As we have been saying in recent commentaries at this page, no one believes that the present Gold upmove is for real. After all, it can't be. The last two came to nothing. This one has already run out of "ammunition", the short interest is way down. And look at Gold stocks. They have barely moved.
Tis true, Gold stocks have hardly moved. Consider the relative performance of Gold and (Australian) Gold stocks since Gold hit its recent $US 270.70 low on May 25:
Gold: $US 270.70 to $US 288.70. Up $US 18.00 or 6.65%
The Aussie Gold index: 663.6 to 677.7. Up 14.1 points or 2.12%
Three to one Gold over Gold stocks. Isn't it supposed to be the other way around? Not necessarily, and especially not necessarily at MAJOR Gold bottoms. No one ever believes an upmove in the Gold price is for real at MAJOR Gold bottoms. No one ever believes an upmove in ANY investment market is for real at a MAJOR bottom. Not at first, they don't. Most people need convincing, and the Gold price is not yet convincing, having hit the high point (intra-day) in its present upmove ten days ago and repeatedly failing to consolidate above the $US 290 level.
At previous Gold bottoms, especially in 1976, 1982, and 1985, Gold stocks watched Gold move off its bottom and said: "Nah, it ain't for real". Then, when Gold kept going, the gold stocks decided that maybe it WAS for real. When that happened, they took off.
The other difference between the situation now and the situation at those previous Gold bottoms (the short-lived Gold spurt in 1993 being the exception) is that most major Gold mining companies now make their money on "paper Gold", not on the Gold they actually produce. The development of Gold hedges and Gold forward selling only really got going in the wake of the market crash of 1987, and there has only been one short "boom" in gold stocks since then, the one in 1993.
These are a number of very good reasons why Gold stocks are not yet reacting to the present Gold upmove. In Australia, there is one more. June 30 marks the end of the financial year in Australia. All Aussie stock traders know what happens in June, there is a surge of "tax selling" - realising a loss on badly performing stocks and using the loss to reduce taxes. Since Gold is amongst the worst performing sectors (it may be the worst of all) of the local market over the past year, there has been a lot of Gold stock "tax selling". That will dry up over the next two weeks, as we approach the end of June.
On June 12, a short article appeared from Bloomberg about a report released by an "economist" who works for the Fed. We have seen no follow up on this article anywhere, except for a couple of mentions of it on Kitco's Discussion Group. The gist of the report was that it is about time that the world's Central Banks stop messing about and get together and sell ALL their Gold.
Apparently, the report was prepared in May by this Fed staffer. From the reaction to it so far, we would conclude that no one is taking it seriously. Well, we take it very seriously indeed. In fact, we are devoting the current issue of The Privateer (published on June 18) to this subject.
Why are we taking it seriously? Because the person who prepared this report works for the Fed. People who work for the Fed do NOT release reports like this to the media without having obtained prior approval from the highest levels. We have seen no comment on the report from anyone inside the Fed, or anywhere else in the U.S. Government or Administration.
We can recall arguments about getting rid of all the Gold and having done with it - stretching all the way back to the late 1960s - when several Government representatives went on record as stating that once the "support" of the Dollar was removed from Gold, the metal would fall from its then mandated $US 35 oz level. We recall having seen predictions that it would fall as low as $US 5.00. It didn't.
Mr Nixon could have just gotten rid of all the Gold in the lead up to August 15, 1971. He didn't. Instead, he "closed the Gold Window" and refused to redeem the U.S. Dollar for Gold - at ANY price.
On the surface, the present proposal is just as ridiculous as it has always been. But the timing of the proposal, and its source, is anything but ridiculous. It comes from the Fed, the U.S. Central Bank, which is presently on the horns of a desperate dilemma as it watches the Dollar drop while knowing that another rate hike on June 27-28 would likely prove highly damaging if not fatal to the flagging U.S. stock market.
But the timing and the implications of this proposal go far beyond that, which is why we are devoting the current issue of The Privateer to it.
Will this proposal resurface, and will it be acted upon? There's no way of knowing. Can the U.S. "persuade" the rest of the world to go along with it. We don't think so. And if the proposal IS acted upon, will it decimate the Gold price? We don't think it will. At present prices, the entire U.S. Gold holding (claimed to be 262 million ounces, a figure which has not changed for more than 30 years), could be bought for $US 75.64 Billion. That's about ten weeks worth of U.S. trade deficit, or enough to keep the U.S. government running for about 2 1/2 weeks.
One thing is for sure, the plot is thickening fast. Do you remember the actual statement at the top of the "Washington Agreement" released by the Europeans back in September 1999? This was the agreement which awoke Gold from its slumber: "Gold will remain an important element of global monetary reserves."
Perhaps the Fed can convince them that it simply ain't so. What do you think?