Gold Stocks Could Be Ready For A Bouce: Steve Sjuggerud

After pointing out that gold stocks have underperformed gold itself, Dr. Steve Sjuggerud bases his bullish forecast on the Gold Miners Bullish Percent Index (BPGDM) oscillator. Although it's still falling, and is not yet in oversold territory, it's approaching levels at which both it and the Market Vectors Gold Miners ETF have bounced upwards.

Here's the graph:



In Dr. Sjuggerud's article, this graph correlates the BPGDM with the ETF itself:



He concludes that it would be wise to stock up on cash so as to take advantage of the opportunity.


If so, then the oscillator itself has better be kept an eye on so as to determine a good selling point unless it's being used as just a timing device for a long-term investor's entry point. In the latter case, the fundamental values of the underlying companies should be used as the basis of whether or not to invest at all. Although the gold-mining sector has a P/E lower than that of the general market, what matters for cyclicals is where earnings are going to go. A gold mania would be the best earnings-booster - while it lasts - because gold, and revenues, would handily outpace costs.

Gold In A 4000-Year Bubble?

In the last of a series on gold on National Public Radio's "Money Planet" blog, Jacob Goldstein and David Kestenbaum ask if gold is in a bubble. For their answer, they refer to economic experiments done with simple virtual stocks. One experiment featured a stock that paid out a one (virtual) dollar dividend at the end of each round, and expired worthless at the end of ten rounds. Despite the simplicity of calculating the fundamental value, it still traded above that value at times and even went into a bubble. When that fact was pointed out to the student participants, the stock went up even more! As virtual stock-marker experiments show, bubbles are frequent.

One explanation for bubbles is the greater fool theory. People figure they can sell the stock to some greater fool, who will pay more for it.

Another thing that can cause bubbles: People don't always have great information about what's going on. So they just follow the crowd.

And once bubbles start, it can be hard to put the brakes on. If you think home prices are going up, you can buy a house, or two houses. But it's hard for the average investor to bet the other way — that home prices are going to fall.

So for all these reasons, we see bubbles and crashes, in the lab and in the real world. The people in Williams' experiments sometimes buy stock for more than it could ever pay out. This gives us a definition of a bubble: When the price of something rises way above its fundamental value.

That definition, though leaves one in somewhat of a quandary when it's applied to gold. Since there's no way to calculate gold's fundamental value, it's conservative in the accountant's sense to assume that gold has none because it pays no interest and dividends. Thus, a conservative accountant would have to conclude that gold has been in a bubble for at least four thousand years.


Clearly, this line of reasoning is a reductio ad absurdum. The definition of "value" is clearly too narrow, as can be seen when it's applied to any valuable that doesn't generate a return or stream of services. Yes, this includes money: it too pays no interest or dividends. The same criterion used by narrow-minded stock jocks to claim that gold has "no intrinsic value" can be used to claim that any money, fiat or no, is worthless. Exactly the same line of reasoning: just substitute any currency for gold and run through to the answer.

Tracking The Cost Of Living Through...The Gold/Chocolate Ratio

Yes, the gold-chocolate ratio: more specifically, the number of Hershey bars one hundredth of an ounce of gold will buy. Richard Bloch has done it over at Seeking Alpha, and the ratio shows that gold's value has increased quite a bit in terms of chocolate bars recently.

Since Hershey's adjusted the weight of its bars over time, Bloch also graphs the number of avoirdupois ounces-equivalent 1/100 troy oz. of gold can buy:



He also does the same thing with pounds of Corn Flakes per 1/100 oz. of gold. That ratio hasn't hit the same extremes lately.

Mark Hulbert: Gold's Inverse Tie To Greenback Less Strong Than Assumed

Lately, the greenback's gyrations have influenced gold more than usually. It's tempting, I know, to assume a rigid negative correlation between the greenback and gold because movements in the former have touched off inverse movements in the latter. However strong the relationship appears in the qualitiative sense, Mark Hulbert's number crunching found that it's not all that strong in the quantitative sense.

