Gold on the Ropes, but Not Yet Down and Out

Friday, 10 August 2012
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Published in From The CEO

Gold is straining investors’ patience.  It clings tightly to the ropes, but the referee hasn’t stopped the fight yet.  The Fed posturing of the last several months has failed to materialize into a third round of quantitative easing here in the states, an event we know will not only pull gold off the ropes, but will enable it to triumph.  The yellow metal has endured more than its share of blows to the solar plexus. 

ETF gold input has quieted down.  Union Bank of Switzerland reports that a mere 18 Koz were added on Tuesday; and though an additional 51Koz were added on Wednesday, the flow slowed down to molasses in January when 30 Koz were sold off.

Contrary to our recent optimistic report, the anemic Indian Monsoon season has failed to turn around.  As a result, customary aggressive buying in India has slackened for lack of farmers’ income due to poor crop yields.  To make a bad situation more difficult for gold, it’s now entirely plausible that the current inferior Indian crop yield might force rural holders of gold to sell off some of their holdings.

Dallas Federal Reserve Bank President Richard Fisher’s blunt talk against a third Fed stimulus round is perhaps the dampest of the wet blankets sitting on top of the gold price.  A known stimulus hawk, Fisher made the following comment to Fox Business News yesterday:
“particularly now that inflation is not clawing at the door and is running a little less than 2%,…what good does it do for us to put more money in the system? To me we would just be pushing on a string.”

Outspoken though he may be, Fisher’s is only one vote among many at The Fed Board of Governors.  Others like Boston Fed President Eric Rosengren hold just the opposite point of view.  Still, gold hangs tightly range-bound in mid-air at $1,623.00 per ounce as I write this column while it awaits an unambiguous and apolitical sign from the Fed.

Gold might be down, but it’s far from being out though.  So let’s now consider why gold is very much still a contender.  When a commodity or stock price slips but doesn’t completely tank, you can be sure there are strong fundamentals at work behind the scenes.  A look at Comex reveals that stops have been set on both sides of gold’s current price.  When this happens, the stage is set for a breakout in one direction or the other.

Another strong element in support of the dangling $1,623 price level is current drought conditions and rising food prices.  Gold always responds to even incremental inflation; and while we now disregard it as a major threat here in the US, China remains very sensitive to inflation. The Chinese are more apt to make aggressive purchases as a result – purchases that will undoubtedly reflect in the price of gold during the last quarter.

Yet another development that could dramatically affect the price of gold is worth noting here.  As a gold investor, or potential gold investor, you should take this particular development very seriously.  According to a report in Reuters this morning, U.S. bank regulators had ordered five of the country's biggest banks, including Bank of America Corp and Goldman Sachs Group Inc, to create a plan for avoiding collapse in the event they found themselves faced with problems staying open.  These same regulators stressed that the government would not be able to help in the event such problems become concrete.

This regulatory program for a worst-case banking scenario has been in effect for the last two years, and has been pretty much kept a secret until now.  Make no mistake:  despite our cozy-comfy feeling of security, America has seen its share of bank failures.  We’ve seen banks fail in the panic of 1819, the panic of 1837 and the panic of 1907.  We saw it happen again during The Great Depression; and just when we thought that banking panics were comfortably behind us, we saw it again when New York’s Franklin National Bank, the twentieth largest bank in the country, went belly up in 1974.

If our banks go under, what will happen to our cash, my friends?  Do you think the FDIC will take care of each and every one of us?  Oh, and while you’re pondering that, be sure to pick up some gold at the current price. 

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.