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Associated Press: Opinions differ on rising price of gold
11:21p ET Friday, September 23, 2005
Dear Friend of GATA and Gold:
The two pro-gold reports from CBSMarketWatch today
that are appended here probably signal another
smashing for the gold price Monday but they also
show that more people are paying attention to the
metal and the currency-related reasons for owning it.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
$500 gold -- get used to it again
Consensus clearly bullish for the long term
By Tomi Kilgore
CBSMarketWatch.com
Friday, September 23, 2005
http://www.marketwatch.com/news/story.asp?guid=%7BEFF969AB%2D3D8C%
2D41E6%2D8086%2D632F85AA740A%7D&siteid=mkwt
NEW YORK -- Yuppies, "perestroika," and a stock market crash.
Gordon Gekko made the infamous "greed is good" speech in the
movie "Wall Street," and Michael Douglas won an Oscar for playing
that role.
The good ol' days or not, 1987 was the last time the price of gold
per ounce reached the $500 mark. While the world is a very different
place 18 years later, gold's recent spike suggests a return to that
level is inevitable.
Despite some concerns that the near-term upward path might be a bit
bumpy and the reluctance by analysts to make projections on how high
the price could eventually go, the consensus is clear -- be it for
fundamental or technical reasons -- this is just the beginning of a
long-term bull market.
Gold for December delivery had reached a 17-year high of $479 in
electronic trading on Thursday. On Friday, gold fell $3.10 to
$467.20 on the New York Mercantile Exchange, but was still up
$29.10, or 6.6% since the end of August.
Prudential technical analyst Ralph Acampora said gold's spike up to
17-year highs should not deter investors from buying. His reading of
the price charts suggests a target of $507 per ounce in the near
term.
"Most of the technical indicators suggest that despite an
accelerated trend in price, gold is not overbought," Acampora
said. "Hence, any hesitation is deemed a buying opportunity."
Getting above $500 may be a short-term goal, but Acampora envisions
the price rising even further in the long term, as gold continues on
a upward path it has followed upward for the last four years.
Meanwhile, J.P. Morgan global strategist Jon Bergtheil sees some
risk that gold's run up might be interrupted in the short term by
U.S. dollar strength, as well as from a typical post-Christmas weak
period.
But over the long term, Bergtheil thinks the price will move
steadily higher because gold's drivers are now a lot more secular
and a lot less cyclical.
"We now expect gold to breach $500 during 2006 and to hold these new
higher levels through the balance of the decade," Bergtheil added.
Citigroup analyst John Hill is also bullish for fundamental reasons.
"We expect gold to work its way higher and fully expect a test of
$500 per ounce in the coming months," Hill said. "We believe supply
and demand builds a base for the next round of macro-/monetary and
investment catalysts to enter the market at high price levels."
Why gold?
Gold serves three primary purposes.
First, it is viewed as a protection against the erosion of the value
of money from rising inflation, and against a decline in prices of
paper assets, such as stocks and bonds and the U.S. dollar.
Second, it is seen as a protective "mattress" for investors during
times of geopolitical and economic uncertainty.
Third, gold is a precious metal. People buy it because it looks nice
hanging from their necks and wrapped around their wrists.
For those able to remember the gold rush of the late-1970s, when the
metal soared from the low $100s in 1976 to above $850 in 1980, the
first 2 scenarios were the principal drivers. Inflation was rising,
the stock market was stagnating, the dollar was sliding and Iran
held U.S. hostages for over a year.
In 1987, the dollar was tumbling, inflation was rising, and the
stock market crashed. On the geopolitical front, Soviet leader
Mikhail Gorbachev initiated a restructuring of the Soviet economy
(and society) and Oliver North told Congress about Iran-Contra plans.
Heading into the turn of the millennium, however, gold had lost its
luster as inflation was non-existent, equity markets were soaring
and global optimism was high. Some central banks and government
entities had no longer thought of the metal as so precious, and were
steadily selling off their gold reserves.
Gold fell to a low of about $250 in mid-1999, the lowest price seen
in two decades.
To protect against the disorderly dumping of gold, 15 European
central banks agreed in September 1999 -- known as the Washington
Agreement on Gold -- that the metal would remain "an important
element to global monetary reserves." They collectively agreed to
halt gold sales, with the exception of those that had already been
decided.
Coincidence or not, the 20-year long downtrend ended shortly
thereafter.
When gold's latest uptrend began in 2001, terrorism had shocked the
world, the stock market was still crashing and the dollar was
teetering on the verge of major bear market.
As $500 gold appears on the horizon, geopolitical concerns are still
lingering, and the U.S. braces for yet another disastrous hurricane.
But if investors are afraid of rising crude prices sparking a surge
in inflation, they certainly aren't showing it.
The spread between the yield on the 10-year Treasury note and
overnight rates (the "yield curve") -- which quantifies long-term
inflation expectations -- has narrowed ever since the Federal
Reserve started raising interest rates in June 2004, and is now at
levels not seen since the last recession in 2001.