I fed into my PC’s statistical package five years’ worth of data for gold bullion and the Dow Jones FXCM Dollar Index (which represents the dollar’s value against a basket of the currencies of the U.S.’ largest trading partners). I was specifically interested in the extent to which changes in the dollar’s value led to changes in gold’s price.

As expected, I found an inverse correlation: Increases in the dollar’s value tended to correspond to decreases in gold’s U.S. dollar price, and vice versa. Crucially, however, I found that the ups and downs of the dollar were only able to explain about a quarter of gold’s gyrations.

(For the statistically minded among you: The r-squared for the correlation was never higher than 0.26, regardless of whether I focused on daily, weekly or monthly changes in the dollar index and gold.)

His finding makes sense, as the data he used included spaces when the U.S. dollar and gold were going up and down in tandem. The Eurocrisis stimulated demand for both safe havens.

Hulbert's results are presented as a soother for worried gold bugs fearing that the metal will plummet if the greenback snaps back. It's a nice gesture, but the negative correlation (qualitiatively) has gone up recently. Sad to say, a snapback in the greenback will hurt gold.

Morningstar Still With The Gold Skeptics

Morningstar, a top-notch equity research firm that's been trying to apply its ususal tools to gold, is back with an analysis backing up their firm contention that gold will decline in the long run. The four reasons given provide a useful tip that shows how Monringstar's analysts think:

So what drove [the] massive increase in gold prices during the last decade? We believe four major factors have been largely responsible for the recent surge in gold prices:

1) The inception and proliferation of gold-backed, exchange-traded funds (ETFs).

2) Growing retail demand from emerging markets, particularly from China and India.

3) Central banks switching from being net sellers to net buyers of gold.

4) Miners scrambling to eliminate their gold hedge books.

While we think that some of these factors could continue to provide a tailwind for gold prices, we believe many of the factors cited above are unsustainable over the long run, thereby lending support to our lower long-run gold price forecast (compared to high current prices).

Granted that these factors have been partly responsible for gold's ten-year bull market, especially #2, but note what that list of four has left out. There's nothing about demand stimulated by rising inflation [remember 2007?] or fiscal crises. There's nothing about using gold as a long-term hedge against fiscal irresponsibility. There isn't even the mainstream-friendly factor of gold's newfound popularity as portfolio insurance. They did hit the spot with respect to #2, but the others do little more than scratch the surface. As for #4, the timing of at least one of those de-hedgers (Barrick) was embarrasingly maladroit. They did so right at the top of the late '09 run, after which there were a lot of skeptics crowing about the end of the purported gold bubble. Gold did face a correction that eventually drove it down from Dec. 2nd's $1,225 to $1,045 at the Feb 4th '10 bottom, but we now know that the exploded-bubble thesis has been definitively disproved.

Yes, what Morningstar considers to be primal tailwinds does reveal their circle of competence. With respect to gold, they seem to be wandering out of it. Even the scholar-validated driver, of low or negative real interest rates pushing gold up, gets only a passing mention in the midst of explaining why gold oughta go down.

Survey Finds Majority Of 130 Canadian Advisors Bullish On Gold

An Investment Executive survey found an increasing percentage of Canadian advisors are bullish on gold: of the more than 130 sampled, a majority view the metal's prospects favourably.

Despite the huge run-up in gold prices in recent months, advisors aren’t convinced that the rally has ended. The percentage of advisors bullish on gold jumped to 53% from 35% in the first quarter, and 51% said they’re bullish on gold stocks, up from 38% in Q1.

“After one quarter of doubt, it appears advisors once again see value in investing in precious metals,” said Howard Atkinson, president of BetaPro. “Bullish sentiment on both gold and silver was very strong in the Q2 Survey.”

Last quarter saw increasing skepticism about gold. This quarter, more advisors are becoming leery of crude oil. Japan's woes and the demand reduction that will be called forth by higher oil prices, which will impact economic growth, were the main reasons for the skepticism.

Attempt To Deduce Gold's Intrinsic Value Through Valuing CPI In Gold

John Tobey's method follows from gold being money. In his analysis, he has a graph of the CPI basket as measured in ounces of gold:



As the graph shows, the average is 1.75 ounces of gold. When it's above the average, gold is undervalued and a buy. The most undervalued period was just before the London Gold Pool gave up on controlling the price of gold in 1968: gold was then $35. The subsequent eleven years saw a rip-roaring bull market. Gold wasn't as undervalued in 2001, but it was about half of where it should be given the CPI basket. That undervaluation preceded and gave fuel to the current bull market.

