So What Happened to Gold?
By Adrian Ash
January 17, 2008
Devaluing money so no one can
trust it seems an odd way to fix the economy...
GOLD'S TAKEN QUITE THE TUMBLE already this
week, losing more than $30 an ounce between Tuesday and
Wednesday before bouncing...falling...and then bouncing and
falling again into the London close.
Take a look at the chart and it's clear the hot
up-trend is broken. Gold
Prices have slipped through their near-vertical move
starting in mid-December – and not a moment too soon!
Any time you stumble upon a 15% surge in only six
weeks, best stand aside and let some other fool pile in at the
top, most especially if he wants to pile in with borrowed money.
Expect plenty of options & futures traders
caught buying Comex gold contracts on Monday to be hurting
already. Gearing up with cheap money cuts both ways when one-way
betting goes wrong...
We can only guess at quite how much money has so
far been lost by bullish gold traders this week.
The "net long" position of speculative
traders – the total number of their bullish contracts minus
their bearish betting – had never been greater than in the
week to last Tuesday, the latest data available. With Gold
Prices only pushing higher 'til Monday, you can bet there
was never so much money at stake, gambled on gold's 38% surge in
five months only running one way.
Of course, gold buyers holding just physical gold
– that most simple of assets – are also showing a loss from
the new all-time record of $914 per ounce. But at least they
don't face any margin calls. And at least they've still got
their gold. Whereas the Comex's most over-geared gamblers will
now be calling their brokers – and locking in losses – just
as soon as they drain that last shot of Wild Turkey.
Outside the leveraged losses of the derivatives
market, meantime – and outside the offices of high-fiving
derivatives brokers – what exactly has changed for gold since
the start of this week? Behind the sound and fury, our guess
here at BullionVault
remains the same as it was long before this last sharp leg
higher began:
The long-term trend for Gold
Prices won't truly turn lower until the price of money
itself turns sharply higher.
Sadly for anyone hoping to save for retirement or
plan a new business, however, the world still has Ben Bernanke
running the Fed – along with Jean-Claude Trichet at the ECB in
Frankfurt...the team of "yes" men stacked up by the
British government against governor Mervyn King at the Bank of
England...and the zero-rate crazies of the Ministry of Finance
in Tokyo, still blocking any move above 1% interest from the
Bank of Japan.
In short, higher global interest rates look as
likely right now as George W.Bush winning a third time this
autumn. Double-digit interest rates – which is what it took to
restore the value of money, stem inflation in the cost of
living, and kill the bull market in gold at the start of the
'80s – now look as remote as flared burgundy trousers and the
first series of Dallas.
Fast forward to 16th Jan. 2007, and the latest US
consumer-price data told nobody nothing they didn't already know
today.
The cost of living in Dollars has shot sharply
higher, unlike the returns paid to anyone caught mistaking those
Dollars for wealth. So even without this week's ludicrous rumors
of an "inter-meeting" rate cut worth 100-basis points,
the Federal Reserve is now paying zero after inflation. And
whatever the bond market says, Ben Bernanke has plenty of time
to destroy America's currency by simply sticking to the Fed's
pre-announced meeting schedule.
No "inter-meeting" rate cuts are needed,
whatever the bond market might think.
Over the last three months, said the Bureau for
Labor Statistics today, the cost of living in the US rose at a
5.6% annual rate. Across the Atlantic in Europe, announced the
EuroStat agency, consumer prices rose at a near-14 year clip.
Things are getting tough if you're trying to
survive on a fixed income, in other words. They're worse still
if you've been dumb enough to buy a fixed-income asset such as,
say, US Treasury bonds anytime since the global credit crunch
kick-started a fresh downwards lurch in real interest rates last
summer.
The "safe haven" flight into the warm,
welcoming arms of US government debt has been so massive, the
10-year yield has now sunk from 5.20% at the start of
July...right down to 3.70% on Tuesday this week. So even fund
managers possessed with enough foresight to put your retirement
funds into Treasury bonds early would now be delivering less
than zero in real terms.
Yes, the new bear market in stocks has helped feed
the bull market in bonds. But losing money in stocks is no
excuse for losing real value in bonds. Not unless you're paid
for mere "relative performance" rather than actually
delivering genuine gains to investors.
Back in the Gold
Market, meantime, new investors have got to expect some kind
of pullback, plus a consolidation to follow. The price action
this month alone says it's long overdue! But where – and for
how long – might the price of gold now sit?
The surge starting in summer '07, sparked by the
Fed's first-round of rate cuts, looks at first glance just like
the huge run-up of early 2006. That "cathedral top"
ended in a blow-off around $720 per ounce; and it was preceded,
as now, by a record-sized "long" position in Comex
gold futures.
The Gold
Market then dropped 25% inside two months. It took another
10 months to get even again, before shooting higher.
But the difference then was that Gold
Prices had moved higher along with all things – bonds,
stocks, crude oil, base metals, mortgage-backed derivatives,
even commercial real estate prices. Since August '07, in
contrast, gold has surged higher whilst the equity markets have
sunk. Oil has failed to push higher, and real estate's dead. Nor
can the real value of bonds, destroyed by inflation, hope to
keep up.
Put another way, what would the world's physical
gold owners now accept in return for their gold? What might they
accept six months from now?
US Treasury bonds yielding less than inflation...?
British Pounds losing value at the fastest rate in 16 years...?
Euros to lend or invest into business, even as input prices for
manufacturers outpace the very returns that investors can
earn...? Japanese Yen paying 0.2% in the bank even before you
factor in the rate of inflation...?
We can thank the world's central bankers for this
pretty pass in financial affairs. Cutting interest rates below
inflation, Bernanke & Co. believe they're somehow going to
help both workers and business. Quite how remains unclear;
devaluing money so no one can trust it seems an odd way to fix
the economy.
That's as true for savers in Europe and China as it
is in the United States. And it's not until interest rates turn
sharply high – maybe up to double digits, hitting even the 19%
enjoyed by US cash-savers at the start of the 1980s – that
central bankers can hope to restore the world's trust in money.