Gold was up $12.50 to $958.70 per ounce in trading in New York yesterday and silver surged another 54 cents to $19.20 per ounce. In Asian and early European trading, gold and silver remain well bid and have consolidated near these new respective record and 27 year high levels.
Gold strengthened in British pounds and fell slightly in euro. The London AM Fix at 1030 GMT this morning was at $957.00, £483.09 and €634.07.
The recent string of U.S. data has been appalling (including yesterday’s very poor Durable Goods number) and this is putting significant pressure on the dollar and supporting gold. Ben Bernanke testified to Congress that while commodity price gains and price data suggest greater upside risk to the Fed’s inflation forecast, the Federal Reserve is nevertheless willing to risk this by cutting interest rates in order to prevent a deepening of the credit, financial and economic crisis. Bernanke acknowledged in his usual understated way that housing, job market and credit conditions could pose downside risks to their growth forecast but equally an unmooring of inflation expectations could complicate Fed policy and limit flexibility.
That is putting it mildly. Further rate cuts in an already stagflationary environment is very gold bullish.
The perceptive Charles Dumas of Lombard Street Research said that the policy of even more interest rate cuts is “disastrous”. Dumas said the policy could actually lead to recession, rather than avert it, as the resulting inflation was eventually squeezed out of the U.S. economy or as consumers’ real incomes fell because of higher prices. “The Fed’s childish denial that food and energy prices matter (they are not included in the “core” inflation measure) is contributing to the strong upward trend in commodity prices, as investors globally fly from the dollar into real assets,” he said.
GDP figures and Jobless claims in the U.S. today will be watched closely and likely influence the currency markets and gold.
Precious Metals Remain Undervalued and Are in a Classic Bull Market
To those not familiar with the precious metals markets, gold and silver look overvalued due to the recent increase in prices and many believe this is a prelude to a 1980 style gold price collapse. This is extremely unlikely for a variety of reasons. Indeed quite the opposite is true, a gold panic and mass exodus into the safe haven of gold is more likely than any ending of this secular bull market.
Firstly, gold and silver’s rise in recent years has been gradual and orderly and both show the price movement of a classic bull market. Volatility has been less than in the benchmark S&P 500 with daily price movements averaging around 1%. Very rarely have there been price movements of 3% or more up or down and rarely have there been weekly movements of more than 5%.
The bull markets in precious metals have been marked by periods of price strength, price corrections and consolidations prior to further increases in price. Classic bull market behaviour designed to put off and deter weak hands and uninformed investors (who unfortunately will only partake in the bull market in the final blow out stage which is likely some 5 to 12 years away).
Continuously many analysts and much of the media has exaggerated gold’s sell offs and there have been many times when market tops have been called. At $600, $700, $800, $850 and $900 there have been doubters and naysayers who have warned that gold was overvalued and ripe for a correction or price ‘collapse’. This is the classic grind of ‘two steps forwards and one step back’ and the wall of worry that all bull markets are subject too. But particularly the gold market due to the lack of informed comment and analysis.
To further put gold’s bull market in context, oil is up some 1,000% in recent years – from $10 to over $100 per barrel. Wheat is up some 100% in the last 6 weeks while gold is up 100% in the last 3 years. Again gold is only up 365% in 9 years. Calling a top in gold now is akin to calling a top in the Dow Jones Industrial Average in 1997 when it reached 7,000. The DJIA has risen from a post 1987 crash level of 2000 to 7000 in 1997. It subsequently doubled in value.
Finally, in 1980 gold had risen from $35 to $850 or 3,000% in 9 years. Today gold has risen from $260 in 1999 to over $950 today or some 365% in 9 years. So gold had a 3,000% increase in the 1970s and has seen a 365% increase in the 2000s. And this increase in price has been in U.S. dollars which has been the weakest currency in the world (after the Zimbabwean dollar). Hardly the stuff of speculative bubbles.
Gold will likely double in value in the coming years and will reach its 1980 adjusted for inflation high of some $2,300 per ounce (based on CPI calculation of inflation).
Support and Resistance
Strong support in gold is now seen at $890 to $900. Short term support is now at $925 and below that at $915. The $1000 price level remains a short term price target and $1,200 is now a realistic possibility in the coming weeks.
Silver is trading at $19.26/30 at 1200GMT.
As we stated yesterday, silver remains undervalued and $25 looks likely in 2008. Silver’s nominal high of $50 per ounce is likely to be reached in the next 3 to 7 years. Nearly all other commodities have reached their nominal record highs and some have reached their inflation adjusted record highs. Silver remains the laggard and this will likely change soon as silver plays catch up.
Platinum is trading at $2115/2125 (1200GMT). Platinum is flat and appears to be taking a breather and consolidating prior to further likely price increases in the coming weeks.
Palladium surged and is trading at $543/549 per ounce (1200GMT).