The graph also shows that gold at $1,450 is about as overvalued in his terms as it was at the peak of the 1970s bull market. Thus, he concludes that gold is a high-risk buy. Had the metal been at its average, it would be selling for $571.


Of course, there are two objections to this analysis. First of all, inflation is global and so is gold demand. As Third World nations with traditions of holding gold become rich, like India and China have, then his metric becomes less accurate. Secondly, the current CPI may well be understated, as John Williams of Shadowstats has been showing. His calculations of the CPI using the same methodology used in the 1970s shows the last decade as experiencing '70s-level inflation.

GFMS Chairman Says Gold Drivers Still In Place

As summarized at Mineweb, the chairman of GFMS, Paul Walker, believes that the same long-term drivers that have pushed gold up in the last ten years are still in place.

"There is a backdrop here of ultra-low interest rates, macro-economic dislocation, fears of global imbalances - the wrath of these things still remain solidly in place and that's really the bedrock of the gold bull rally... the essential underlying glue that holds this whole story together in my view, is ultra-low interest rates, negative real interest rates, growing imbalances across a range of asset classes. And, as a result gold has benefitted."

" We've always said gold is the canary in the coal mine here that's signalled that something is not quite right and trust me, the macro-economic situation is still not quite right," he says....

GFMS' interest-rate forecast calls for ultralow interest rates in the developed world to continue through next year. They won't stop until the bond vigilantes come out of hiberation, which the firm does not expect to happen anytime soon. Demand from mainland China and India should continue to push gold price up.

However, the metal is highly dependent upon investment inflows. Should those flows choke off, then gold will undergo a sustained tumble. Walker doesn't see that happening anytime soon, though; GFMS is confident that gold will reach $1,500 sometime this year and perhaps sooner.

Jordan Roy-Byrne Explains Why Gold, Gold Shares Are Consolidating

In a Daily Markets article, Jordan Roy-Byrne given his take on why gold and gold stocks (as represented by ETFs) have been consolidating over the last five months. Gold's been held back by the strong performance of U.S. equities, which have taken capital away from gold demand. Also, silver has recently drained off demand for gold with its strong performance.

As for the gold shares, they are hampered by the more modest rise in gold in Canadian dollars. Since many gold miners are Canadian, they tend to book revenue in C$ terms. For Canadian mines, they have to spend Canadian dollars. (The same hampering applies also to Australian companies and the A$.) Currency effects, plus the higher cost of oil and petroleum products, have held down profits. Miners are squeezed by higher oil prices because about 25% of their operating costs are for petroleum products.


That currency effect is a good catch, even if many Canadian companies listed on senior American exchanges do report in US$. Mine costs have to be paid in the local currency.

Guide To Finding Junior Gold (And Oil) Companies

"The Patient Investor" has spent some time investing in junior resource stocks. He's been involved with VSE-listed stocks as far back as the 1980s, when the Venture was still the Vancouver Stock Exchange. And, he's written a guide explaining what he looks for in a junior. Included is his procedure for finding American quotes for Canadain-listed stocks. Of note is the fact that he uses management presentations not for selection, but for elimination.

As for golds, he uses these criteria:

What do I look for in companies? I want multiple projects with large land areas, a high amount of resource, experienced management, low number of shares, and in a good location.

For gold mining companies with open pit heap leaching projects, I want at least a million ounces of gold reserves and production of 75,000 ounces of gold a year. In third world countries I want at least 50 million tons of ore at .8 grams of gold a ton. In the US or Canada, I want 50 million tons of ore at 1.2 grams of gold a ton. For underground mines with a milling operation, I want at least 1.5 million ounces of gold reserves and production of 100,000 ounces of gold a year. I want at least 20 million tons of ore at 6 grams per ton in third world countries. In the US or Canada, I want 20 million tons of ore at 8 grams a ton. If a US or Canadian company produces much more gold a year and has much larger reserves, I will look at a little lower grams per ton.

