The Coast is Clear

The New York market is closed and, in a few hours, Asian buyers will decide what's next for the barbarous relic with the lasting appeal - the coast is clear to put up a gold chart and pick over the events of the day.

[Note to new readers: Over the last year or so, whenever precious metals have been the subject of a post at this blog, the price seemed to go in the wrong direction (i.e., down). Commenters now sometimes plead for silence during rallies - this after-the-close commentary is something of an experiment.]

In chart form, it's pretty clear what happened with the price of gold today - a nice surge, breaking decisively through the $670 level that has been providing resistance for most of the last week.


In John Mauldin's always-excellent weekly commentary he quotes Dennis Gartman on the source of this resistance - strong sellers, it appears. Strong sellers who seem to have taken the afternoon off today.

Gold is at $668.50 and is having trouble busting through $670. There are persistent rumors that there is a major seller at this level. Dennis Gartman (no gold bug he, but he is currently bullish on the barbarous relic) writes this morning:

"Moving on to gold, we note that the resistance between $668-670 has proven formidable indeed, for gold has effectively traded within that range for the half day prior to writing yesterday's TGL and for the past full day. Once again, we've no idea who it is that is selling spot gold at $670, but it is someone of very real consequence and with very material selling to be accomplished. Once again, it may be a government, it may be a hedge fund, it may be miners hedging forward production because of bank agreements made on a project or two or three... it may be a combination of the above, or it may simply be very large 'specs' wishing to take profits on old long positions or wishing to get materially short.

"All we care about is that it is someone or something that has thus far successfully stopped gold from advancing, and with the week's end upon us, we shall not be at all surprised to see that seller remain successful in keeping gold from moving through his offers. Next week, however, the 'game' shall be played with a bit more enthusiasm, and the seller... whoever or whatever 'he' might be... shall have a far more difficult time keeping gold in check."

As I have said many times, gold is a neutral "currency." It is the one currency that cannot be printed by a reserve bank, and thus, is a long-term hedge against monetary deterioration.

Gartman gives us a very wise quote from James Burton, Chief Executive of the Gold Council, and one with which I totally agree. When queried about whether a return to a gold standard is possible in the foreseeable future, he answered:

"No - the gold standard was appropriate to the second half of the 19th century, but circumstances are now different. But this does not mean that gold no longer has a monetary role. It remains an important reserve asset for central banks since it is the only reserve asset that is no one's liability. It is thus a defense against unknown contingencies. It is a long-term inflation hedge and also a proven dollar hedge while it has good diversification properties for a central bank's reserve asset portfolio."

I would expect to see more developing central banks put some of their reserves into gold over time, as the developed world sells some of their gold. I would also not be surprised to see another bubble in gold develop at some point, as there is something about the metal that seems to alter mental reality when it starts to run. I hope not, for a bubble and the following aftermath would do a great deal of damage.

We're a long way away from a gold bubble - remember that in inflation-adjusted terms, the 1980 high of around $850 works out to over $2,000 today.

A slow steady rise at a rate far above the official measure of "inflation" would be best for everyone involved (that is, except for the central banks who continue to sell the stuff).

In this report from Bloomberg, it sounds like the combination of a higher than expected CPI and changes to open interest made sellers scarce.

Gold surged to a nine-month high in New York after the U.S. said inflation accelerated more than forecast in January and commodity prices jumped.
...
Gold's gain accelerated after the New York Mercantile Exchange said the number of open futures and options contracts was higher than some traders expected.

"Once the open-interest report came out, there was a big incentive to buy," said Michael Guido, director of hedge-fund marketing at Societe Generale SA in New York. "There are no new shorts coming into the market."

Some traders were concerned that gold's decline yesterday of 1.8 percent, the biggest in six weeks, would spark renewed selling and may end this year's rally. Instead, the number of open contracts fell by 3,476 contracts, or less than 0.9 percent, to 396,115, the Comex said.

Who in their right mind would be selling gold right now?