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Some Ugly Talk About Gold
(March 5, 2013) February marked the fifth consecutive month that gold has dropped in price. Gold is now trading about $300 less than its 2011 record high, a full $200 less than where it was five months ago, not to mention $100 less than it was five weeks ago. As of the first week of March, gold prices are already down 6% for the year so far. So, is the gold party over? 

How bad is sentiment about gold? Investor action tells the story: In January, gold ETFs were liquidated to the tune of 110 tonnes, putting back onto the market an amount of gold roughly half as large as what was mined that month worldwide.

From the popular financial press, we learn that many hedge funds and investment ‘big hitters’ have exited gold for more exciting trading opportunities elsewhere. Whenever the trend dies out in a market, like it has with gold lately, ‘hot money’ gets bored and heads for the exits. With the faintly favorable economic news of late pushing stocks to near-record levels, a lot of opportunistic money has been chasing equities as they trend higher.

The steady individual customers for gold today are still out there, convinced on the fundamentals that gold is still the ultimate safe haven, and a good protection against chaos itself. The thought is that gold makes sense in a world in which currencies are created out of thin air, seemingly at whim, without a shred of discipline (or adult supervision) in sight as the printing presses (and whatever device creates electronic money) continue to run day and night in a veritable orgy of monetary profligacy.

One trend which continues is “Buying on the dips,” a strategy used by many a gold investor over the past twelve years. Retail gold bullion volume is up sharply in the past four months, with strong buying of physical bullion on price corrections, such as we have seen lately. This contrasts with early 2012, when central bank buying of gold was the largest support for the market, with quantities of several hundred tonnes going to government vaults, at the same time that many private gold accumulators stood aside and waited.

Our favorite view of gold, one that we repeat often, is that gold is the insurance that you purchase when you’re not exactly sure what it is that you’re insuring against. Today, that insurance simply costs less. The same troy ounce of pure gold that would have cost you $1880 eighteen months ago, now costs less than $1600. Perceptions change, markets change, and good luck to anyone who thinks they have it all figured out in advance. 

Not that it’s hard to find all sorts of opinions out there. And beyond the shallow sound-bites we get from financial TV, there are some more knowledgable people who are taking gold’s year-and-a-half spell of trend-lessness to make the case that the gold bull is done. Their argument is that the eleven-year rally, during which gold prices more than sextupled, ended in the middle of 2011, and is not likely to revive in the next few years.

One of the more readable commentaries along these lines came from Puru Saxena in a March 2nd commentary:

“Looking at precious metals, it is becoming clear to us that both gold and silver put in major tops in 2011 and the onus now lies on the bulls to reverse the downtrend. As you will recall, we sold our positions last spring and since then, our advice has been to avoid this sector. Whichever way you cut it, the reality is that the price action in both gold and silver has been extremely disappointing and despite the ongoing QE-ternity, the selling pressure has overwhelmed the buyers! Look. If you review the price charts objectively, you will note that both gold and silver have formed a series of declining tops and they are currently trading well below the 200-day moving average. Needless to say, such price action is bearish and in our view, there is now a real risk that the prices of both gold and silver will fall below last summer’s lows. If that happens, the secular bull-market will be over and prices will probably drift lower for several years.”

“At present, nobody knows whether last summer’s lows will be breached, but the recent abysmal performance of the mining stocks suggests that next big move may be to the downside. Contrary to the bullish chorus of the ‘gold bugs’, the AMEX Gold Bugs Index has already sliced through last year’s low and it is now trading at levels not seen since 2009. We are sure you will agree that any market trading at a multi-year low cannot be in an uptrend; thus this is not the time to have any exposure to the mining stocks. Yes, central banks are creating additional currency units and yes, monetary inflation is here to stay. Nonetheless, all this is yesterday’s news and by now, ‘stimulus’ has already been discounted by the market. Thus, if you own precious metals and are convinced about your thesis, you should wonder why then, are prices falling?”

“Turning to currencies, the world’s reserve currency is strengthening and the US Dollar Index has now climbed above its November high. By doing so, it has also broken through the 200-day moving average and the trend is up for now. Elsewhere, the charts reveal that the Australian Dollar, British Pound, Canadian Dollar and the Euro are weakening and with the exception of the single currency, the others are now trading below the 200-day moving average. Once again, although it is very difficult to make accurate predictions, it does appear as though the US Dollar is likely to strength over the following months and it is conceivable that we may be in the early stages of a multi-year rally. After all, the US Dollar Index fell by over 40% between 2001 and 2008 and today, most people are convinced that the world’s reserve currency is a lost cause. Thus, bearing in mind the magnitude of the previous downtrend and the lopsided bearish sentiment, the stage may now be set for a big rally in the Federal Reserve’s currency.”

- Puru Saxena (

To be honest, we can’t imagine the massive game-changing event it would take to launch the dollar into a ‘multi-year rally.’ Sure, there’s a chance that other countries might attempt to debase their currencies quicker and deeper than does our own Treasury/Fed, but let’s not bet against the home team. In the global currency ‘race to the bottom,’ we feel confident that our current crowd in Washington has the motivation, drive, and know-how to win that competition. The dollar’s reserve currency status, that ‘exorbitant privilege’ that we Americans have enjoyed for so long, is in the end no more permanent than that of the British pound it replaced a hundred years ago, or the Spanish escudos, Dutch guilders, Austrian coronas, and Roman denarii that came (and went) before. 

In the spirit of fairness, here we present a part of Clive Maund’s pointed rebuttal to gold’s current naysayers, from his commentary of 3/3/13:

“Public opinion and a raft of technical indicators are all at low extremes that continue to indicate that gold is marking out a major low here and set to reverse to the upside before long. So you can safely ignore all the fair weather pundits who are coming out of the woodwork to proclaim gold’s bull market dead, and also the plethora of bearish articles appearing in the mainstream media at Big Money’s behest in order to squeeze the last drop of blood out of the little guy before the next big rally starts.”

To sum up: “You pays your money and you takes your choices.”  If you feel over-exposed to gold in the present climate, then by all means, sell some. Or if you don’t have enough gold to confidently face the future, then buy some more. Like the drug Ambien, precious metals will help you sleep better at night, but the dosage should be adjusted according to your own needs. 


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