The reason for wanting higher grade ore in the US and Canada is higher labor and operating costs. Also, if the company is producing other metals as part of its operations, then a lower grade of gold ore can still be very profitable. The reason I want more production in an underground mine and milling operation is it usually costs much more to produce an once of gold than in an open pit heap leach mine. I usually try to invest in these companies once they have raised money to bring a mine into production or after the scoping/feasibility report is finished.

That point is where a patient investor would step in. Often, exploration stocks on the verge of production drift listlessly for what seems to be a very long time. From what I've seen, the rewards for this strategy are greatest at about the time a good or very good feasibility study is released. Of course, the risks are greatest at that point - and that's because the big barrier is still acquiring capital for the project. Companies that don't secure capital have a tendency to drop to near-zero if they're indebted. If not, they still sink and go dormant indefinitely.

Should they get financing or taken over, on the other hand, then they climb and sometimes shoot up.

One exception to this rule are hot companies whose flagship projects contain huge deposits. They tend to be shoot up long before the feasibility study, in part of hopes of a takeover by a major. One more wrinkle: a company with a hot strike tends to leap up beyond the price that later economics justify.

The best entry point for risk-takers is before the feasibility study if the stock has been listless for a long time. A good sign for those less adventurous is a jump in the stock price once the feasibility study is released.

Still, there's the capital barrier to remember.


An example of an advanced-stage exploration company with a good preliminary economic assessment, which is two steps away from a feasibility study, is Majestic Gold Corp. I've profiled it here. Unfortunately, Majestic does not qualify on the low-shares criterion but the projected economics of its project are fairly good.

Report Says Rise In Jewelry Demand Last Year Likely Anomalous

The World Gold Council reported last year that jewelry demand rose in tonnage terms despite gold rising nearly 30% in the same timeframe. But, a Reuters analysis says that the rise is likely to be replaced by a more-usual decline in tonnage terms as prices keep going up.

"Higher prices tend to mean less jewelry demand," said Mitsubishi precious metals analyst Matthew Turner. "People buy less because the price has gone up, and they tend to sell more back as scrap. There is a double effect."

One market is expected to be an exception -- China. Last year China's jewelry demand rose by 14 percent, a healthy gain that was still outstripped by Chinese buying of investment products such as bars, which leapt 88 percent.

Philip Klapwijk, chairman of metals consultancy GFMS, said the jewelry chiefly being bought in China is top-quality 24-carat merchandise, much more than 18-carat.

That suggests the driver may be investment rather than the traditional use of jewelry as adornment....

There is anecdotal evidence that Chinese demand counted as jewelry is de facto investment, jewelry being bought because of shortages of gold bars. In developed economies, high gold prices have pushed down jewelry demand by double digits. Indian jewelry demand picked up the slack last year, but that demand is volatile from year to year. Over the longer term, jewelry has dropped from 75% of total demand (in 2004) to about 50% (2009.)


What's evident from the report is one category leaking into the other. Some jewelry demand is for investment, and I believe this holds true for India as well as China. On this basis, investment demand may have rose in tonnage terms for 2010.

No matter how it's sliced, the increase in overall gold demand outpaced the supply increase last year. Given gold's rise, that result certainly counts as unusual. Whether it's anomalous will have to wait for the 2011 report.

Mark Hulbert's Contrarian Analysis Says Run Is Solid

Gold's run close to $100's worth since its Jan. 27th low. In his latest Marketwatch column, Mark Hulbert says the run-up has been accompanied by an unusual amount of skepticism.

In early December, for example, when gold hit what so far has been its all-time high, bullish sentiment was nevertheless much lower than it had been on several other occasions over the previous several years. And over the subsequent six weeks, during bullion’s $100 correction, what bullish sentiment that had existed rapidly evaporated.

On both counts, contrarians could detect little of the enthusiasm and outright exuberance that signals an imminent major decline.

And, sure enough, gold’s correction turned out to be quite modest, and bullion is now back to within shouting distance of its early December high....

