Musings of a Veteran Gold Broker? Part 5
It has been about five weeks since I last posted on this Forum. For those readers who know my handle, I work here as a gold broker at Centennial Precious Metals. I have to say that this past summer was one of the busiest here on record for the firm. Perhaps people had been reading my posts about the change in trend which usually occurs every Labor Day weekend. This year did not disappoint us, with the absolute summer low arriving on August 17th, after which the price started drifting higher. The weekend before Labor Day provided the springboard to much higher prices, as we saw the gold price go from $680/oz. to its recent high of $745/oz. earlier this week.
So here are my observations on where we have been and where we might be going. As already stated, the gold market starts its seasonal uptrend around late August/early September and continues higher until the Easter timeframe (late March/early April). Along the way there are pullbacks, corrections, hiccups, or whatever you want to call them. One such pullback occurred this past Tuesday when we saw gold drop $20/oz. I would like to discuss this correction. In my opinion, gold should not have dropped that sharply against a feeble rally by the US Dollar. There was clearly some help from behind the scenes to smash gold down before it broke above the psychologically important $750/oz. level. Last week I was remarking to some of my co-workers and clients that I thought gold would reach $750/oz. before selling off $20 or so. Now that this event has transpired, where do we go from here?
Anyone who has followed markets for any length of time knows that markets are interrelated and that nothing occurs in a vacuum. Having said that, lets examine the gold market from a technical perspective and then try to put it into real world terms. Starting with last summers average low of $660/oz. (excluding the one-day drop down to $645/oz.), we saw the market rally about $85/oz. to $745/oz. earlier this week. Applying the typical Fibonacci ratios of 38%, 50% and 61.8%, we could expect the gold price to retrace to around $715/oz, $700/oz. and $692/oz. respectively. In all candor, I would welcome a healthy shakeout to at least $715/oz. and I thought we were going to see it until todays explosive rally back to its current price of $737/oz. However, I cannot rule out one more shot to the downside but the odds are now against it. In this business, we humans cannot predict the future price with absolute certainty but we can predict trends and price ranges based on percentage probabilities. I can live with that.
So what happens if gold manages to pull back to $715/oz. or even $700/oz.? I predict that all the buyers (both physical buyers and individual futures players and hedge funds) who are sitting on the sidelines will storm into the market and prices will respond accordingly. Thus any pullback will be shortlived. Just as an aside. I received two phone calls this week, one on Tuesday and the other one on Wednesday. Both of my clients are deep-pocketed, well-heeled investors. Both of them can easily buy $1 million in gold with one phone call. Both of them are eagerly waiting for some type of pullback. My counsel to them was to act sooner rather than later and here were some of my reasons.
The chances of a pullback diminish with time as other economic reports are released, thus influencing the price. Also, the influence of other markets, primarily oil, on gold is well-established. I have told my clients over the years that gold and oil maintain roughly a 10-to-1 relationship to each other. It is not exact but rather approximate. Earlier today, crude oil rallied from a low of $78.91/barrel to a high of $81.75/barrel, which is 3.6%. Spot golds low today was around $720/oz. and now it is trading around $738.50, which is about a 2.6% increase. You can see how these relationships are not exact but approximations only.
Now add to this oil-gold relationship the 10-year, 20-year and 30-year cycle framework, courtesy of W.D. Gann. It was exactly 20 years ago that we experienced the worst one-day selloff in US stock market historydown 512 points on October 19, 1987. I was working here part-time at Centennial and I remember that day vividly. The stock market had peaked around August 26th (Harmonic Convergence or some planetary alignment was the ostensible reason) and then began a gentle descent which nobody noticed except the people who follow cycles. As I recall, there was a brief plateau period until about October 6th, which acted as a trigger for the big selloff on October 19th. Now I believe history repeats itself but not exactly the same way. Certain analysts who study cycles also believe that. Two names come to mind: Eric Hadik and Peter Eliades. I subscribe to Hadiks newsletter and I know he has been predicting, based on cycle theory, a 20% or greater selloff in the Dow Jones by the end of this October. Yesterday a client told me about Peter Eliades similar prediction. Question is: What will act as the trigger event to fulfill this prediction?
We need to look at geopolitical concerns and see if there are any which might be the trigger to a stock market selloff. There are always many unsettling events. Just turn on the TV and watch the evening news. However, in the last few weeks, I have heard from two trusted sources that the US will initiate a bombing campaign against Iranian nuclear facilities before Bush and Cheney leave office. The question is when. One source believes it will happen before Christmas 2007 and most likely in late October/early November. Is that perhaps the reason oil prices spiked higher today on no apparent news? The other source believes the attack will happen in the first quarter of 2008.
Either way, I believe such an attack will have a tremendous effect on both oil and gold. Earlier in the week, I was told there was an article in the Wall Street Journal (it might have been the op-ed page)that predicted such an attack would push oil prices to $120/barrel. Given our 10-to-1 ratio of oil to gold, that would put gold at around $1200/oz. As an aside, I was informed that the webbots forecast (a project launched by George Ure and Clif from the Urban Survival website) is pretty grim. After the release period in September (which we have already seen push up the gold price to $745/oz.), we are now entering a time frame in November where there will be discussions about the death or near death experience of the US Dollar as payment for oil. Earlier this week, Yahoo! Finance ran an article on Irans refusal to accept US Dollars for its oil. The Iranians have turned to the Euro and Japanese Yen for 85% of its oil sales. Only 15% remains in the US Dollar, and that wont be for long. The discussion of the US Dollars demise might even extend to other commodities like gold and silver. Of course, such talk raises the spectre of the Amero coming on the scene. That is another whole discussion in itself.
One other thing bears mention. Last week, Peter Bofinger, a member of Germanys five wise men economic council (similar to our FOMC here in the US), suggested that Europe should begin to weaken the Euro in order to protect its exports not only to the US market but to the rest of the world. This kind of talk is unbelievable but not totally unexpected. If you go back and read any of the posts by MK and myself, you will see that we talked about competitive currency devaluation as the only way to protect market share. Now mind you, this kind of talk is occurring when the Euro/US Dollar exchange rate is only 1.41. Now imagine if you are a wealthy European who has all of his or her savings in Euros, thinking that is enough to protect purchasing power. You wake up one morning to the fact that some bureaucrats have decided to cheapen your currency just to protect export market share. What are you going to do? Bien sur! You will call your firiendly gold broker and buy as much gold as you possibly can.
In closing, it is my opinion that the gold price will not undergo any significant correction as some analysts are hoping. As discussed above in this post, there are simply too many extraneous factors that are impacting this market, creating hordes of nervous investors. As my German banker friend in Frankfurt said to me back in January 2007, I should expect to see a stampede by the rich into gold by the end of 2007. Question is: Will you be one of them?
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