Gold Price - Where is it heading?

[lamborghini]

All these thoughts do make sense and the carry trade can have an effect for a while but the dollar will be the main driver.

You may be surprised then that Gold may still go down?

I would put it to you that the Gold price has gone through a bull run and may be overpriced like many stocks?

 

[Dr Doom]

All these thoughts do make sense and the carry trade can have an effect for a while but the dollar will be the main driver.

You may be surprised then that Gold may still go down?

I would put it to you that the Gold price has gone through a bull run and may be overpriced like many stocks?

Yes, true. I'm seeing conflicting signals from the $US and gold stocks, as indicated in the XAU index. Either one is indicating a possible break to the upside? Gold stocks seem to have narrowed the trend range and are bouncing off this new support, while the $US looks the weaker of the two with a defined downtrend, but maybe ready to break out?

Time will tell?

 

[Dr Doom]

Interesting up tick in cot for commercials. Maybe the rebound to continue?.

 

[Bush Trader]

Hi All

This is a great article and I will post it in its entirety for those of you that do not subscribe to FNArena. It offers a plausible explanation to Gold price resistance we have seen.

Cheers

Will Gold Ever See US$700/oz Again?

Source: FN Arena News - March 12 2007

By Greg Peel

Investing in gold can be a heartbreaking experience. Day after day, everyone from single-minded gold bugs to respected economic analysts suggest gold must go higher, and that a move back to 2006 peak levels is not out of the question. But since the collapse in May last year, it's been a long and volatile road back.

Such it was once more just when gold had US$700/oz in its sights prior to the Chinese market scare. However, even before China did its thing gold was finding it difficult to break through the US$690/oz level.

Respected analyst and gold trader Dennis Gartman noted on March 1st that "despite the fact that we are long term bulls of gold, we find it disconcerting that spot gold has seemingly badly failed in the past two or three days to push upward through $685-690. Whoever, or whatever, the seller is at that level, it has been formidable indeed".
Gartman knew exactly what conclusion would be drawn in certain circles regarding who that seller might be:

"We care not who the seller is. GATA may, and certainly GATA may make much of the implications that one might draw from some nefarious, governmental force that is the seller. We care not. That is an argument that neither we nor they shall win. What is important is that gold has failed to advance under circumstances that might otherwise have been considered quite bullish of it."

Gartman was not surprised by the sell-off which transpired following the Chinese debacle. While collapsing share prices should otherwise be bullish for gold, he remained quite cognisant of the sudden need for liquidation. At US$673/oz Gartman exited his long gold position. At US$637/oz he came back in. As gold has now held above US$647/oz, Gartman has built on the position.
And he was certainly right about one thing. The Gold Anti-Trust Action (GATA) committee had no doubt as to who the seller was above US$685/oz in the first place.

As the gold price rose towards the US$690/oz level, there was a huge build up of open interest in Comex gold futures. What does this imply?
A futures contract does not exist until one buyer meets one seller at a price. At that point there is an "open interest" of two contracts – one short, one long. Thereafter, a new buyer at a higher level might either meet a new seller, or the previous buyer selling out. If the new buyer meets a new seller, open interest has increased to four contracts. But if he meets the previous buyer selling out, the net result is only three (one ceases to exist).

Had the original seller capitulated and bought back from the original buyer, the open interest would be zero, as both contracts would be negated.
Traders in all markets watch futures open interest movements very closely. They are an indication as to whether the speculators/investors in the market are getting long or short. This sounds a bit counter-intuitive, for the reality of futures contracts is that there must be a buy for every sell, implying a net square position. But if a market is on the rise, and open interest is rising as well, the implication (particularly in the gold market) is that it is investors building up long positions. The seller is possibly a mining company hedging production, or perhaps a central bank affecting gold sales. It is unlikely to be investors coming the other way, for in a rising market sales by investors will be to take profits. Investors never start out going short. If it were investors selling, the open interest would fall.

When open interest builds to a significant level in a rising market, it follows that downside pressure will also build. If the price does continue to rise, at some point the longs will look to cash in. If the price begins to fall, then chances are the longs will look to bail out in a hurry.

And guess what? That's exactly what happened last week. Not only were the longs caught out, the world in general, and the Chinese in particular, were liquidating their physical holdings in a desperate attempt to raise cash against losses in equity positions. The longs were caught in a vacuum.
The other implication of the build up in open interest in gold futures was provided by the fact that the price had stalled on approach to US$690/oz when everyone was expecting US$700/oz to be just around the corner. If open interest is building and the price isn't moving, the buyers must be hitting a wall of selling. And as Gartman noted: "Whoever, or whatever, the seller is at that level, it has been formidable indeed".