The $64,000 question now, of course, is whether gold’s rally will soon take the yellow metal into new high territory. Contrarians are betting that it will.

That’s because the mood among gold timers remains quite restrained. The HGNSI currently stands at 45.3%, just half of its all-time high of 89.6%. In other words, despite gold being only a few dollars shy of its all-time high, the average gold timer is still allocating more than half of his gold portfolio to cash.

He adds a caution that the skepticism doesn't guarantee a challenge of the current record high, but he does specify that skepticism means untapped reservoirs of bullishness.


I think I know why the gold timers have been so cautious right now. After a big run, gold normally waits several months before continuing again. Any run like the current one is going to be discounted because a consolidation phase implies it's not going to go very far before tailing back. Timers just don't see potential for a really big gain right now.

As for skepticism back in the fall, it's likely due to timers watching ETF figures and not seeing record holdings as the metal advanced. They evidently underestimated physical (and, in India at least, jewelry) demand taking up enough to keep the rally going.

Why Is The Mainland Chinese Government Encouraging Citizens To Buy Gold?

In a two-part series that begins here and ends here, Stuart Burns tackles the question. At first, he wonders if the PRC is trying to make the renminbi a gold-backed currency, which he then dismisses. It would take too much gold, and a 1978 amendment to the IMF says member countries are not allowed to peg their currencies to the metal. He then discusses the possibility that the government seeks to get out of U.S. Treasuries, which he considers controversial. Then, he supplies his answer: gold buying is being encouraged as a sink for excess liquidity.

Encouraging citizens to buy cars, white goods and electronics is good for industry, but the rate of growth has been so rapid – aided and abetted, one should add, by the stimulus measures introduced by Beijing in the aftermath of the financial crisis and has since largely wound down – that it has brought price inflation with it. Raising interest rates and bank reserve requirements has the desired effect of slowing demand, but at the additional cost of raising costs for industry. Giving the population something else to speculate on apart from property prices could be the intent. Nor can we see how encouraging the public to buy gold furthers the aims of a currency reserve standard — India has been the largest importer of gold for many years, most of it bought by the general public, yet the rupee is a long way from the front runners as the next reserve currency.

He concludes by saying this policy is likely to continue for years to come.


Another reason, which he doesn't mention, is the PRC rulership going with the flow of tradition. Holding physical gold as a means of storing wealth is a long-standing practice in China, although silver has been more of a mainstay. Since this tradition ties in with wealth, and has no political implications at all, it's a safe one for the rulership to encourage.

Gold: Not Quite A Regular Commodity

To some, the point Robert Blumen makes may be obvious - but many gold analysts seem to be unaware of it. Gold is often treated as if it were a regular commodity, but it has one crucial differentium from the real thing: commodites are consumed, while gold hardly is. Although jewelry can be seen as consumption, the gold isn't destroyed as part of the fabrication. Normal commodities are destroyed as they're used.

As Blumen himself explains in an interview with Jay Taylor:

[T]here are two ways of looking, or there are two different kinds of markets, there is commodities and there are assets. I'm going to define these in an idealized way, nothing really is perfect. But for the purpose of discussion, a commodity is something where there are no accumulated stockpiles of it.

So in the case of a commodity whatever gets produced also gets sold, it gets purchased and it gets consumed. And by consumed I mean it's destroyed. It's transformed into a form where it is taken off the market permanently.

An example of that would be gasoline or any agriculture, something you eat. You buy it and you destroy it. So for a commodity the supply and the demand have to be very tightly balanced and if one of them changes the other one has to change. And the way that is accomplished in a market economy is through price. You would have more supply the price has to go down.

The other type of market is what I am going to call an Asset Market. And let's say for the moment an asset market in an idealized way is the market in which there is a certain stockpile of the asset, which doesn't change. And in asset market, you can't really look at quantity supplied and quantity demanded, because the quantity is the same. In asset market, the quantity of the existing stockpiles is traded around among different people. So gold is an asset.

Now the gold supply does grow a little bit each year, it's between 1% or 2%, but the market is dominated by trade among the existing stockpiles of gold, and that's how the price is formed.

