Gold Awakens

Posted On Aug 23, 2012 By Dave Gonigam

August 23, 2012

  • Fed-speak pushes gold to a four-month high: Richard Russell spots the next target while Frank Holmes identifies a still-growing source of demand
  • The Street retreats after the Fed news: Guenthner and Elmerraji on why that’s one more sign we’re still in a “shadow rally”
  • The reliable recession indicator that gives the Fed a new excuse to pump money
  • Oil creeps up… the “Flying Pigeon” that plods at ground level… gold, free speech and Nancy Grace… and more!

  Could it be? Did someone just awaken gold from a year-long slumber?

The Midas metal sits at $1,664 this morning — a four-month high, and a level that finally exceeds its 200-day moving average. Silver, meanwhile, is positively on fire: Eight days ago, it was below $27; at last check, it’s $30.67.

  The Federal Reserve gets some of the credit: Minutes from the Fed’s July 31-Aug. 1 meeting were released yesterday afternoon.

The key paragraph read thus: “A number of [committee members] indicated that additional accommodation could help foster a more-rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

The phrase “fairly soon” managed to jump out from the plethora of polysyllabic words and borderline run-on sentences. Risk on, baby!

Next potential catalysts: Ben Bernanke’s annual speech at Jackson Hole, Wyo., a week from tomorrow… and the next Fed meeting Sept. 12-13, complete with Bernanke press conference. Yes, try to contain your excitement…

Still, gold’s latest run-up began before the release of the Fed minutes. Barely 48 hours ago, it stood at $1,620.

  “Gold may finally be on its way to higher levels,” declares the octogenarian dean of newsletter writers, Richard Russell.

Examining a “point-and-figure” chart a half-hour after the release of the minutes yesterday, he wrote, “Gold has risen to fill the $1,640 box, which is constructive. The next bullish action would be a rally to the $1,650 box” — which it then proceeded to do.

“This would take gold clear out and above its consolidation base, and would put it in line to try for $1,680.

  Bill Gross is upping his gold exposure. As we noted on Monday, the Bond King is down on bonds, and down on stocks too.

So Pimco’s $20 billion Commodity Real Return Strategy Fund is expanding its gold holdings from 10.5% of total assets to 11.5%.

“We think gold is going to perform in a positive correlation to changes in inflation,” says fund manager Nic Johnson. “We see higher inflation because of rising commodity prices, unconventional monetary policies and increasing sovereign debt.”

130  “The official sector continued its gold-buying spree this quarter,” writes U.S. Global Investors chief and Vancouver favorite Frank Holmes.

“Official sector” is the World Gold Council’s label for central banks. “The WGC reported that central bank purchases hit a record high since the official sector became gold buyers three years ago,” writes Mr. Holmes, who’s been poring over the council’s latest quarterly report.

All told, central banks made up 16% of total gold demand during the second quarter…

Among the countries leading the way is Kazakhstan, which aims to build up its gold stash to a total 15% of the nation’s foreign exchange reserves. As Borat would say, “That’s nice…”

Meanwhile, the “love trade” Mr. Holmes often mentions in relation to gold is going through a rough patch. Both jewelry demand and bullion demand fell in India and China during the second quarter.

Still, Indian wedding season is just around the corner. “We’ll look for any indications from government policies that might spur the continuation of the long-standing tradition of gold buying for weddings and Diwali in India, along with gold gifts for weddings and births that take place in China during this auspicious Year of the Dragon.”

[Ed. Note: In a recent interview, Marc Faber says “I don’t think anything is… cheap, but I would still argue that gold is relatively cheap.”

If you’re inclined to agree, you’d do well to look into the Hard Assets Alliance — the simplest way to buy, sell, store and take delivery of gold, silver, platinum and palladium. If you’ve ever been put off by precious metals dealers with complicated websites and fuzzy disclosures, you’ll find the Hard Assets Alliance refreshingly different.

For a limited time, you can open an account at no charge. You can learn what they’re all about at this link. Please note that we may be compensated once you open an account, but we wouldn’t recommend the Hard Assets Alliance if we didn’t believe it offered you an outstanding value.]

  Stock traders are “selling the news” after the Fed minutes. After a pop yesterday afternoon that erased earlier losses, the major indexes are down about half a percent this morning. The S&P’s at 1,407.

  “The August rally is still intact,” write our technical team of Greg Guenthner and Jonas Elmerraji.

Greg and Jonas are on board with famed technician John Bollinger (if you’ve ever noodled around with Bollinger Bands on a charting website, he’s the guy who devised them). Bollinger calls the current advance “the bull market that no one liked… No one I know is interested in the stock market anymore…”

“Disbelief,” say Greg and Jonas, “is an important characteristic of the early stages of any new rally.

“Look back to earlier this summer as the market first started moving higher off its recent correction. Stocks moved off their June 4 lows. Important metrics turned bullish. The indexes moved higher for a second day, then a third…

“But the attitude remained bearish. There was still a cloud lingering over the market. Investors haven’t gotten out of ‘bear mode’ just yet.”

So what now? “After a quick move to the upside this month, the market needs to digest its gains. That’s the action we’re seeing this week. The pause in the recent rally — or even better, a pullback — gets most investors riled up about another drop. It’s kind of the ‘See, I knew I was right — stocks can’t go up right now’ moment.

“The further removed we become from the pain, the more investors will begin thinking positive thoughts about stocks…”

  If Fed governors are looking for an excuse to pump, they’ll find it in this chart.