The Commodity Futures Trading Commission in the US reports weekly on futures positions based on the size of the firms that hold them. It did not escape avid gold writer and GATA supporter James Turk that the big sellers were the so-called "gold cartel" – those large global investment banks who act on behalf of central banks.

GATA's accusation is that the gold cartel has long been acting to suppress the gold price in order to maintain the value of the world's reserve currency – the US dollar. The cartel is able to sell vast amounts of gold futures (paper gold) to achieve this, such that the central banks need not run down their actual physical holdings. GATA is convinced that this practise is destined to reach a breaking point at which the central banks will no longer have the firepower to hold back the tide.

But in the meantime, the gold cartel can simply sell into the market with enough weight behind it safely knowing that the longs will eventually break, and the subsequent sell-off will allow for short positions to be unwound. It doesn't always work however, as the 2005-06 run up to US$725/oz is testament to. Turk maintains that the cartel was also unsuccessful in holding gold in the US$640s and US$660s recently. It wasn't until the US$680s that the cartel got its break. Thank you China.

Turk is confident that despite the gold rout of the last two weeks, the technicals are still bullish. "We can take solace from the fact that gold is in a long term uptrend", says Turk, "clearly indicating that the gold cartel is losing the war".

Dennis Gartman "cares not" who is selling gold. Many participants in the gold market scoff at GATA's claims. Nevertheless, the gold derivative market is alive and well and often subject to waves of selling meeting waves of investor buying.

This is yet to dampen the enthusiasm of just about every major broker and analyst in the FNArena database and beyond who have pitched their average gold price valuations for 2007 at either the high $600s or above US$700/oz.

 

[Dr Doom]

Hi All

This is a great article and I will post it in its entirety for those of you that do not subscribe to FNArena. It offers a plausible explanation to Gold price resistance we have seen.

Cheers

Yes Bush Trader I think the fundamentals have always been there, & now even more so re the supply side shortfall -

" SYDNEY (XFN-ASIA) - Australian gold output has slipped to its lowest levels in 13 years, but the industry's unhedged producers are enjoying strong revenue gains, thanks to continued price increases, the Age newspaper reported, citing an industry survey.

It said the survey by Melbourne-based consultant Surbiton Associates, showed Australia's gold output fell 5 pct to 249 metric tons in 2006 from 263 tons in 2005 -- the lowest annual total since 1993.

The Age said the production fall moved Australia's global ranking as a gold producer from second position behind the dominant but also falling South Africa to third position, with the US industry regaining the second slot.

Surbiton director Sandra Close said that despite the production fall, the value of Australian gold production increased substantially.

"The average spot gold price of around 800 aud an ounce for 2006 was more than 200 aud an ounce higher than for 2005," the Age quoted Close as saying.

She said the value of Australian gold production for the year increased almost 30 pct to 6.4 bln aud."

 

[OK2]

Similar article in Herald Sun, also goes on to say BMA GOLD having appointed administrators and Tanami GOLD having design problems with their treatment plant delaying production. BGF and BMG deferring production in favour of further exploration.

 

[Dr Doom]

The first I've heard of BGF problems; can't see it in ann's?. LHG share price may come under pressure if true?.

 

[Sean K]

The first I've heard of BGF problems; can't see it in ann's?. LHG share price may come under pressure if true?.

I haven't seen any reports on BGF problems. Perhaps that was an error and O2K meant BDG?

 

[OK2]

Good day guys,

Just reading it out of the article;

http://www.news.com.au/heraldsun/story/0,21985,21362267-664,00.html?from=public_rss

Cheers

 

[Sean K]

Central Bank Gold Sales Continue To Decline
FN Arena News - March 14 2007

By Greg Peel

Yesterday the European Central Bank system reported 0.5t (16,000oz) of gold sales for the week. This small amount indicates the continuation of a trend begun last year, in which the European central banks are selling less than their allocated quota under the Washington Agreement.

Blanchard & Co's Neal R. Ryan surmises that if the trend remains intact sales will fall 8-9 million ounces short of the 2007 quota instead of the 6-8 million ounces previously expected. This "bodes well" for the gold price, notes Ryan, although he suspects a price above US$700/oz would probably trigger further sales.