Blumen goes on by explaining that an increase in supply doesn't matter all that much to the gold price if added demand is there to absorb it. (By corollary, a shrink in production doesn't matter all that much if demand to hold is dropping.) This follows from the fact that a large majority of the potential supply is gold already dug up from the ground.

As an asset, gold's main use is to protect against fiat debasement. When that debasement is increasing, gold tends to go up. In times when the debasement is letting off, gold tends to decline. Increases in fiat currency ultimately trump increases in supply.


He also says there's no hard-and-fast way to value gold. Some like to use the U.S. money supply, but such analyses essentially discount a future gold standard. That may well come, but "eventually" is quite different from "imminent." The metric that the new goldbugs have settled on is real interest rates. Below-average, particularly below zero, real interest rates melt away the opportunity cost of holding gold.

PRC Rate Hikes May Not Be That Bad For Gold

Over at Seeking Alpha, "Hyperinflation" points out that the rate hikes by the People's Bank of China may not be all that bad. The reason he gives, is the need to maintain the renminbi-greenback peg. If the PBoC tightens too much, the Chinese currency will be forced up; that, the PRC doesn't really want.

Even if the peg is broken in a serious way, the result would be pressure on U.S. prices. Instead of exporting inflation, the U.S. would have to face it:

Given the massive increase in the real money supply (that which is immediately available for use in exchange), we have already created an inordinate amount of inflation which has in part been masked by artificially low input costs, as the Chinese have taken inflationary pressures off our hands by accepting a reduction in the purchasing power of the yuan.

So should the yuan begin to de-peg to a meaningful degree, we would see a sharp spike in input costs which would be passed along to the consumer. This would then propel inflation expectations to rise, causing a rise in the demand for an inflation hedge (precious metals)....

Ironic, I know, but the breaking of the peg would lead to a bump-up in the CPI. That bump-up could trigger a new round of gold buying on the assumption that the U.S. is going to be overriden by inflation.

Hedging Coming Back?

Credit Suisse analyst Tom Kendell has seriously raised the possibility of gold producers going back to hedging again, although with less complex instruments than were used in the past. By doing so, he intimates of a risk of gold declining.

“Hedge is not a four letter word,” he quipped as he told delegates a term that would also be increasingly heard in the financial markets during 2011 was “normalisation” and that was not necessarily good for the gold price.

He told delegates that, “the fact that financial market conditions are returning to normal means that mid to long-term bond yields are rising and will continue to go up.
“In theory, that is not good for gold because you do not get a return on investment in gold but there are some deep-rooted structural issues in the United States which still remain positive for gold.”

Although not a gold bear, he does raise the possibility that economic recovery will continue to drag gold down. Gold miners implementing this advice would make for a real reversal, as some of them have spent a lot of money removing hedges from their books.


This may just be a disguised sales call for Credit Suisse hedging products, but it does speak to a relative lack of bullishness right now. We all swim in the times, and it looks like the ebullience of late last year has ebbed. Not to be cynical, but this boat-floating is a sign that gold could go up later this year. It indicates a wall of worry still in place.

Ubika Research Comes Up With New Junior Gold Index

The gains made by junior exploration companies has resulted in them getting more attention and publicity. So, Ubika Research has put together an index devoted to juniors that the firm considers promising: the Ubika Gold 50.

The Ubika Gold 50 Index comprises our top fifty (50) promising junior gold exploration companies. We use various proprietary criteria in selecting these companies including market capitalization, trading volume, exploration location, type and size of deposits and their exploration stage....

The Ubika Gold 50 Report

This free downloadable report provides a summary of the key performance data for "The Ubika Gold 50 Index" and its constituents. It also compares the performance of "The Ubika Gold 50 Index" versus the benchmark TSX Venture Index and Spot Gold price.

Apart from the performance of the Index and change in market value of each company in the Ubika Gold 50 list, we also provide a summary of major news events related to these companies and highlight one or more companies in the weekly Ubika Gold 50 Report. To download your free report please visit: http://www.smallcappower.com/ubikagold.aspx

The page itself lists all fifty stocks in the index, and has a digest of news on the companies. There's no graph of the Ubika 50's performance over the course of the year, though.

