A Melman Minute — August 24, 2011
| By | Leonard Melman |
|---|---|
| Date | August 24, 2011 |
When we wrote the following comment this past Monday, we didn’t expect quite the immediate and drastic market action which ensued.
“However, while we remain staunch advocates of the rationale behind gold being an investment of value and also the potentially desirable basis for a new currency order, it does trade within normal market structures and is therefore subject to the same kind of market action and reaction laws. As such, we do expect a correction to set in, perhaps a serious one, over the next several weeks – but we do not believe that a full-scale reversal of the multi-year bull market in gold is likely to occur at any time in the near future.”
Whatever the reason, gold has come under severe selling during the past two days after making an intermediate high just under $1,920 per ounce. By mid-morning today, the price had dropped by almost $160 per ounce to a quote as low as $1,761. Trading has since returned the price to near the $1,780 level. Gold’s drop of about eight percent has been exceeded in percentage terms by silver’s decline from a peak of just above $44.00 to a morning low – so far – of $39.45.
There are two immediate thoughts which come to mind. First, as can be clearly seen on gold’s long-term 5-year chart, even with the sharp declines of the past two days, the yellow metal remains clearly above its intermediate and long term bullish trendlines. Second, gold has enjoyed a spectacular run over just the past few weeks from about $1,500 to over $1,900 – more than $400 – without a single important interruption. Market history strongly suggests that when such enormous profits are generated over a short period of time, the initial counter move can be swift and severe.
Clearly, the situation regarding gold, silver, platinum and palladium bears close watching and a high level of caution relating to trading these metals or their derivative investments is strongly suggested.
There is one piece of evidence which we believe would appear to indicate that this sharp correction is more in the nature of a trading move rather than a fundamental market reversal. Please note the chart of major mining corporation Barrick Gold, symbol ABX, where today’s price decline is somewhat less than the rapid decline in gold itself would have suggested.
When the shares perform better than the action in the underlying metals would imply, in our opinion, that action has a positive inference for the metals themselves.
Anyone who has been fortunate enough to have visited the community of Jackson Hole, WY could not help but be impressed by the immense array of natural beauty to be encountered; a region of rushing rivers, endless forests, ski resorts and the awesome splendour of nearby Grand Teton National Park. However, as the world turns much of its attention to Jackson Hole for the rest of this week, it will not be due to the scenery. Instead, observers will be focusing on any news emanating from an all-important gathering of many of the world’s financial leaders, particularly including Federal Reserve Chairman Ben Bernanke who is scheduled to address the symposium on Friday, August 26.
Part of the reason for the heightened level of interest in what would otherwise by just one of many financial conferences is that Bernanke used last year’s Jackson Hole gathering to announce the Fed’s enhanced Quantitative Easing programs and speculation is rising that he will announce yet another similar plan on Friday. Interest in this meeting is also driven by the growing consensus that the world’s major economies are faltering, perhaps ready to descend into a dreaded “double-dip recession” which many are fearlessly forecasting.
The data would appear to justify such concerns as America has released a string of negative economic reports during the past month including declines in New Home sales, increases in home loan delinquencies and reports from both the New York Fed and the Philadelphia Fed that economic activities in both their regions are on the decline. In addition, consumer sentiment readings are on the decline of late, despite occasional positive data such as the release today of a report that Durable Goods Orders for July showed a solid increase.
Indications of growing economic difficulties are hardly confined to America as unsettling information has been forthcoming from Europe, India and even China in recent weeks. As an example, major European banks have been lining up in order to announce job cuts and some of them have been severe. Bloomberg News Service reported this morning that European banks’ announcements of job cuts in the past month alone have totalled a reduction of over 40,000 jobs. The list of banking houses which reported job cuts reads like a ‘Who’s Who” of European banking establishments, including such names as UBS-Switzerland, HSBC Holdings, Barclays PLC, Royal Bank of Scotland and Credit Suisse.
Bloomberg attributed the cuts to “...as concerns about the creditworthiness of Italy, Spain and France roil financial markets and reduce income from fixed-income trading, stock and bond underwriting, as well as mergers and acquisitions...”
The loss of 40,000 generally high-paying jobs is yet another blow for the European Economic Community as those cuts will likely diminish consumer spending while at the same time increasing government expenditures at a time of already-slowing business conditions and ongoing huge governmental deficits.
Europe must also cope with information that the much-applauded second rescue of Greece appears to be unravelling. Several countries want collateral for their loans to Greece but that country has none to offer, raising speculation that the entire rescue could come undone. Europe is also troubled by the discarding of yet another plan as at least temporarily unworkable, this one involving the issuance of Euro Bonds.
All of this news out of Europe and America is coming at the same time that serious doubts are being discussed about India’s economic future. For several years, forecasters have been predicting years of solid growth in India which, combined with China’s rapid rate of improvement, was being looked to in order to provide support for the world’s otherwise weakening structure. Those hopes may now be diminishing as India is suddenly reporting slower auto sales, reduced fixed investments and lower construction spending. Inflation has begun to rise and foreign investment in India is on the decline.
With all of this in mind, the world is looking with eager eyes to Friday’s speech by Bernanke and market sentiment now changes in swift reaction to any blurb coming out of that center.
All of this should make for a most interesting background by the end of the week.
As of 9:40 AM, several markets have moved through particularly wide ranges, most particularly including the precious metals. Gold opened near $1,830, rose to over $1,850, plunged to $1,761 and is now trading near $1,780 while silver has made similar directional moves. Securities markets have also been variable as the Dow Industrials opened down about 50 points, rallied to +115, fell back to -50 and are presently trading nearly unchanged while the TSX Index, reflecting lower metals prices, is off by about 100 points. Mining share indexes are off by about 3-4% while base metals are trading close to unchanged on balance.
In other markets, long-term interest rates are moderately higher, crude oil continues to regain some lost ground and the US Dollar Index continues to trade near the 74 level.