One simple fact of the matter is that European central banks are simply running out of gold to sell, or at least running out of that which they are prepared to part with at any price. Germany's Bundesbank has reiterated that it will not sell any gold in 2007, and probably not in 2008 either.

France appears to be about the only keen seller, now that Spain and Portugal seem to have shut up shop as well.

Outside the Washington Agreement it's a different matter all together. Central Banks are buying, not selling. The World Gold Council yesterday updated official activity and noted purchases from Russia (17.3t), Belarus (6.2t), Kazakhstan (7.6t) and Greece (3.8t) within the last 3-6 months. Another (unnamed) ECB bank or banks added 14t in February alone.

So what are we doing down here below US$650/oz?

Ryan's take on matters is that the sharp price decline – sparked by a rush to cash after the Shanghai Surprise – cannot continue, even if equities fall further. Moving into the US dollar is particularly tenuous. Eventually the opposite will be true as gold investment is again recognised as a safe move. Supply/demand fundamentals are currently dictating a higher gold price.

Ryan sees a buying opportunity.

 

[bean]

Being a Gold And Silver Bull, I am at the moment either being silly and this stock market correction is over OR towards end of next week I am going to be picking up absolute bargins. I was expecting an up couple of days then hard down next week... looks like it may be just hard down for everything for a week.

Triple witching US markets this friday stocks usually rise....if it does'nt are we going to have a week of down on everthing gold included.. if we do gold US$560 - US$580 by next wednesday. before phase three of the bull restarts

 

[Kauri]

Wonder if gold is going to keep tagging the Dow??

 

[ducati916]

Why not?
It's way higher than it's inflation adjusted value, way above the premium for global instability and it was pushed up on pure speculation.

Unless speculative *buying* returns, then it's going to sell off on speculation until circa it's inflation adjusted value [with a possible overshoot to an undervaluation]

jog on
d998

 

[Kauri]

Why not?
It's way higher than it's inflation adjusted value, way above the premium for global instability and it was pushed up on pure speculation.

Unless speculative *buying* returns, then it's going to sell off on speculation until circa it's inflation adjusted value [with a possible overshoot to an undervaluation]

jog on
d998

So unless it goes up it is going to go down???

 

[ducati916]

Speculation is sentiment and can turn quickly, thus any short covering can provide some buying.

However, short-term money [Hedge Funds] have been blasted recently and they will be looking for a little stability in quality.

Gold therefore will not benefit from buying the dips buying the highs, you'll still see buying the dip's, but difference will be selling the highs.

jog on
d998

Incidentally, the new area for the Hedgies is Hollywood. They are financing film.......go figure. Their big success to date is *300*

 

[Dr Doom]

Why not?
It's way higher than it's inflation adjusted value, way above the premium for global instability and it was pushed up on pure speculation.

Unless speculative *buying* returns, then it's going to sell off on speculation until circa it's inflation adjusted value [with a possible overshoot to an undervaluation]

jog on
d998

How do you derive your inflation adjusted value Ducati?. A number of people (analysts economists etc) have this value at a premium to the current price.
We're talking some $500 difference in values here, so how can 2 views be so different?.

I see gold at least being stable 'going forward', being subject to flow on effects of global equity sell offs, due to the following -

- central banks are accumulating now, as opposed to disposing through the accord.
- money supply has flattened but is still inflationary; growth flat-lining - stagflation?
- supply is less than demand
- viable alternative to any fiat currency (flight to safety?)
- the US dollar will most likely continue to devalue (what would happen in a recession?)
When everything that has been going up in the past due to liquidity excess starts to go down, gold may temporarily be the safest of asset classes.
If you believe in secular trends then the secular gold bull is still intact I think.

 

[ducati916]

DrD

How do you derive your inflation adjusted value Ducati?. A number of people (analysts economists etc) have this value at a premium to the current price.
We're talking some $500 difference in values here, so how can 2 views be so different?.

The real simple approach, go back to the gold peg @ $35oz in say 1968
Then calculate the annualised inflation rate from 1968 = 4.73%
Inflation adjusted value for Gold = $127.66
Global instability premium = $100 [generous]
Investment value of Gold = $227.66

If we go back to say 1930;
Gold @ $20oz
Inflation annualised = 3.33%
Investment value = $249 + $100 premium = $349.00

I took my valuation back from 1930 hence I value Gold circa $350.00

- central banks are accumulating now, as opposed to disposing through the accord.
- money supply has flattened but is still inflationary; growth flat-lining - stagflation?
- supply is less than demand
- viable alternative to any fiat currency (flight to safety?)
- the US dollar will most likely continue to devalue (what would happen in a recession?)
When everything that has been going up in the past due to liquidity excess starts to go down, gold may temporarily be the safest of asset classes.
If you believe in secular trends then the secular gold bull is still intact I think.

