gold blog

In the last few weeks Gold has demonstrated true underlying and potentially explosive power, and is now finding itself mentioned in the mainstream press. This is just the beginning of what will be, IMO, a spectacular 5 to 7 year bull run in the "King of Metals". The spot price for Gold will certainly eclipse 4 digits and as the bubble develops, as it always does with all full blown manias, the final record high price for an ounce of Gold will surpass even the most diehard of Gold bug predictions.

At the suggestion of Jim Sinclair, I have gone out and purchased the most recent copy of the Economist dated September 20-26 which covers the trade talks recently completed in Cancun. The cover of this issue will give you a clear message as to what is contained within.

Rumors abound of an extremely large gold buyer at the Comex. Thinking is this entity is playing the shorts for all they are worth. Estimates are the entity is buying somewhere in the 400 ton range. TONS.

I also noted this morning that CNBC showed full screen live charts of 1) the dow, 2) the nasdaq and, this is the truth now, 3) GOLD. In that order. I never thought I would ever see the day when that happened.

Please note that THE Gold site is www.lemetropolecafe.com. Bill Murphy and the boys truly are the most courageous of individuals. I thank them for their drive and determination when I most needed it.

The following is the article mentioned earlier:

ODJ Gold Driven By Dissatisfaction With Other Assets - Analyst

By Gavin Maguire
New York, Sept. 23 (OsterDowJones) - The current fund and investor appetites for gold are being motivated not by "the more traditional short-lived reasons we've seen in the past" but by a "longer-term dissatisfaction with traditional asset classes," according to a research note by Friedberg's Commodity Management.

As a result, despite the hefty speculative net long position in the gold market and the fact that prices are near their highest levels for the year, there is room for further upside progress, it said.

DOLLAR'S CURRENT WEAKNESS A FACTOR, BUT GOLD WAS ALREADY STRONG

Friedberg's said that while much of gold's recent strength that has pulled prices to eight-month highs around $388 per ounce has been the weakness in the U.S. dollar, a good deal of the buying in the precious metal has been because of the gold market's own fundamentals and a general diversification away from traditional financial assets.

It added that while the U.S. dollar has indeed plunged to over two-year lows relative to the yen within the past few days, gold managed to push up to the $380-per-ounce, seven-month-high area "as early as 10 days ago."

"Judging by the size of the open interest at Comex, gold bugs and other groups of gold investors are definitely feeling exuberant. But we don't think that they are necessarily acting irrationally, in response to any short-term, panicky attitude toward financial markets or geopolitical crisis," it said.

NO FEAR OR PANIC FACTORS CURRENTLY AT PLAY

"Typically, when there is trouble brewing somewhere in the world, fear premiums have the same effects on the same markets. A brief scan of those markets shows no such fears: Stocks in the U.S., Europe, and Japan have been shaking off their bear-market appearances rather handsomely of late," Friedberg's pointed out.

By way of contrast, "we can look back to this past February, when gold was trading at current levels, to find that the Dow Jones was hovering at 7,500, more than 20% below its current level," it said. "In addition, credit spreads have narrowed to their lowest level in years, indicating that financial markets are calm."

Investors may very well be diversifying their portfolios to include gold, "but in a rational manner," Friedberg's said. "If in fact the complacency indicated in a strong stock market and the confidence shown in corporate debt turns out to be misguided, gold could only benefit.

"This establishes some evidence that the appetite displayed by investors in gold is not being motivated by the more traditional short-lived reasons that we've seen in the past," it said. "Instead, we are witnessing a longer-term dissatisfaction with traditional asset classes caused in no small part by the unhappy ending of the tech-bubble bull market in equities."

GOLD MARKET IN TRANSITION - DESERVES "A DIFFERENT READ"
"As traders, though, with a more intermediate-term time horizon, necessitated by the highly leveraged futures markets that we employ, there is some explaining to do," Friedberg's said. "As mentioned above, open interest has skyrocketed to record levels. Were this the case in any other futures market, we would monitor the open interest level daily and beat a hasty retreat from a long position at the first sign that a liquidation of the weaker hands was imminent.

"Indeed, sell signals have been identified for the current gold market," it ceded.

"We believe, however, that the dynamics of the gold market are in transition and therefore deserve a different read," it explained. Typically, producers of any commodity can sell into rallies and sit with large paper losses, according to Friedberg's, "because as producers, they can deliver the commodity, and at worst they will have sold too early."But they will not be foreclosed on by their broker," it explained, adding: "The speculator does not have this luxury."

MINER DE-HEDGING, LIMITED CENTRAL BANK SALES SUPPORTIVE FOR MARKET

The "puzzle" in the current gold market is the identity of the commercial shorts, according to Friedberg's. "In the past, mining companies and central banks would end all rallies quickly enough. But the nature of activity by mining companies and central banks has changed dramatically."

Central bank selling has become transparent since the signing of the Washington accord and "no longer inspires the fear and hesitancy among gold investors that it did in the heyday of the mid-1990s. The accord expires next year and is likely to be renewed," it said.

Hedging by mining companies, however, is not only no longer a bearish factor, according to Friedberg's, "the de-hedging process has become a bullish factor, at least until the companies committed to be hedge-free complete the repurchase of forward sales."

The statistics "are very clear on this matter," it said. "According to a report published by Gold Fields Mineral Services in August, de-hedging in the first two quarters of 2003 totaled 329 metric tons, compared with 423 tons for all of 2002."

It is "unlikely that mining companies have begun to hedge," Friedberg's said, "because the vast majority of them are large public companies that have made it very clear to shareholders that they have adopted hedge-free or close-to-hedge free policies."

WHO ARE THE COMMERCIAL SHORTS IN THE MARKET, AND CAN THEY DELIVER?

So who are the commercials with the "mammoth short positions who can sit with painful paper losses and deliver if they have to?" Friedberg's asked.

"We speculate that many of the so-called commercials, designated by the exchange as such, may be commercials, but are not natural selling hedgers, and cannot deliver the gold that they have contracted to sell."

With a rising market, "the pressure is on the shorts, and analysis of open interest readings must be revamped for this particular situation," it said.
"The 'commercial shorts' may very well be speculators who will need to cover one day and who do not have the advantage of being able to sit through substantial price movements against them," Friedberg's predicted.

"We've tightened up our stop to $370 per ounce, because if our theory is wrong, a liquidation would be powerful given the overwhelming size of the open interest," it said. "In the meantime, the market is poised to take out the highs and sprint past the $400-per-ounce level."

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Gavin Maguire, OsterDowJones, (646) 364-0959
gmaguire@osterdowjones.com
Copyright 2003 OsterDowJones Commodity News (ODJ). All rights reserved.