This is the Philadelphia Fed’s State Coincident Index. It crunches four employment indicators for each of the 50 states.

A fall below 50 on the chart has preceded the onset of every recession going back to the Carter presidency by four-five months. There was only one false alarm, and it came last year. But the drop this year is proving deeper and longer lasting.

 Oil is inching up again today. At last check, a barrel of West Texas Intermediate fetched $97.54. Brent Crude — a better representation of the oil price worldwide — is up to $116 on the nose.

 “They’re heavy and slow,” says the Los Angeles Times. “They’re also touted as the most popular mechanized vehicle on Earth.”

The paper writes of the decidedly retro Flying Pigeon. Its most notable features are a clunky 50-pound steel frame (more than three times the weight of a modern carbon-fiber bike), one gear and absolute top speed of 12 mph.

Why haven’t you heard of this marvel of sophisticated engineering?

Well, unless you’re in China, you’re not going to see too many people dragging them around town. But in China, you’d be hard-pressed not to come across hundreds of these iconic machines sluggishly gliding along.

Just to give you an idea of the cultural impact they’ve made, in the ’70s, the Chinese government’s idea of prosperity was “a Flying Pigeon in every household.”

And now, the Bray-Ali brothers of Los Angeles are spreading the riches of inefficiency throughout Southern California. The brothers imported 870 unassembled bikes in two containers to open up a bike shop four years ago.

And, guess what? They’ve sold about 550 of them in the past four years. For an average $300…

Designed in Mao-era China, sold to present-day American hipsters for $300 a pop…
“You’re not going to go racing on a Flying Pigeon,” said co-owner of the Flying Pigeon LA bicycle shop, Josef Bray-Ali. “You’re going to go shopping.”

And unless you want to carry your bike and your bags back home, steer clear of the hills. With the Flying Pigeon, we can take two steps forward and hear you panting six steps back…

Up next, a shakeup in the automobile market: New Ladas and Trabants for 22 large…

“This Brandon Raub story,” a reader writes inspired by yesterday’s main topic, “reminds me so much of the Nobel Prize-winning novel Waiting for the Barbarians by J.M. Coetzee.

“Coetzee describes a ‘fantasy’ empire going wild after an imaginary force, ‘the barbarians.’ The book does not target any country, but it was banned in the Soviet Union! Upon reading the book, I had to think about present day USA!

“P.S. Hope this does not land me in a psychiatric institution…..”

“So,” writes one of our regulars with on the gold angle to the story, “is Nancy Grace concerned about rich white guys like, say…. George Soros, who just bought a boatload of that shiny stuff?

“And, isn’t it a hate crime now — not to mention a terroristic threat — to pick out someone because of their race (white) gender (male) and sexual orientation (straight).

“Oh, wait. I forgot. Those guys don’t count.

“Thankfully, I’ve never heard of Nancy Grace and probably never will again. Guess I haven’t been missing anything.”

The 5: Just be aware she has a sizeable following of mooing masses who’ve never heard of “innocent until proven guilty”… and when innocence becomes too obvious to ignore (i.e., Duke lacrosse rape case), it goes down the memory hole…

 “Here is a short list of weird things,” a reader submits:

  1. “That Mr. Raub is locked away in a hospital named in honor (!!) of John Randolph, of all people. One wonders how he is taking the news. If I held a seance and asked him, ‘Do you think the Feds would nab me?’ Hard to decide what to do. Do you happen to know whether they have really good drugs at that hospital? I mean, that could make a diff.
  2. That Mr. Raub is locked away in a place called Hopewell. It out-Orwells Orwell, don’t you think? Not even he could make this stuff up. ‘Hopewell.’ One doesn’t know whether to laugh or cry.
  3. That Nancy Grace (‘By the pricking of my thumbs,/ Something wicked this way comes!’) is actually Bill O’Reilly’s love child, which explains a great deal. I bet you are wondering about the source of that hot little item. But that only shows how un-with-it you are. That is SO ‘Old America.’ Get with the program. Nobody needs evidence for making accusations, or, in my case, revealing inconvenient truths about a neo-con ho like Nancy G. You might not know it, but you can make up the truth if you know how. You may publish this tidbit if you wish. I ain’t selfish.
  4. All in all, I have to say that this is outstandingly good news! I am jubilant! All this time, I’ve been thinking that I was just a white guy, but I now find — from an unimpeachable source — that I am actually RICH. And I had NO idea! It’s rather embarrassing, really, but I’ll get over it. Probably in Hopewell.

“Keep up the great good work! I don’t know what I’d do without The 5 Min. Forecast every afternoon. But I intend to find out very soon, now that I know I’m rich. Wow.”

The 5: Indeed, the hospital sits on the birthplace of John Randolph of Roanoke — a long-forgotten statesman whom you could plausibly argue was a more-consistent Jeffersonian than Jefferson!


Dave Gonigam

The 5 Min. Forecast

P.S. Best wishes to EverBank’s Chuck Butler as he prepares for surgery to remove the cancer in his jaw on Sept. 5.

“I dread the recovery and rehab,” he writes in today’s Daily Pfennig, “but look at this as a way for me to lose some weight, which is much needed, as I won’t be eating for some time afterward! I won’t be talking much, either, and that means that family and friends won’t be shy about coming around, for they don’t have to fear hearing me talk about debts, deficit spending and the economy.

“Please, I ask of you, this is a decision I made. Please don’t send me notes telling me not to do it or that there is a better alternative way. I’ve seen them all. Please support my decision, that’s all I ask.”

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