Commodities | Feb 28 2007
By Greg Peel
When asked on Monday what he thought would happen to gold if the US equity market broke down, veteran gold trader and CEO of the Tanzanian Royalty Exploration Corporation, Jim Sinclair, suggested the sellers would come in.
“Quite quickly thereafter and most certainly when the US dollar also gets hit gold will steady” Sinclair suggested, before adding that the next move would be to the heavens.
Gold pundit Peter Grandich, of The Grandich Letter, noted that gold had been “quite overbought” on Comex (futures exchange) by investment funds. It was no surprise therefore that gold was hit hard, but the bounce off the US$660/oz low was a “valiant comeback”.
Grandich welcomes such corrections, and would not yet be surprised if US$650/oz was seen again. But ultimately Grandich sees the gold price in four figures. He also points out that market carnage such as was experienced last night used to spark a flight into US dollars, but this was not the case in any magnitude. The US dollar is “terminally ill”, says Grandich.
There is no doubt that almost every analyst in Australia is bullish gold, if not quite so stridently as our gold bugs above. We have experienced such shake-outs of wobbly longs before, and there is nothing to suggest views will change overnight.
A less hyperbolic Neal R. Ryan, of US coin dealer Blanchard & Co, had been forecasting a few weeks ago “the end of easy money” available from the yen carry trade. This has now taken its toll on the Chinese stock market. Ryan cites a number of reasons why this is good for precious metals.
Firstly, he believes that a significant correction in US equities will put pressure on Fed chairman Bernanke to follow up on his recent comments that inflation is under control, and cut rates. Ryan suggests that Bernanke, and US Treasury Secretary Henry Paulson, “don’t want to be at the helm of the economy while it spirals down the tube”. A rate cut would be a big positive for precious metals.
Secondly, the euro has become very popular and the yen is finally beginning to strengthen. Moreover, the Chinese may yet raise rates as part of the government’s economy-slowing package. This would see more weakness in the US dollar. “The dollar is cracking”, says Ryan.
Thirdly, investors will simply shift into precious metals to get away from volatile markets elsewhere, Ryan suggests.
It is notable that gold didn’t really tank last night until after the official close, when EFT custodians dumped the physical required to cover investor selling in the listed products. They would have sold into a thinner market. It is also notable that recent reports of Chinese retail buying over the New Year period were adding impetus to the gold price. A stock market collapse – if you can call it that – may well put at least a temporary halt on such enthusiasm. Ryan also notes, however, that the strongest season for precious metal investing is as yet a month away.
“Load up”, say Ryan.
At 4pm New York closed had rebounded off its lows to US$662.90/oz, and at 12 noon Sydney it was US$667/oz bid.