Two things are apparent about the Gold spurt which began on June 2. This one is quite unlike the previous two sharp spikes, the ones in September 1999 and in early February this year. It has not had anything like the explosiveness of either of those moves, and this time, there is no "Washington Agreement" or announcement of Gold hedge buy backs as an obvious reason behind it. The second thing that is obvious is that hardly anyone believes this move is for real. Both volume and open interest on the Gold futures market are way down, and Gold stocks have hardly moved at all.
Do you remember the U.S. stock market in August 1982 (when the Dow bottomed at 776)? The attitude towards stocks at that time was exactly the same. No one believed it. Interest rates were still high, the U.S. was still gripped by the recession, and the stock market had been gyrating unpredictably for years. It took until 1985, after a market pullback and a short-lived economic downturn in 1984, before investors started to put their money into the market in earnest.
If the situation on the U.S. stock market in the years leading up to 1982 was bad, the situation in Gold leading up to today is worse. First, the price fell steadily for nearly four years, from February 1996 to September 1999. Then it spiked, twice, but nothing came of either of them. Gold stocks just kept on going down, buried alive amid the rest of the market which spent most of that time powering ahead. And when the stock market did keel over, with the tech stocks taking a terrible pounding, it bounced back again. The Gold stocks haven't even had a "dead cat" bounce. They just lie there gathering dust.
Of course, all of this is a perfect textbook description of investor attitudes at a market bottom, especially one that has already given two false signals of being about to take off. As we said in the current issue of The Privateer: "Twice bitten - thrice shy.". The lack of enthusiasm is overwhelming. All in all, its a perfect situation.
"In the final analysis, the present level of Gold against the U.S. Dollar cannot be maintained indefinitely, especially if the Dollar continues to fall in coming weeks. It is much too early to call the Gold close of $US 270.70 on May 25 a "bottom". All we can say is that it was certainly a selling climax, and that the Dollar fell - precipitously - the very next day."
(Posted here on May 26)
It is still too early to call that May 25 selling climax a "bottom", but that is what anyone with an interest in Gold (or Gold stocks) should be thinking it was. Nobody believes it when major tops, or bottoms, are hit on investment markets. Most American investors still don't (or won't) believe that the Nasdaq boom is over. It is not yet definitively proven that it IS over, but it would take something very analagous to a miracle to get the Nasdaq back above its March highs. It is true that market miracles sometimes happen, especially in election years, but we will believe that one when and if we see it.
The key to Gold's future performance remains the U.S. Dollar. If the Dollar can arrest its recent slide (and it has staged a minor turnaround since June 7) then Gold may continue to languish. But if the Dollar starts to drop again, it is going to be very hard to keep the Gold price at its present unexalted levels. A lot rides on the June 27-28 FOMC meeting. The Europeans have just sent a jolt of surprise through the markets by raising their rates a greater than expected 0.50%. The Head of the Bank of Japan is insisting that his nation's "zero interest rate" policy cannot continue much longer. And U.S. stock markets (the main lure for the foreign investment capital that forced the Dollar UP in recent months) are still looking very shaky, despite their recovery over the past two weeks.
Gold itself is $US 11 higher than it was a week ago, and $US 9 Dollars lower than the peak it reached in spot future intra-day trading on June 6. Gold stocks, both in the U.S. and in Australia, have yet to react at all. The situation was skewed somewhat in Australia by the recent coup in the Solomon Islands. That led directly to a mine closure by DELTA GOLD (DGD) and a precipitous fall in its stock price. However, the Aussie Gold index did react enough over the past week to produce a double bottom on its point and figure chart. So we now have solid support on both Gold and (Aussie) Gold stocks.
With Gold still falling (albeit only $US 0.40 on June 9), the situation is unresolved. We can but wait and watch. But keep two things firmly in mind. First, the present attitude toward Gold and its stocks is perfectly attuned to what happens at market bottoms. Second, for both Gold and Gold stocks, the downside risk is minimal. If you use charts, the major support points are easy to pick and are VERY close to the present action.
Contrarians don't always make money, but when they are right, they make a lot of it. With trading discipline firmly in place, it's a very good time to be a Gold Contrarian. Watch this space.