Auguries — Twilight For Gold?

December 15, 2011

By Kevin Michael Grace

Precious metals were hammered this week, with (at press time) gold down $138.60 (-8.1%) to $1,573.80 and silver down $2.36 (-7.5%) to $29.28. Reuters attributed the sell-off to a “dash for cash,” which has “overwhelmed gold’s traditional status as a haven from risk.”

According to Rupert Caldecott of Dalton Strategic Partnership, “With so many assets declining daily in value, cash has its merits. The bond markets are offering no help. The problem with safe havens is that they have proven not to be safe at all, and the list is getting shorter. It may only be cash very shortly.”

This explanation appears more than a little counter-intuitive and more than usually post hoc ergo propter hoc. David Urani asks at Wall Street Strategies, “Wait, so Europe is going down the toilet; the very existence of the Euro currency is being questioned; and the global economy is looking very shaky. Wouldn’t those all be good reasons to buy gold?” The problem is, “If you’re a gold bug, then the real bane of your portfolio right now is the dollar. The Achilles heel of gold is the fact that it’s priced in dollars.” And he demonstrates with a chart that “Gold’s movement is [now] nearly a mirror image of the dollar.”

The commentators at Seeking Alpha are near-unanimous in their belief that it was the dollar that done gold (and silver) in. (See here, here and here.)

How low can gold go? At the Financial Times, Jack Farchy observes, “For the first time since January this year, it is really struggling for direction, with genuine doubt among investors as to whether it is still in a bull market.” After a ritual denigration of “double tops, head-and-shoulders patterns, ichimoku clouds” and other such manifestations of technical analysis, Farchy is compelled to confess that the importance of gold’s fall below its 200-day moving average for the first time since January 2009 cannot be ignored. “Indeed, I know a manager of a very large macro hedge fund portfolio who holds a bullish view on gold based on the parlous state of the financial system and believes prices are heading to $2,500 and beyond. And yet, he won’t dream of buying gold [until] prices have been flushed out a good deal more.”

Our friend Peter Grandich remains bullish. So much so that he asserts, “The great ‘Bull Run’ won’t end until the price of gold has at least a ’2′ in the front.” So much so that he has put up one million dollars and challenged the “Three Stooges of Gold Forecasting”—Dennis Gartman, Jeff Christian and Jon Nadler—that gold will reach $2,000 before it reaches $1,000. (So far, no takers.)

Grandich introduces an alternative explanation for the sell-off: manipulation. The “‘pied pipers’ of the hate gold crowd would want you to believe that the widespread corruption that has become evident in financial markets worldwide somehow doesn’t take place in gold and silver.”

For Jeff Nielson, gold manipulation is a given. But given all the leased gold (purportedly) shorted onto the market in recent years, where has all the new gold for the latest (purported) short come from? When the one-month gold lease rate falls to -0.57% (the lowest on record), a major new source must exist, Nielson argues. And yet, “Here, unfortunately, we must descend into speculation.” Which in this case is the hypothesis that the central banks have got their hands on Greece’s 111 tons of gold, confiscated to pay for the 50% “haircuts” the bankers took on that country’s debt, and on Libya’s 143.8 tons, traded by that country’s rebels in exchange for boots on the ground to oust and kill Colonel Gaddafi.

At the Financial Post, John Shmuel notes that gold is “still hovering above the $1531.90 low posted on September 26.” His technical analysis, however, indicates that if the 34% correction of 2008 is repeated, “We’re going to see $1,270 in gold in coming weeks or months before this is all over. If you can’t stand the heat, get out of the kitchen.”

Of course, after the 2008 correction, gold rose as high as $1,900. And Shmuel does not believe that the economic fundamentals are any sounder now than then. He concludes, “I feel you need to be dollar-cost-averaging gold in anticipation of the biggest and least publicized bull market of the past decade. Even with the financial world collapsing around us, I would rather own gold or other physical assets than worthless paper which can go to zero. That won’t happen with precious metals. All we need to do is to look at history to teach us this lesson!”

Needless to say, the sell-off of bullion has further hobbled precious-metals equities. At Seeking Alpha, Robert Hallberg declares, “Stock valuations are suppressed and do not represent fundamental value. This is especially true among the junior minors.” This seems unlikely to change, and so, “The writing is on the wall. If the market will not bid up the price of the juniors, the cash rich seniors will acquire them in efforts to expand operations.” Many of the seniors, Hallberg notes, “are sitting on a lot of cash”—Newmont TSX:NMC has over $4 billion, and Barrick TSX:ABX has $2.6 billion.

And now to cases. Hallberg suggests three possible junior takeover targets: Esperanza Resources TSX:EPZ, Golden Star Resources TSX:GSC and Taseko Mines TSX:TKO.

From the same source, Thomas Kelly names the four listed US gold miners which have outperformed bullion in 2011: Extorre TSX:XG, Royal Gold TSX:RGL, Vista Gold TSX:VGZ and Yamana TSX:YRI.

At the Gold Report, David Morgan, publisher of Silver Investor, admits, “I don’t really like the junior sector that much.” That said, “Nothing is more exciting than getting a speculation right.” In that regard, he likes Pretium TSX:PVG, Silvermex TSX:SLX and Tahoe Resources TSX:THO.

And at the Globe and Mail, Darcy Keith reports that despite a recent 15% fall in its share price, Continental Gold TSX:CNL is “still a hit with the five analysts who cover it: three rate it as a ‘strong buy’ and two as a ‘buy,’ according to Zacks Investment Research.”

Finally, British Deputy Prime Minister Nick Clegg was so distressed by David Cameron’s veto of expanded EU powers that he went into hiding. Clegg’s enthusiasm for the European Union is congenital—he is the European Union. Clegg’s mother is Dutch (and there is Russian blood on his father’s side), while his wife is Spanish. This has engendered the suspicion he is a stranger in his own country. One might ask how he has christened his offspring. Has he chosen traditional Island names, such as William, Elizabeth, or, more recently, Darren? As it happens, the Clegg kiddies are called Fernando, Chiquitita and Voulez-Vous. Fine choices all, but they’re not very British, are they?

http://resourceclips.com/2011/12/15/auguries-twilight-for-gold/