Gold Defying Expectations…And Gravity

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I have to admit it: Gold’s performance in recent weeks has amazed even me. And I’ve been one of the most ardent bulls over the past few months.

As I’ve written before, I fully expected gold to begin rising between late-July and mid-August, beginning a stealth rally before much of the market started paying attention again after Labor Day.

Then I expected the fall physical buying season to support the price into the holiday season, whereupon—at some point—investors would begin to realize how much currency and debt had been created across the globe and begin buying up gold as the only viable counterbalance to massive currency creation.

But I never expected this whole scenario to play out within a few short weeks. For the record, gold dipped—briefly—back below $1,000 a couple of times, as cynical investors bet that the metal would once again fail to hold the millennium mark…or as concerted forces worked to prevent it from doing so.

But then the metal broke free from the attempts to shackle it. It even established a new record price when it closed over $1,002.80. So what’s behind this latest spike in gold?

Short answer: No one knows for sure…but there’s been no shortage of speculation from pundits everywhere.

My view is that the important transition in investor expectations that we’ve been predicting is being completed. And the result is that investors now understand that the dollar simply must fall in value relative to other currencies—both the actions and inactions of U.S. officials over the last few months completely support that view.

Moreover, all currencies will fall in value relative to commodities, primarily gold, as debts must be inflated away…and as the oceans of new currency created during the bailouts are pulled into commerce by the nascent global economic rebound.

From another standpoint, gold bugs have to be comforted by the level of skepticism that still accompanies this rally. If a true bull market “climbs a wall of worry,” then gold seems to be advancing steadfastly up a near-vertical slope of concern. There has certainly been no shortage of naysayers and unbelievers during the metal’s ascent past the $1,000 plateau.

And, frankly, there have been some valid reasons for concern. The large commercial net short position in gold, for example, just shot to record levels, even as heated demand for gold forced prices into backwardation. As Gene Arensberg and I have noted, the large commercials are rarely wrong in their prognostications.

But when they are wrong and are forced to cover their massive shorts (as in 2005), they are spectacularly wrong—and the gold price explodes higher in a short-covering frenzy. Were they going to be right or wrong this time?

Then we had the announcement in September by Barrick Gold that it had—finally, after a $750/ounce rise in gold from 2001—decided to buy back all of its remaining gold hedges.

This blockbuster announcement left many wondering if a top in gold had been marked. Indeed, considering how Barrick’s market calls over the years had been so perfectly erroneous, it was understandable that some experienced traders, the esteemed Dennis Gartman among them, considered this an opportune time to exit some of their bullish gold bets.

But perhaps that conclusion was just too simple…to easy…to be correct. Perhaps Barrick, with their sources inside the most hallowed boardrooms of Wall Street and Washington, were tipped off that gold was about to break loose from all efforts to constrain it. Perhaps they realized that the commercials were going to have to cover their short positions. Perhaps they became aware that the bottoms of government vaults had finally been reached…or at least a decision had been reached that no more official supplies would be forthcoming to dampen the market.

We can wonder all day long. But, as my old friend Jim Dines is wont to say when pointing at a particularly compelling chart, “Don’t think. Look!”

And it doesn’t take a master of technical analysis to look at gold’s chart and marvel at the power and clarity of this bull run. In fact, gold’s remaining real resistance has most likely already been cleared. The old intraday “high” of around $1,030 was fairly ephemeral. With the old, March 17, 2008 record close on of $1,002.80 on a spot basis growing distant in its wake, gold is truly breaking out to new territory on a nominal price basis.

And yet, on a real, inflation-adjusted basis, there is plenty of headroom ahead—to at least $2,200 in current dollars.

Yes, anything can happen…and gold could be driven back below $1,000 at any time. Gold’s foes may not have much ammunition in terms of bullion, but they still have bull—and plenty of it. While the rally was largely sparked by Ben Bernanke’s pronouncement that the recession is technically over (a fact we announced in July), the right words spoken at the right time by the right person could throw a barrel of cold water on this gold rally.

Regardless, as I’ve stressed over and over again, we are on the right side of the long-term move. Stand pat in your general allocations, while taking profits where prudent.

Brien Lundin

is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com. Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.

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