Gold

Gold was up $13 to $878.40 yesterday and silver was up 7 cents to $16.62 (more on silver below). Gold traded flat in Asia and has risen in early trading in Europe to $889 per ounce.

The dollar is flat but oil is again higher and this is contributing to gold’s rally this morning.

Further consolidation at these levels (the $850 to $890 range) may be necessary. Should gold close convincingly above $890 to $900 we could see the momentum players who deserted gold in recent weeks come flocking back into the market driving prices higher again and contributing to the next stage of the gold bull market.

Today’s Data and Influences

It’s a relatively quiet day on the data front but markets await April’s housing starts and permits and Michigan consumer sentiment which are expected to be weak which should further support gold. The housing report is likely to show that U.S. housing starts fell to a 17-year low which should make dollar bulls and gold bears nervous about adopting positions.

Yesterday’s TIC Data Worrying for U.S. Current Account Deficit

Yesterday, gold surged initially on technical buying and short covering prior to weak data in the form of Empire and Philly Federal Reserve Indices, industrial production, weekly jobless claims and the TICs data, all of which were neutral to negative which exacerbated the move to the upside. As did oil rising to near new record high prices again above $126 a barrel. We are again testing resistance at $890 and need to close above it and $900 if the negative technicals of recent weeks are to be reversed and gold can resume its medium and long term rising trend.

The TICs data was dollar bearish and gold bullish as it showed that net overall U.S. capital flows reversed sharply in March to show an outflow of $48.2 billion after a revised $48.9 billion inflow in February. Private investors shunned U.S. assets in March, with data showing an outflow of $57.6 billion after an inflow of $58.4 billion the previous month. This is a clear indication that the Bear Stearns and financial crisis led foreign creditors to balk at buying U.S. assets and means that the dollar’s recent slight recovery reprieve may be short lived.

The TICs will assume increasing importance in coming months as we see whether the U.S.’ many creditors are willing to continue funding the U.S.’ still massive annual trade and current account deficits even at near record low bond yields. Even a small decline in buying interest in dollar assets could have serious ramifications for U.S. bond markets, interest rates and the dollar – resulting in a return to higher interest rates and an even lower dollar.

Contrarian Investing Positive for Gold

The mood towards gold in much of the financial press and in the markets remains bearish to lukewarm at best and this is another contrarian signal that the worst of gold’s sell off may be over.

A contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong and thus goes against the crowd who are invariably wrong.

It is interesting that much coverage of equity markets is to continually buy the dips and use corrections to add to positions (no matter how much risk there is in the financial markets). Rarely do pundits say that stock markets have ‘peaked’ and it is time to sell all stocks. Stocks for the long term is the mantra. Even though gold has outperformed the benchmark S&P 500 and Dow Jones since 1971. This is a truly long term time frame of 37 years which is the lifetime of your average investor.

Yet, there is a continual barrage of such misguided commentary on the gold markets. Tops have been called in the gold market when gold reached $500, $600, $700, $800, $850, $900 and $1,000 and all were proved wrong. Eventually the gold perma bears will be proved right (interestingly they are normally stock perma bulls) but that will be when gold has surpassed its 1980 inflation adjusted high of some $2,300 per ounce.

Timing the market in any asset class is a mug’s game and proper diversification into all major asset classes, including gold, is advised. The allocation to each asset class should be based on the macroeconomic conditions of the moment. Thus, in current times risk aversion should be paramount and thus an allocation of at least 10% to gold is merited.

Silver

Silver is trading at $16.80/16.86 per ounce at 1200 GMT.

There is speculation of strike action in Peru which should support silver at these levels. Miners in Peru, the world’s biggest producer of silver, may hold a national strike in 11 days unless Congress passes legislation on a greater share of profits, higher pensions and rights for subcontracted workers.

Resource nationalism is rife throughout the developing world with indigenous people demanding a share of the national wealth produced from their land. This was seen in Venezuela overnight with the government forbidding new gold and silver projects and threatening other mining and logging concessions. Environment Minister Yuviri Ortega said the South American country will not give permits for any open-pit mines and will not allow companies to look for gold and silver in its vast Imataca Forest Reserve.

Meanwhile industrial and investment demand for silver remains very strong. Geoffrey Burns, chief executive officer of Pan American Silver Corp., said yesterday, that there is rising industrial demand internationally as mine output declines. Investment demand has remained very strong with the silver ETF adding a sizeable amount of ounces in recent days despite silver’s recent sell off. A further nearly 2 million ounces were added to the ETF on Wednesday alone.

PGMs

Platinum is trading at $2103/2113 per ounce (1200 GMT).
Palladium is trading at $435/441 per ounce (1200 GMT).