Ignore Central Banks.
Money supply may well become contractionary, thus deflationary.
Supply is in excess of demand [check the Gold stats]
In a deflation, Bonds are where you want to be.
Gold went up due to liquidity speculation, that's why it's so overvalued. There are NO FUNDAMENTALS supporting Gold at anything much above $400oz

The secular trend for Gold relies on monetary inflation. That trend on a secular basis is as safe as anything I can think of, but, the cyclical trend is down with the bears baby.

jog on
d998

 

[Kauri]

DrD



The real simple approach, go back to the gold peg @ $35oz in say 1968
Then calculate the annualised inflation rate from 1968 = 4.73%
Inflation adjusted value for Gold = $127.66
Global instability premium = $100 [generous]
Investment value of Gold = $227.66

If we go back to say 1930;
Gold @ $20oz
Inflation annualised = 3.33%
Investment value = $249 + $100 premium = $349.00

I took my valuation back from 1930 hence I value Gold circa $350.00

jog on
d998

ducati,
Not sure I understand how you can value gold today based on 1930's pricing...
$100 for Global instability premium ... a random round number based on what valuation method or principle.. why not $200 or $300..
The remainder of your valuation model based simply on 3.33% annualised Inflation.. does that also account for the fact that the easy 30g/t near surface veins have all but gone, exploration is now a major cost..no more looking for surface quartz and digging a hole, workers no longer live in humpies with Kero lamps and Coolgardie safes, oil dollars looking for a home, govts and banks now actively trading, hedge funds, ETF's, small punters like us in the market........
In the early 70's our neighbour offered my father 1/2 acre of his front paddock adjacent to us for 500 pounds..($1000) before he subdivided it. Allowing 5% annualised inflation it should be worth what..$5000 now???

 

[Dr Doom]

Ducati,
If you take the inflation rate of money as the amount of increase in money supply, and the inflation rate of gold as the total increase in the above ground stock of gold, then if we compare the two we can determine if one is undervalued to the other.

Using this method the gold price should be around $US850. But that is only half the story, as that is only comparing with the US dollar. The fact that gold is also rising in other currencies says that those countries are also inflating their money supplies in relative proportions to the gold price appreciation in those currencies.

Now if the US if forced to lower the interest rate due to factors coming into play in order to prime the economy again, then the situation will only get better for gold as the US dollar will most likely depreciate further. Not to mention the 'flight to safety' if the situation becomes worse than a recession.

A simple analysis but I think it's the main factor driving gold at the moment.

 

[ducati916]

Kauri

ducati,
Not sure I understand how you can value gold today based on 1930's pricing...
$100 for Global instability premium ... a random round number based on what valuation method or principle.. why not $200 or $300..

The 1930's was when the last effort was made with the Gold standard.
As to $100 against any other number, of course, you can pick whatever number you want. I picked $100 as an *educated guess*

oil dollars looking for a home, govts and banks now actively trading, hedge funds, ETF's, small punters like us in the market........

True, and all of these that you mention are SPECULATIVE variables.

In the early 70's our neighbour offered my father 1/2 acre of his front paddock adjacent to us for 500 pounds..($1000) before he subdivided it. Allowing 5% annualised inflation it should be worth what..$5000 now???

$6081.40
Just demonstrates how inflated and overvalued land has become, assuming it's priced marginally higher than $6K

DrD

Ducati,
If you take the inflation rate of money as the amount of increase in money supply, and the inflation rate of gold as the total increase in the above ground stock of gold, then if we compare the two we can determine if one is undervalued to the other.

But I am not interested unduly in the VOLUME of money.
I am interested in the Purchasing Power of the money.

Now if the US if forced to lower the interest rate due to factors coming into play in order to prime the economy again, then the situation will only get better for gold as the US dollar will most likely depreciate further. Not to mention the 'flight to safety' if the situation becomes worse than a recession.

But here we differ. I don't see lower interest rates. That mistake has already been made once by Greenspan, I think Bernanke is actually quite a hawk.

jog on
d998