Back on Sept 4th I discussed gold's likelihood of a breakout above 1k. Gold had been going up for apparently no reason as the US dollar was trading more or less flat, jewelry demand was sluggish and gold lease rates were low. I speculated the reason it may be going up was due to other factors that can drive it namely, investment/speculation demand due to fears of a declining dollar. It turns out this was the correct reason. Yes the dollar did drop as well but it only dropped about 4-5% since Sept until now while gold has gone up about 15%.
Gold got a dose of Viagra yesterday when it was revealed that the Indian central bank bought 200 tonnes of the stuff but did you know that they bought the stuff between the dates of Oct 19-30th? Therefore the price of gold got a boner AFTER the fact which makes me question the sustainability of such a move. Yesterday the US dollar was actually up modestly vs. most currencies but yet gold was up huge so this means that it wasn't a US dollar drop that fueled the surge...it seems to me that this is based purely on speculation (and mabey also scrambling short sellers) that India's purchase is a signal that other central banks are going to follow India's lead, namely, China.
Now, I respect the fact that when something makes a new fresh all time high it usually goes on to make more of them...it's usually a powerful signal, but if you look at the reasons behind this latest surge it seems emotionally driven....a blow-off type move prone to failure.
If possible I would like to ask the central bankers of the world who apparently are now showing interest in gold this....where the fuck were you $500-$600 ago? Oh wait a second....you were SELLING your gold reserves! Throughout the 1990's one of the big reasons why the price of gold languished was because of the overhang of central bank SELLING and leasing of gold! It was getting so bad that in 1999 The Central Bank Gold Agreement and Washington Agreement was initiated to limit central bank gold sales. In addition to central bank gold sales many gold producers (Barrick gold in particular) heavily hedged their production which again puts pressure on the price of gold via the futures market.
Barrick by the way is quite hilarious. In September they did an equity financing to unwind their hedge book which they will take massive losses on. Again I ask where the fuck were you clowns $500-600 ago? You would figure that the largest gold company in the world would be experts on gold and thus would have smartly reduced their hedges years ago but no....it took 10 years!..10 friggen years and a 300% rise in the price for them to do so!!! Talk about selling low and buying high!LOL!
You see, even the prestigious heads of the corporate world and central banks are not immune from falling into the same psychological traps that the everyday Joe Six-pack retail investor fall into. In the case of gold, central bankers and hedgers like Barrick fell into the recalability trap - after languishing for 20 years they took an overly cautious approach to the rise in the price of gold this decade (until now) because throughout the 1980's and 1990's gold rallies were short lived and eventually led to lower lows. Therefore, coming into this decade central bankers and hedgers were conditioned to believe that the price of gold could never rise again to its former glory, that it was no longer an important asset class.
Now, 10 years later only after 2 major bear markets, a near collapse in the global financial system and a massive 300% increase in the price of gold in 10 years we are seeing a 180 degree shift in opinion from these jokers. So the question I ask myself is this....should these jokers be faded? Are the actions of Barrick gold and central bankers signaling a long term contrarian sell signal for gold or is there still yet another big leg higher to go since we may still see even more buying from central banks? I'm not really sure right now but I think there's a good chance at this happening.
To give the bullish argument some merit, there's quite a bit of room for central bank gold reserves to climb even higher because they are still a small percentage of their total reserves. But this is a similar argument tech bulls gave in 2000 when they said the internet was only near the beginning of its massive growth potential (they were right by the way but tech stocks still tanked 90 %!)
One thing's for sure is that I'm NOT going to be on board with this latest surge in gold as per the reasons I've mentioned. What I'm also sure about is this....the easy money has been made with gold. Coming into this decade anyone bullish on gold was ridiculed. The same institutional investors who smugly laughed at the gold bulls back then now advocate gold as important must have asset class and to buy it on any dips. I was quite bullish on gold going into 2001 and quite bearish on the markets but I was still a rookie. I sold waaaay too early on the gold stocks I bought...(I shudder every time think about how much I could have made if I had held on for just another year or 2). When gold first started turning heads in the spring of 2001 with a significant rally to about $290 I remember guys like Cramer and Doug Kass bashing the rally with impunity. I remember a fund manager on CNBC saying "gold will not be a good long term investment...you have to trade it". Back then if you said gold was going to $1000 before the end of the decade most people would have laughed at you looked at you as a quack. Now if you say gold is going to $2000 in the next few years you could find a lot of people who would agree with you.
What will it take for the long term trend in gold to turn bearish? It would take the US dollar to regain its status as the world's ultimate reserve currency and that in turn will only come about when the pessimism regarding the long term financial soundness of the US economy and its fall from grace as the world's 1 and only superpower has climaxed. Interest rate differentials and such will have cyclical impacts.
I've been hearing news anchors on TV, including those that are not of the financial media mention the line "the long term trend of the US dollar is down". Remember what I said about the media, especially the non-financial media....by the time they are aware of a trend it's usually in its late stages or has already turned and they just don't realize it yet.
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