Another Look At The Recovery Trade

Conventional wisdom now believe that gold and silver are suffering because of the recovery trade, which makes industrial metal more valuable because economic recovery increases the demand for those metals. The "Daily Trader" as Seeking Alpha has another take: given the power of the industrial metal's bull market, they're not just discounting recovery. They're primarily discounting inflation.

There are perhaps a number of reasons as to why gold has gone up over the last 12 months. I guess the central one is inflationary fears. I prefer not too get too caught up in reasons. Rather, I look for inter-market behavior to identify the underlying theme driving a security.

Now it stands to reason that if gold is genuinely weak then there should be associated weakness in related or associated markets. Gold is a precious metal (currency) but it is also a "hard" asset, i.e. a commodity. In any event, if base metals (copper, Al, Tin, Zinc, Nickel etc), other precious metals (like silver, platinum, and palladium) and the broad commodity group were showing weakness then I would take the current weakness we are seeing in gold seriously. From the charts [in the article] it seems that base metals, other precious metals, and the broad commodity group are all making new highs daily (actually record highs in a number of cases).

In other words, record highs in base metals make gold and silver the odd metals out in a rising trend. That trend should pull the two inflation hedges up along with the rest of the group.


To sum up, the recovery-trade meme is just another brick in the wall of worry. Read properly, the metals part of the recovery trade is signalling recovery plus inflation.

Gold Market Not As Vulnerable As Feared To ETF Drawdowns

That's the message from a Reuters article webbed by the Financial Post. It's based upon last month's experience, when ETF holdings fell in tandem with falling gold prices. That experience showed that the other sources of demand, such as physical demand in Asia, are robust enough to pick up a lot of slack from falling investment demand.

If significantly more ETF gold were to hit the market, it could have a short-term impact on prices. But analysts say there are plenty of other demand sources out there to mop up supply, as long as good underlying reasons to buy gold remain.

“We are still in a zero interest rate environment, we still have major fiscal issues in Europe, America and Japan, we are still seeing lack of confidence in fiat currencies,” said Philip Klapwijk, chairman of metals consultancy GFMS.

“I don’t think we are at the beginning of a secular change in direction. The bull case for gold is still intact.”...

Nick Brooks, head of research at London-based ETP operator ETF Securities, said though he expects the outlook for growth and interest rates could prompt selling of gold in the short term, demand for the metal is likely to stay firm this year.

Premiums for gold bars in much of Asia last week were at their highest since at least 2004 in the run-up to Chinese New Year and India’s wedding season. The two countries are the world’s biggest consumers of physical gold holdings and the gold price....

Whistling past the graveyard? Not as of now. Divestment from ETFs would amplify an all-out bear market, but the source of such divestment would be the same force(s) that made for the bear market itself. So far, there are none on the horizon.

Two Views On Gold

Naturally, they conflict. A Financial Post article has both a bearish and bullish case for gold: the former focuses on diminished investment demand for the metal.

Brockhouse Cooper strategist Pierre Lapointe warned that the financial demand for gold and silver appears to be running out of steam, noting that ETF gold holdings have dropped 2.2% (or about 217,000 ounces) since Jan. 10th. This could be a trouble sign, as he pointed out that financial demand represents a whopping 32.7% of total demand for gold.

“The risk now is that if financial demand dries up, bullion and silver prices could retreat sharply,” Mr. Lapointe wrote in a note.

He added that the main drivers for gold (the need for a safe haven, a weak U.S. dollar and inflation) are not positive enough to “push up gold prices significantly” going forward.

On the other side, DundeeWealth Economics analyst Martin Murenbeeld points out that gold's decline has been fairly gentle despite all the alarm bells being rung in the media. Although the metal is likely to be held back in the near term due to an improving economic outlook, optimism over resolution of the Eurocrisis and tightening in emerging markets, the U.S. budget deficit is still going up and the Eurocrisis has only faded but not disappeared. Left unmentioned by both is the possibility of U.S. inflation ramping up.


I note an important tilt in the above: it's the gold bull that's accomodating the bear case, not the reverse. There's still a golden wall of worry, and no euphoria to speak of. So, there's less overbullishness for the gold market to weed out.