First, a negative PR concept was broadly disseminated regarding Rothschilds bowing out of the London Gold Fix. This was looked at by non-professionals and hot money hedge fund managers who dabble in gold and the shares as a very bad sign. Actually Rothschilds has been losing money on their bullion bank business because mining companies are hedging less and the bullion loan business and hence the “carry trade” has dried up. Rothschilds also dumped their commodity and oil-trading unit as well. This event, to a gold non-pro sounds bad, but in fact the cause is bullish. Less hedging and in fact dehedging (buying back their gold loans) by mining companies means less supply in the market in 2004.
Second, gold and the mining shares have been on a huge run for the better part of three years and a natural consolidation (resting level) was obviously reached. In all markets there are very big winners who have been in the move for a long time. They decide to take a small amount off the table, coupled with new money coming in that is nervous since they have bought high and are seeing a correction creates more selling by the now losing new money. This is normal stock market action. With gold shares it is exaggerated because the sector is naturally very volatile. Market makers also head for the hills and fund managers that like the sector are frozen and will wait out a correction or scary sell-off. This creates “no bids” but is usually temporary.
Third, the French and Swiss central bank news about selling gold for usage in humanitarian causes is all old news. But headlines and negative news repeated to a world market will always prompt the weak holders out. The French and Swiss governments should sell just a small percentage of their real estate to the private sector and make 100 times more money for their “humanitarian” causes.
Fourth, The US dollar can’t go in the same direction all the time. Currently the dollar is having a rally and this will not last. But a mini rally has dampened the gold price. It is a mis-conceived notion that a good economy will be bullish for the dollar …when that economy is based on excessive debt and paper money expansion.
These four factors helped contribute to the sell-off in the gold shares today. They are all minor factors and are dwarfed by the fundamentals most of you already understand that are bullish for gold.
Inflation is in the air and a lot of people know it. The 1st Qtr. Consumer Price Index numbers were recently reported in the U.S. at an annualized rate of 5.3%, substantially higher than we have seen in many years. Inflation can reappear quickly. In 1965 the inflation rate was 1%, two years later 4%. In 1973 inflation was 3% and in 1975 it was 11%. In 1978 it was 6% and in 1980, 12%. Gold had strong run-ups in these time frames. The past usually repeats….especially when the monetary authorities ignore the lessons of the past.
The current PPI (Producer Price Index) core crude index (an important leading sub-index of crude raw products) is now up almost 7% in the past year….which means we have plenty more inflation in the pipeline. This will be supportive for gold.
The good news is that anyone in the gold share market is now getting some good experience in the volatility of the mining shares. This will be very important to rely on when gold goes to $600 or $700 and has a natural correction. Can you image what will happen to gold mining companies if gold corrected from $700 and backed off to $500 ? How about $1000 back down to $600 ! It very well could happen in the expected 10 year bull market that in my opinion is just starting. From the late 1950’s, Xerox went from $1 to $4000 by 1973 (split adjusted). Anyone along for the ride had to experience Xerox at one time going from $35 to $180 and then back to $40… then it went to $4000 a share. The same thing could happen to gold and the mining shares. So treat these corrections as normal and remember there are a lot of money managers that missed the first wave of the gold and gold share market and this correction will have them soon showing up at the party to buy some bargains.
THE GOOD NEWS
Jewelry demand in the U.S. was up 3% in 2003 to $16.3 billion. The interesting data is that the average price per unit was only $76. This implies a wide based market and one that is relatively low priced (in relation to gold) therefore a price increase in gold is more easily absorbed. Now in many parts of the world gold jewelry is 100% gold and is very price sensitive, but in the industrialized nations gold demand for jewelry will be a positive growth industry. Also in an age of billions of new consumers coming into the modern world this huge and spread out market place for gold just from jewelry will also get larger and larger.
Gold shares of the major companies were trading in the past week at levels that they were trading at when gold was last $380. It looked as if a correction in the gold price was anticipated by the collective market place. If so, this correction may be over very shortly. A major correction in gold seems unlikely due to the fact the hedged mining companies would cover their short positions (currently 60 million ounces) as well as other players who have been caught short that in the long run do not have a lot of faith in the dollar.
This is a correction and the gold market is in a major bull phase.
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