In addition, the U.S. dollar has been trending higher over the last
nine months. Since hitting an all-time low vs. the euro on Dec. 30,
the dollar has appreciated 12%. Against the Japanese yen, the buck
has gained 8% over the same time.
That doesn't temper J.P. Morgan's Bergtheil's optimism, however, as
he said he believes gold's drivers are now more about the science of
demand and supply than the psychology of fear and uncertainty.
"Our optimism on gold has been based more heavily on variables of a
more long-term nature than the often transient influences of
variables such as the oil price, inflation and the dollar,"
Bergtheil said in a research note to clients. "They primarily
consist of a Chinese jewelry market in its infancy, a South African
gold industry in its twilight years and limited new mine supply
elsewhere."
He also expects demand from India to continue to increase, amid
strong economic growth and a burgeoning middle class.
"Indeed, China's 'taste' for this metal is in an evolutionary stage
within an evolutionary economy, India's appetite for the metal is
well-established and its own economic evolution may well impact more
quickly on gold demand than is the case for China," Bergtheil said.
Merrill Lynch analyst Mike Jalonen noted that India recorded the
highest demand for gold during the second quarter, with jewelry
demand rising 47% over the same period a year ago to 277 tons.
Jewelry demand in greater China grew 12% to 65.6 tons, Jalonen said.
For Prudential's Acampora, the reason for his bullish outlook is
more technical. He feels the termination of the two-decade bear
market has fed into a new bull market.
"It was during the latter stages of this multi-year decline that
gold traced out a massive bottom formation from 1998 through 2002,"
Acampora said. "And it is because of this major base pattern and the
termination of the 21-year downtrend that allow us to label the
subsequent rise in gold...a new secular bull trend."
Tim Evans, a senior analyst at IFR Markets, shares Acampora's long-
term enthusiasm, and sees $500 gold as an eventuality.
"New highs are never bearish," Evans said, referring to gold's run
to 17-year highs last week.
For the near term, Evans is a bit more cautious. He feels the
current "irrational exuberance" in the gold market makes the price
vulnerable to a correction before the first $500 print.
"Non-commercial traders have been loading up on gold," Evans
said. "That suggests there is less probability of substantial new
buying from current levels, and that the risk of a downside move is
higher."
He sees potential for a decline to just above $450, but that would
actually make gold more attractive, and shift the reward vs. risk
profile back to the positive side.
David Solin, partner and technical analyst at FX Analytics, is also
concerned about a potential pullback, but still expects to see $500
gold sometime in the near future.
"We are just not getting the confirmation from other financial
markets for the recent pace of price gains to continue," Solin said,
referring to the recent strength in the U.S. dollar and the
flattening yield curve.
While he feels mild pullback prior to seeing $500 is not out of the
question, Solin thinks any correction will be shallow and short
lived as the long-term trend is in place.
Not all see $500 as a given, however.
Merrill Lynch analyst Mike Jalonen is bullish on gold over the
medium to long term, on the belief that the arguments in favor
outweigh the arguments against it.
For the near-term, however, he said in a recent research note that
the price of bullion may be "close to a peak."
His concerns center on a likely rise in supply, as soon as next
week, as the Washington Agreement allows the 15 European central
banks to resume gold sales for the next fiscal year on Sept. 27.
During the current year, the sales limit, which he said equaled 12%
of annual demand, was reached within 10 to 11 months.
Will the rising price of gold give the central banks an incentive to
sell even faster, or will it make them rethink their plans to sell
at all?
A $500 print might look tempting, but the long-term outlook is even
more attractive.
The latest rush to buy gold has proved a boon for the shares of gold
mining companies.
Said Prudential's Acampora, "The old adage now applies: 'As the
commodity goes, so go the underlying common stocks.'"
Since the end of August, while the December gold futures contract
climbed 6.6%, the CBOE Gold Index hiked up 15%. The gold sector
tracker reached an 8 1/2-year high in intraday trading on Sept. 19.
Since mid-1999, when gold bottomed out near $250, the index has more
than doubled.
Among the gold companies' shares that Acampora finds attractive is
Barrick Gold, which on Sept. 19 reached a near 8-year high of
$29.96. The stock closed Friday at $28.68.
"We believe that this upside momentum could carry [the stock] to its
all-time high of $33," Acampora said.
He also likes Newmont Mining, which Acampora said has recently
broken out of a downtrend. The stock closed at $45.63 on Friday, and
has gained 15% since the end of August.
"This move up materialized on heavy volume and supports the
continuation of a rally to the low $50s," he said.
Morgan Stanley's Rick Bensignor said AngloGold Ashanti's gains seen
over the last 4 months have propelled the stock into extreme
overbought territory, suggesting a period of consolidation is
likely, but recommended using any pullback as an opportunity to buy.
