SEPTEMBER 26th 2011 GOLDWATCHER POSTING

GOLD & ECONOMIC UNCERTAINTY: CRISIS OR OPPORTUNITY?

Readers are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice.

#26/09/2011 : NB  Please SEE NOTE BELOW ON CME RAISING MARGIN REQUIREMENTS ON GOLD, SILVER & COPPER

Charts courtesy KITCO #Gold Price 21st and 22nd September & #2000 to 22nd September

gold-2122-sept.gif

gold-chart-from-2000.gif

A brief comment on the above charts:

The top chart displaying the  gold price collapse yesterday and the day before (it’s even worse today)  reflects a gold investor’s nightmare. The lower chart with the gold price from January 2000 till the 21st September 2011 reflects the exceptional price gains  experienced until recently, including the parabolic rise since July.  I am no expert on technical analysis and make only two comments on the charts. The first is  the recent collapse reflects technical damage and, anything with a label, can become a self fulfilling prophesy.  My second comment is that a parabolic rise, unless it followed a very specific catalyst, is likely to reflect an unsustainable spike or a price overshoot.

Gold and Economic uncertainty: 

I am not a gold bull – # Correction – I am not  a goldbug (see note below)  but was co-author of The Goldwatcher, have blogged for almost four years promoting the book and have recently been Tweeting. So, no surprise that I felt lousy over the market collapse and found it difficult to compact careful analysis for this blog.  Luckily I read an article today on Gold and Economic Uncertainty published by the CPM Group and found the job done for me.  The founder and MD of the CPM Group Jeffrey Christian is one of the most well informed and authoritative people in the Industry . Here is the closing sentence of the report : ‘Thus, CPM Group has stated that it honestly thinks the gold price could range between $1,600 and $2,100 over the next four months, decline over the next few years, but remain far above any prices that existed in the gold market prior to 2010.’

In a nutshhell CPM  recognise all the dire problems facing the Eurozone and the United States. But market response is the key determinant. And, warts and all, the $ remains the safe haven of choice for big money in times of crisis – for now anyway.  Goldbugs will be dismissive of CPM’s conclusions and they may be right.  In a September audio interview with King World News Robin Griffiths,  Cazenove’s Private Wealth strategist . also recognises a $1600 downside but, looking ahead,  and beyond a $2200 level,  he  sees potential for gold in double digits based on supply and demand dynamics.

Motivation, Timing and Strategies: 

With gold, as with all financial assets, decisions are best made in the context of your motivation, triming and strategies. Following this approach I contributed an article to an Investors Chronicle feature on gold (Pages 12 and 13) at the end of 2009. The article closes with this quote from ’The Power of Gold – The History of an Obsession’ by Peter Bernstein : ‘The most striking thing in gold’s long history was that it led most of the protagonists in the drama into the ditch…Midas…Croesus..and the gold bugs of the 1980s were all fools for gold chasing an illusion.’  Will outcomes for us  be different in 2011?

If we are  ’un-informed opportunists chasing an illusion’ outcomes probably won’t be different.  But, as there is ample good information we can access.  we can  try and steer clear of mistakes that lead to losses. A good starting point on the information route is  the London  Bullion Marketing Association’s Annual compilation of price forecasts from leading analysts published every January.

Recent analysis on gold distinguishes between a  ’Fear Trade’ and a ‘Love Trade.’ The Fear Trade describes what we are usually up to in the West – buying gold as protection against crises we fear will affect us.  The Love Trade relates to the Middle East and Asia- particularly India and China, where for centuries gold has been imprinted in the culture of societies  as a universal store of wealth and value. The Love and Fear trades  appear to have accounted for much of the the gold price surge we have experienced from the early years of the last decade until today’s tumble. But what was behind the tumble?

To account for the dramatic gold price plunge over the last few days we have to consider another class of trade . The  Trade Trade. It includes speculators, trend followers, momentum investors etc etc. The most vigorous buyers while the price is surging.  And the most anxious sellers when the price starts falling – specially when margin calls oblige them to sell good assets like gold rapidly.  The market should be more stable when over extended Trade Traders have been shaken out.  I followed my Goldwarcher co-author Frank Holmes in making a case for moderation with gold in the book. It was good advice then and still is.

Finding the next opportunity: 

In 2000 0r 2001 when the US  Stock Market crashed Warren Buffett was quoted  advising investors to  ’rejoice’ when panic drove prices to levels where shares were really worth buying.  The same could be be true again for gold after this correction has run its course.

#  Note added 25th September :  I meant to write goldbug – someone totally committed to gold in all circumstances regardless of price.   I have contributed to The Goldwatcher book and this blog as an objective independent analyst. But having consistently made the case for gold as insurance against  currency and financial market risks it would be wrong to say I not a gold bull.  And, I must acknowledge, had I been a goldbug I would be much richer !

# 26/09/2011 NOTE ON MARGIN REQUIREMENTS POSTED THIS MORNING ON TWITTER WITH DETAILS ON CME RAISING MARGIN REQUIREMENTS FOR SILVER, GOLD AND COPPER

Margin increases announced after POSTING Friday’s comment on The Goldwatcher : Gold and Economic Uncertainty : Crisis or Opportunity?

Exchange operator CME Group Inc is raising the collateral requirements for trading in gold, copper and silver futures.
Gold margins being raised by 21%, silver by 16%, and copper margins by 18%, effective at the close of trading Monday, CME said in an email after trading closed Friday.
Following the change, speculative investors in the benchmark 100-troy ounce gold contract must put up $11,475 to open a position and maintain $8,500 of that to keep it overnight. Producers and consumers of the precious metal must put up $8,500 to open a position, and the same figure to hold it overnight.
In silver, speculative traders must put up $24,875 to trade a 5,000-ounce contract. The cost to hold a contract overnight was lifted to $18,500.
Copper speculators must post $6,750 to open a contract and $5,000 to hold it overnight.
Exchanges require margins to cover potential losses margin increases USUALLY IMPOSED when markets become more volatile.