The Fear Quotient

March 4, 2009 Market Updates, Physical Gold, Politics No Comments

Equities rise on a decrease in the fear quotient. “Experts” explain gold’s fall and equities rise on a decrease in the fear quotient, but I feel that the real fear is just beginning!

The DOW was up 149.82 at 6,875, the NAS was up32.73 at 1353 and the dollar was up .13 (.18%) at 88.63. Gold ended the day at $906.70 continuing the loses into the 8th straight session and marking the longest losing streak that gold has had in the last seven months. Gold for April delivery, fell $6.90, or 0.8% an ounce on the Comex. At the time of this writing gold is up $6.00 at $911.90. Apparently the president did not make a major announcement today so the markets took off. If I am not mistaken, this is the biggest up day since the Obama administration took office. Maybe he can turn this into a trend.

The consensus in the media that report on the action in the gold markets is that the global rally in equity markets sent gold buyers running back into the stock market so as not to miss the next wave up. The “expert opinion” is that maybe we have hit a bottom and it is time to re board the train because “equities are the place to be”. The sheep will believe anything. A more likely scenario is that the market is way over sold and due for a bear market bounce and the absence of any administration denigration of the markets provided the opportunity.

Gold Cuts Through The Market Manipulation

Gold on the other hand is experiencing a multi-pronged attack. Big money moves over to chase the DOW and gold stocks get hammered as waves of selling rolled in to cover the loses in other areas. Profit taking turns into selling in earnest because fear is the motivator of the day, or “I am going to cover or take profits while I can because this may be a market bottom in equities and I don’t want to miss it”. That is the mentality of day traders and weak hands. I think we will see big volume buying around the $905 to $910 level. That is the first line in the sand and I feel that it will likely hold. If not we will see the the test between $890 and $900.

The World Gold Council is reporting demand for gold increased by 64% in 2008, with most investors preferring physical gold such as bars or coins. The Lipper Fund Market Information says that

“European investors sought to diversify assets away from the collapsing financial sector and hedge against the threat of inflation, which may return because of quantitative easing”. The most striking trend has been the reawakening of investor interest in holding physical gold, with demand for bars and coins rising 87% last year”, according to the WGC. “The most dramatic surge was in Europe, where bar and coin demand increased from just nine tonnes in the fourth quarter of 2007 to 114 tonnes in same quarter in 2008, a 1,170% increase, says the report. Citigroup has forecast that “the price of gold could reach $2,000 by the summer”.

These are varied groups reporting that the demand is on the rise and that the price should rise in like fashion as we move on in the year. The recent, almost $100 pullback from overbought territory is understandable because gold investors need to book short term profits given that many of the same investors have lost and continue to lose considerable money in the equity markets. The DOW is off by 23% year-to-date, including a 15% drop over the 13 sessions prior to today’s.

Fear has been the driving force in the gold market. Fear of inflation, fear of the nationalization of the banking industry and fear that no one knows how to stop the financial crisis, aka, fear of government incompetence. Once again the “expert” consensus is that the fear quotient is abating and that is what triggered the move back into equities today. I disagree, and feel that the fear is only just beginning!

Jon Nadler, a senior analyst at Kitco in Montreal disagrees with me and had this to say today.

These investment cycles are definitely emotional waves. As soon as a little bit of apprehension abates” then gold moves closer to fundamentals, he said. Nadler added that the fundamentals “hardly argue for more than $650. The rest is an anxiety premium.

On top of the psychological fears , gold has also come under pressure from new data that showed demand for gold jewelry is down due to the weak global economies, especially in India and it has also suffered due to the dollar’s strong performance of late. The dollar is up 8.4% year-to-date against the Japanese yen. Nadler said,

“gold’s recent $200 rally to $1,000 was built on “shaky ground” considering fundamentals. The $200 rally was unfolding against the background of nothing special in terms of new corporate failures,” said Nadler.

I want to make one thing perfectly clear, I read Jon Nadler regularly and have the utmost respect for his opinions, but on the $650 value point I feel that he is dead wrong. The rise in the price of gold corresponded to the consistent drum beat of more and more bailouts, culminating with A.I.G.’s third. The government currently owns 80% of A.I.G. so it has been, in effect, nationalized. All that is left is semantics. The fear quotient is valid and it has not been removed and will most likely come into play in the next run up in the price of gold. $650 does not represent the the inflation corrected price that gold should be at today, not to mention what it should be at after all the magic money filters through the system in the next two years. Sorry Jon, but you are way off on that one.

Gold has a lot of support factors coming into play as it approaches $900. You have a 10% correction and psychological support at $905, horizontal support at $892 where the 50-day moving average comes in and uptrend support at $875. When we determine where the line is it will be time to buy gold and gold stocks. Once again, time will tell, so we will just have to wait and see if the fear quotient is leaving the market.

Till next time, good luck and good trading!