NOTE: this piece was send out to our readers on March
Scared about the current sell-off? The reason for this sell-off? Well, quite obviously there were more sellers than buyers of our beloved gold shares last week. Don’t like it? Well, as the saying goes, if you can’t stand the heat stay out of the kitchen. I’ve been warning several times lately for the upcoming volatility in gold and its shares. In times like these the only proper thing to do is to do nothing at all.
Sure enough this sell-off is fuelled by panic, fuelled by fear. Fear of a global commodity melt down as a result of China’s economy collapsing. Analysts were pointing to the biggest drop (9.2%) of the Shenzhen/Shanghai Index as a sign that things might slow down indeed.
As a result gold started to sell-off like there is no tomorrow. As I explained in my piece ‘Managing the gold price – absurd idea or not?’ I think the current sell-off has much more to do with blatant government intervention than with fear for a so-called commodity crash.
Never mind that the Shenzhen/Shanghai Index is up 13% last week, yes, it’s 3.8% higher than before the big drop. And you are panicking?
Never mind that China imported 81 percent more copper in January than a year earlier, , a real sign of slowing demand eh?
And what about India, the largest gold consuming nation? Well, GDP is expected to grow 9.2% in 2007, it’s fastest pace in 18 years..Really something to be fearful of right?
These stats don’t point towards lower demand for gold and subsequently lower gold prices, instead the opposite is true.
So what is driving down the price of gold then?
As suggested above most probably it has more to do with blatant intervention but another popular theme nowadays concerns the yen carry trade..
The unwinding of the yen carry trade would force traders to sell gold in order to repay their borrowed yen.
According to Neal Ryan, Vice President and Research Director of Blanchard & Co this is all good for gold, he says:
Blanchard research note: Why it's time to load up on gold
By Neal R. Ryan Vice President and Research Director Blanchard Economic Research Unit Blanchard & Co., New Orleans Tuesday, February 27, 2007
There were serious losses today across the board in stocks and commodities.
What to do?
The dollar is cracking. The end of the easy money via the yen carry trade, which we forecast a few weeks ago, seems to be taking place. It is decimating the Chinese stock market and now is taking its toll on the U.S. stock market.
For a few reasons this is all very good for precious metals investors, though it might not seem that way right now, since everything is out in the yard like a garage sale.
1) Wall Street will start begging, in its subversive way, for a cut in interest rates sooner rather than later. And Wall Street probably will get lower rates because Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson don't want to be at the helm of the economy while it spirals down the tube. According to the Fed, inflation is in check, so getting interest rate cuts to keep the economy and, more importantly, the stock market afloat for investors will be the order of the day. Rate cuts will be very positive for precious metals.
2) The yen is finally strengthening against the dollar, and the euro seems to be becoming the currency of the hour. There also has been chatter that China will have to tighten interest rates on the yuan to cool off its economy. Again, all this is very precious metals-positive because of money that will be flowing into gold amid a weakening dollar.
3) Investors will begin moving much more quickly into precious metals to get away from the volatility in uncertain global markets. Conversations will shift away from your uncle telling you all about how he made money in the Brazilian and Malaysian stock markets to how he has begun buying gold and silver.
4) This is all taking place with the strongest season for precious metals investing still a month away, and with the new gold supply/demand situation we constantly pound the table about starting to work its way into investor consciousness.
So here we are, fundamentals pointing towards higher gold prices but fear of fear dragging the gold price down. The current sell-off is not the start of a major correction as some analysts do suggest. Let me repeat once more that common mainstream gold analysis has become a joke lately. One noted gold analyst predicted a long-term negative outlook for gold on the thesis that something that can be produced for $350 an ounce simply can’t be sold for $640 for a long period of time. Well, never mind but can some one explain me why oil can be sold for more than 10 times its cost of production for decades? Can someone explain me why people are willing to pay more than 0.1 ounce of gold for a piece of paper ($100 bill) which has a production cost of less than 1 cent? Aren’t these just simple things of supply and demand?
Demand for gold will be accelerating for reasons well documented above while Gold supply won’t be able to meet that demand due to the inability of central banks to fill the supply/demand gap of 1500 tons a year. This will ultimately result in much higher gold prices, not lower.
So what to do now?
As said above, thee only proper thing now is to do nothing at all. In times like these please take a few steps back and take a peek at the big picture, you’ll see that current fear is way overdone.
Let’s take a peek at the updated relative charts and the gold/hui ratio.
The gold/hui ratio chart reveals that big corrections never started from gold/hui ratio’s above 1.85. In fact this chart point towards ‘BUY’ opportunities, not ‘SELL’
relative HUI chart
This relative HUI chart says we’re still in the process of marking higher bottoms (not lower). The last major bottom of last major correction was in Sept 06. All next bottoms turned out to higher ones. We’re nowhere near a major top yet.
relative gold chart
This relative gold chart says we’re still in the process of marking higher bottoms (not lower). The last major bottom of last major correction was in Sept 06. All next bottoms turned out to higher ones. We’re nowhere near a major top yet.
Last but not least, take a peak at the gold chart below and you’ll notice that in fact there’s nothing to worry about.
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