's) were more thoughtful in their analysis: On Friday, August 26, gold rose $59 (+3.3%) and stocks rose 1.2%. The weekend Wall Street Journal's main article on gold was titled, "Bubbly Gold May Take a Bath," while the Journal's sister publication, Barron's, sported a similar title, "Why Gold May Take a Breather." The Journal's article, by Liam Denning, said that gold's rise is really tame by historical standards. NASDAQ rose over 2,000% in the 1990s, while gold is up "only" 600% in the last decade. The article also says that gold's recent 22% rise happened while the dollar and inflation were flat, so gold is not reacting to a dollar decline or inflation. "Why Gold May Take a Breather" (by Gene Epstein, in Barron's, August 29) is similarly sound-minded, although the headline writer is trying to promote readership by emphasizing the negative. (Gene Epstein spoke at the recent Freedom Fest. He is a friend of gold and a conservative voice for sanity.) Epstein started out by saying that gold's "recent surge to record highs stands as an indictment of the paper money system that helps underwrite the financial and monetary irresponsibility of government, and the need to replace that system with the discipline of sound money - literally, money that actually makes a sound. I support that cause." But Epstein also believes that there has been too much froth in gold's recent rise. Epstein highlights two of the most important logical fallacies stated by those who compare gold to its peak in 1980: (1) January 21, 1980 was a bubble peak for one day. Gold rose from $750 to $850 in one day. Then, it fell from $850 to $710 the next day. The average price in 1980 was just $612. Also: (2) The 1979-80 surge reflected a unique time of double-digit inflation and double-digit unemployment. Nothing like that has been seen in U.S. history. Today, the jobless rate is under 10% and inflation is about 3%. The anti-gold analysts usually choose January 21, 1980 as a comparison point, but that is misleading. As statisticians say, "If you let me set the END points, I can determine where the TREND points." By constantly using January 21, 1980 as their starting point, gold skeptics can say two false and conflicting statements: (1) "stocks have beaten gold in the long run" and (2) adjusted for inflation, gold is still below its 1980 high. The truth: (1) If you use almost any other starting point than 1980, this statement is false: Gold has beaten stocks since 2000 and 2005, as we show here each week, and gold has also beaten stocks since 1970 or 1990. (2) Adjusted for inflation, gold has now, finally, risen above its 1980 full-year high of $612. Inflation-adjusted, $612 in 1980 would be $1680 in today's dollars. So, as many in the press continues to misunderstand or misreport the gold market, it's important to note that the sources they quote usually have another investment to sell when they disparage gold. In most cases, they like to quote stock experts on gold! That's like asking atheists what they think of God, or sports reporters what they think of quilts. Gold in the News In a Bloomberg report this week, former Fed chairman Alan Greenspan said he does not believe gold is in a bubble, even with prices topping $1,900. "Gold, unlike all other commodities, is a currency," he said. "And the major thrust in the demand for gold is not for jewelry. It's not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating." INDIA'S APPETITE FOR GOLD ROARS FOR MORE - Despite record high prices, India's ravenous appetite for gold continued to roar for more in the second quarter. According to a Gold Demand Trends report from the World Gold Council (WGC), India's total demand for gold rose 38% in the second quarter of 2011, consuming 248.3 tonnes of gold versus 180.4 tonnes previously. In value terms, demand rose 70% because of rising gold prices. Jewelry demand rose 17%, while investment demand soared 78%. India was the world's strongest growth market for gold for the quarter. KAZAKHSTAN LOCKING UP DOMESTIC GOLD PRODUCTION - Hot on the heels of Venezuela's nationalization of the gold mining industry, Kazakhstan's central bank plans to lock up all domestic production of refined gold in that country. Why Many Gold Coin Prices Rose While Gold Prices Declined Since the bull markets of the 1970s, I have watched gold coin prices, at some point in time, outperform gold bullion prices. With the exception of a period when many Indian gold coins rose dramatically during 2005 to 2007, that has typically not happened in the 21st century. Of course gold stocks were often bought in hopes of multiplying gold's gains, but that hasn't been the case like in the past, either. In the past few months, however, there has been a relative shortage of many rare gold coins dealers need for customers. The dealers I trade with have noted that they are selling far more gold coins than they are buying the past two weeks. Buying gold coins out of Europe has slowed to a trickle and Europeans are often lined up to buy gold coins, not sell. Dealer's inventories were already reduced, since many banks have reduced loans to dealers by up to 30%, regardless of collateral, after the financial banking crisis of 2008. This has caused many dealers to carry less inventory to meet rising demand, pushing up prices for many rare gold coins. As you may notice, many dealers are buying more ads to take advantage of increased customer interest. This results in increased demand for a decreasing supply. That is the formula for rising gold coin prices. Finally, dealers who make their living scaring collectors into prematurely selling their coins are not as effective in a rising market, especially those who have falsely represented the recently-repealed 1099 provisions of Obama care or the Dodd-Frank issues. Fewer collections are coming onto the market to replenish dealer inventories. This is not the time to sell and especially not to hotel buyers or other traveling buyers who use false scare tactics. When it's time to sell for best prices, seek out a major market-maker, like us, in the coins you own to get the best prices.
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