Gold: Back and Forth

January 13, 2009 Gold Stocks, Physical Gold, Politics No Comments

Another day dawns and now gold rebounds on fears of a deepening recession world wide. One day gold is down on the same fears and the next it is up. Could it be that the journalists and experts have no clue as to where this market is headed, or what drives it for that matter? I think that the answer to that one is a resounding yes!

These are uncharted waters, unlike any economic event that most of these “experts” have ever seen. It is easy to try to draw conclusions from events of the past, but if they are applied to this situation the results will not be the same. This derivative implosion is unlike anything in the past. This is an economic “Frankenstein” with the “mad scientists” who created the monster in charge of saving the town. Can anyone seriously believe that Barney Frank belongs any where near the levers of economic power? This can only get worse unless the clowns are removed from office and replaced with adults.

gold bars and passport1 Gold: Back and Forth

The Ultimate Security Blanket!

Ok, where was I? The DOW is currently down 6 at 8,467, the NAS up 13 at 1,551 and gold is trading up $4.90 at $824.80. It is nice to see that gold did not continue down after breaching $820 but it is still early in the game, so anything can happen. The more time that gold spends in the $820 to $880 trading range building a base, the better. The time spent moving back and forth in the trading range will help launch gold on a strong up leg when the time is right. It seems as if no one wants to take a stand in this market. Buy gold one day and sell the next based on “fears”. No serious move up will come until buyers decide to stand by their gold shares and look at the long term picture. The long term picture is very clear. Gold is going up big time and the dollar is going down. It’s that simple.

Pham-Duy Nguyen, Bloomberg, added this report to the latest “fear” based commentary this morning.

Jan. 13 (Bloomberg) — Gold prices rebounded on speculation that the recession will deepen, boosting the appeal of the precious metal as a store of value. Silver also gained.

The U.S. trade deficit in November narrowed the most in 12 years, a signal that world trade may contract as the economic slump worsens. Gold gained 5.5 percent last year as the Reuters/Jefferies CRB Index of 19 raw materials fell 36 percent and the Standard & Poor’s 500 Index dropped 38 percent.

Gold is not as weak as some of the other commodities, said Frank Lesh , a trader at FuturePath Trading LLC in Chicago. Volatility in other markets and the geopolitical tensions are always supportive for gold. A good dip in prices is a buying opportunity.

Gold futures for February delivery rose $6.40, or 0.8 percent, to $827.40 an ounce at 11:39 a.m. on the Comex division of the New York Mercantile Exchange. Earlier, the price touched $814, the lowest for a most-active contract since Dec. 12. The metal fell 4 percent yesterday.

Silver futures for March delivery rose 9 cents, or 0.8 percent, to $10.84 an ounce on the Comex. The metal declined 24 percent in 2008.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was little changed at 787.6 metric tons yesterday after reaching a record 787.9 tons on Jan. 6. Assets grew 24 percent last year.

Maybe tomorrow the first sentence of this article will be reused to explain the reason for gold selling off. It is becoming monotonous. It is time for people to step back and let the dust settle. The government should get out of the way of the markets and let them work, while the press should quit whipping up the “depression” hysteria. Both are part of the problem and not the solution.

Axel Merk wrote this today for the Merck Perspective.

The Federal Reserve (Fed) has gone beyond playing with fire, and may have indeed set the house on fire. It’s one thing to push interest rates to near zero to stimulate the economy; it’s another to monetize the debt by printing money to buy government debt. In recent weeks, the Fed has broken outside even those boundaries and become actively engaged in managing the private sector beyond the core banking system. Worse still, the steps taken may be difficult to reverse and as such may shape the U.S. economy for a long time. These steps are taken with the best of intentions, to save the economy. The only trouble is that we may be on a slippery slope to destroying capitalism on the way. In doing whatever it takes to get the economy back on its feet, the Fed risks destroying the foundation of why the U.S. has been able to establish itself as the world’s leading economic force. Actively participating in credit allocation within the private sector, the Federal Reserve (Fed) jeopardizes the capitalist foundation the U.S. economy is built on. As a result of these actions, the U.S. may be on its way to becoming a modern incarnation of a planned economy.

Why these harsh words? To understand what is so frightening with recent Fed activity, consider that most central banks focus on interest rates, inflation and money supply to promote price stability (and maximum employment in the Fed’s case). Generally, they all influence credit creation by managing the cost of borrowing. Central banks may employ slightly different levers and targets; and while some central banks are better than others at achieving their goals, what they have in common is that they traditionally focus on government debt, mostly short-term Treasuries, to achieve their goals. This is very much by design as good central bank policy leads to an environment of price stability fostering long-term economic prosperity. On the other hand, bad central bank policy may lead to inflation, wide swings in economic activity or unnecessarily high unemployment. However, free market forces will push the private sector to make the best of it. It’s when policy makers start subsidizing ailing sectors of the economy that distortions are created that will come back to haunt us. Traditionally, for better or worse, elected officials decide on the socio-economic fabric of society. Now, the Fed decides which areas of the economy need to be propped up.

The hysteria that has been created by policy makers and the media has allowed the Fed to pursue its recent unorthodox policies. In late September, the world financial system looked rather dire; the government was able to play a role to avoid a disorderly collapse; but the government’s role should have been limited to allowing an orderly adjustment of the excesses of the credit bubble. Instead, the latest salvo to promote the bailouts is that payrolls have dropped by the largest amount since World War II. This may be the case in absolute numbers as the population has grown, but more jobs were lost as a percentage of the workforce in a twelve month period in each of 1982, 1961, 1958, 1954, 1948/49; in many of the cases more than twice as many. Recessions are no fun, neither are personal or corporate bankruptcies; but they may be the cure needed to weed out the excesses of the boom. In contrast, today, hedge fund managers that ran their funds into the ground are raising hundreds of millions of dollars to start anew. Some of the folks that ran Long Term Capital Management into the ground in 1998 started fresh only to have another massive failure in the current credit crisis. We don’t expect the new breed of second chances to be any better. And while the blame lies with the managers, excessively low interest rates contribute to irrational risk taking: all of the bailouts focus on those who have been over-leveraged. What about the group of responsible savers that rely on income? With interest rates near zero, many are tempted to engage in highly leveraged strategies to meet their required income objectives. Pension funds must return 6% per year, leaving them little leeway but to give money to hedge fund managers to magically turn 1% yields into 20% returns; the way to achieve this is with leverage. Actually, there is another way: the Swiss public pension fund system just announced that it will scale down its long-term return objective to 4% from its current 6% per annum.

I have never given much credence to conspiracy theories, but it is becoming quite clear that the Fed has exceeded it’s mandate and is taking the the “free” out of the free market. It is long past the time that the Fed should have been dismantled and the power returned to Congress. At least when Congress screws up we have the opportunity to vote them out, even though we haven’t done it lately. We are headed for dark days that will make the last six months look like spring time. It is time to buy gold and to buy gold NOW!

We will take another look at Alice through the looking glass tomorrow.

Until next time, good luck and good gold trading!