He sees potential for the stock to reach $50 over the intermediate
term.
The stock closed at $42.62 on Friday, and has gained 33% since May
23.
Freeport-McMoRan is one of Citigroup's John Hill's favorite gold
stocks. He feels the company offers "quality gold exposure at
reasonable valuation."
The stock ended Friday at $45.76, the highest closing price since
December 2003.
* * *
Commentary: Gold may be ready to break through
By David Nassar
CBSMarketWatch.com
Friday, September 23, 2005
http://www.marketwatch.com/news/story.asp?guid=%7B23AD9032%2D2FB0%
2D4651%2D8531%2D3A04E9D0BBAE%7D&siteid=mkwt
BOULDER, Colorado -- In my Sept. 14 column I suggested the S&P 500
was likely to pull back to the 1,225 level and that might be a good
place to buy.
This level proved important, given the market did pull back to 1,226
and then followed through with a rally to 1,237 -- but as we know
this rally has succumbed to the events now upon us.
Therefore, we must reconsider the rally broken, given the broad
market is now below 1,225. My hope is that readers acted on this
level and were stopped out. As such, much fear is now in the market,
and we must consider the next possible levels of support.
These appear to be as low as 1,200 and 1,191 given the momentum of
the decline, market breadth and internals (advance/decline). This
changes our focus from the broad market to what is now a "market of
stocks."
Most often we have a stock market, and other times a market of
stocks, and this week's severely negative price action points us in
the direction of being highly selective of sectors and stocks.
This leaves some housekeeping on prior columns in which I strongly
suggested the broker dealers, which I have been recommending for
several weeks.
Given the extreme fear component now in the market, I suggest
setting stops on this group at 172.80. If penetrated, exit
immediately and take profits. Both E-Trade Financial and Ameritrade
Holding Corp. were noted in particular, which rallied nicely, but
these positions must now be considered guilty until proven innocent,
given the current market condition.
Once we gain support within the broad market, I believe this group
will be quick to react and trade with relative strength, but until
then -- take profits and wait for a lower entry opportunity.
Now, moving forward, other groups to consider include the gold and
silver sector, which still have much more room to move higher. From
a comparison basis, this group still trades low relative to energy --
a well respected ratio worth considering.
Let me explain.
Prior to the rate hike on Tuesday, the S&Ps were trading higher
ahead of the news, until Greenspan confirmed the inevitable. This
drove the dollar higher while gold suffered, as did crude.
The rate hike news was just fine and the market liked Greenspan's
words as a whole -- until the fears in the gulf re-emerged like a
bad dream. As this fear exposed itself (See the VIX , representing
the most volatile action in years -- up more than 9% in just one
day), gold made a 17-year high -- signaling a breakout opportunity
(which can also be well tracked by the XAU -- suggesting a breakout
above 111.49 is due any time). Upon viewing the XAU chart, this
technical picture will be clear.
Fundamentally, there is a well-respected ratio between gold and
energy that also can not be ignored, and currently we see that it
takes seven barrels of oil to buy one ounce of gold. This 7:1 ration
is considered to be quite low. If the dollar weakens further over
the coming months -- as many currency analysts believe, gold will
have both fundamental and technical support to go higher --
expanding this ratio. This could be a source of opportunity to buy
low volume pullbacks in gold.
Currently we have gold trading at approximately $475/once (divide by
seven for the approximate price of crude), and if the dollar does in
fact find resistance, we will see a higher gold price, which in turn
will increase the gold/crude ratio.
You may think the gold/crude metrics are completely independent of
each other, but in fact they are historically accurate gauges of
economic stability and have great influence on the monetary policy.
That stated, this puts pressure on the Fed to create a soft landing
for short-term rates, and many believe the one vote of the 9:1
decision to raise on Tuesday was more telling of the fed's future
plan than the nine votes to raise or wording that followed.
Traditionally speaking, a weaker dollar increases the price of gold.
Conversely, rising interest rates supports the dollar (making it
more attractive to hold) and weakens gold, and it is this
fundamental principal that one must consider -- regardless of the
recent divergence whereby both the dollar and gold have shown
strength.
The fact is, gold has been far more resilient than the dollar and
the dollar has received great help from the Fed (higher interest
rates improve the attractiveness of the dollar). And while this year
has been good for the dollar, the dollar has been consolidating
since early summer and has only shown modest strength recently
compared to gold.
This strength is likely to dissipate even more as the Fed's rate
hike campaign is likely nearer the end than the beginning or middle -
- this seems certain given the campaign began in August 2001 and
events of today, while much different in nature, are growing more
concerning.
While the Fed stated it will remain "accommodative" and suggested
again that rates could be raised at a "measured" pace, gold seems to
be a caged animal ready to break through.
The next FOMC meeting is on Nov. 1, and perhaps the best
opportunities to buy gold will be on any weakness as the result of
these rate hikes which appeared to be numbered.
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Ted Butler silver commentary archive:
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