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James Turk: Last week didn''t take dollar out of its 3-year decline
Gold Is Up to its Old Tricks;
Expect a Rally in Battered Gold Shares
By John Brimelow
CBSMarketWatch.com
Monday, July 26, 2004
http://www.marketwatch.com/news/story.asp?
siteid=mktw&dist=moreover&guid=E0AE9B3F-FE26-472E-8E7F-CD4FC2D482F5
NEW YORK -- Gold is below $400 again. It won't last.
Twice this year I have written on gold, making the
same point: The domestic gold price domestic market
premiums paid for gold by the primary global gold
consumer, India, had become so high that the
then-current brutal downswing could not last.
It has just happened again.
In the previous two cases, the downswing went on,
both in terms of time and magnitude, after my
comment. But by squinting, I can claim that the
HUI gold share index agreed with me. And both
gold and the shares were quite soon reasonably
higher -- about 15 percent -- than when I wrote.
My consolation: At the time, many commentaries
were calling for catastrophic further declines in both
gold and gold equities.
And that just did not happen.
This last slump has been particularly annoying to
traditional gold analysts. It was far more severe than
the simultaneous dollar index rally warranted.
As the indispensable Australian Web site The
Privateer notes:
"This week (July 19-23), $US Gold is down $US 16.30
or 4 percent to $US 390.50, its lowest level since June
17. Here is what happened in terms of other major
currencies:
"Yen, down 2.8 percent.
"Euro, down 1.5 percent.
"Australian dollar, down 1.2 percent."
To the rescue, however, is the fact is that, according
to the premiums shown from India, the country has
been hugely a buyer in the international gold market
since gold dropped below $405 early last week.
This is despite the well-publicized normal seasonal
weakness at this time of the year, a weak Indian rupee,
and anxieties about a possibly mediocre monsoon,
which could well mean poorer crops and less money to
buy gold.
This is not a surprise. The highest Indian premiums I
have ever seen occurred at the $US gold lows in mid-'99,
around $255, courtesy the Bank of England's weird gold
sale market demoralization, right in the middle of the
supposed off-season.
Indians snap up bargains in the gold market.
Why has gold gone down so abruptly?
To close readers of the day-to-day Comex data, such
as James Turk's Freemarket Gold & Money Report, the
question is simple: Gold clearly ran into enormous
selling resistance in the $408-$410 area.
The simplest explanation is that this is central bank
selling designed to influence inflation and interest
rate expectations.
Whenever this happens, opportunistic short sellers are
drawn in. But these are very vulnerable to ambush from
an aroused physical market, of which they know nothing.
So I expect a rally in the battered gold shares. In times
gone by I would have considered the famously volatile
South African "marginals" -- that is, high-cost mines --
at this point. But I am alarmed by the ANC government's
irresponsible strong-rand foreign exchange policy.
So I favor non-South African junior producers like
Agnico-Eagle, Meridien, and River Gold.
A suitable senior would be Goldcorp and a promising
special situation, Crystallex.
Experienced gold fund managers well able to respond
to the current situation run the Gabelli, Tocqueville,
and OCM gold funds.
-----------
John Brimelow is a stockbroker and a brother of Peter
Brimelow, who is a CBS MarketWatch columnist. He can
be reached through www.johnbrimelow.com.
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Ted Butler silver commentary archive:
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