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« $1000 Gold: Achieved! | Main | Minor Bear Market Rally For Greenback? »

Gold Update: 11 March 2008

Regular readers will know that we are not buyers of precious metals at these levels and have advocated a little caution going forward as these are tricky times. Gold and associated gold mining stocks are out there enjoying the accolades that record highs bring.

Yesterday, Gold was hanging in there at $971/oz with the magical $1000/oz so close yet so far away. Gold bugs everywhere are waiting to beat their chests with glee when that figure is breached and pop a cork or two. There is no doubt that there is renewed interest in this tiny market sector as evidenced by recent media cover, even CNN can find time to throw gold into the mix, albeit on the back of the oil price. Despite dropping from $980/oz to $960/oz, it managed to finish relatively unchanged at around $970/oz. Not so for the gold stocks as evidenced by the HUI which finished 16 points lower at 471.

Today, we saw gold rally to $985/oz and then drop in the New York trading session to $971/oz as we write. The HUI, however, decided to follow gold up with a gain of about 18 points.

In order to bestow calm on the financial markets Reuters reported the following:

“The U.S. Federal Reserve and other central banks on Tuesday teamed up to get hundreds of billions of dollars in fresh funds to cash-starved credit markets, allowing financial firms to use securities backed by home mortgages as collateral for central bank loans.”

Well this news did the trick as we can see the DOW is up over 400 points and all is fine in toy land. We are concerned that what the Fed is in fact doing is "buying" these mortgage backed securities from the banks to keep them afloat. If the banks don't pay the loans back, then they lose the mortgage securities. Big Deal! Most finanical companies are trying desparately to get rid of these securities and using them as collateral in order to get their hands on billions of dollars in cash, appears to us to be a very smart move on the banks part.

It appears to us that we in for a short period of sideways activity as we wait for the next meeting of the Federal Reserve, where a cut of 50 basis points is almost built in and the possibility of 75 basis points is also in the frame. A whole 100 basis points you ask? We doubt that, not because Ben doesn't want to get the rates down quickly but because a move that big could be interpreted as the Federal Reserve seeing the future looking a lot worse than mainstream thinking can imagine. However, you guys can see trouble coming down the line, that's what gold is telling you and that's why some of your portfolio is dedicated to the precious metals sector, just in case you are right.

We have mentioned once or twice that the HUI may not believe in this high price of gold and is dragging its feet, not wishing to be caught out by a sudden pull back by gold. So what next you ask? Well its only our opinion but we think that gold will stay where it is, at least until the next rate cut which we anticipate being 50 basis points. The market will react accordingly, as it did indeed today, with the central players putting on some sort of a show, a performance that is anticipated, expected, distrusted and disbelieved. According to the script the US dollar will suffer and fall slightly, cushioned a little by its fairy god mother. Gold will edge upwards as it usually has an adverse reaction to the struggling US dollar. The gold stocks will rally but not with any meaningful intent. Why not? Well it is the month of March, not far from 'sell in May and go away'. There is also a lot of profit on the table that just might be removed. Throw in another Nick Leeson or a big name bankruptcy in the financial sector and we could see a panic to raise cash, thus all stocks take a bath. There is also the charts to consider and gold is still $200.00 above its 200dma, which has been a meeting point on more than one occasion over the last twelve months for these two. Nothing goes up in a straight line and gold and silver can experience severe pull backs when the mood changes.

In conclusion we are not buyers at the moment as we bought throughout the summer at lower price levels. Our intention is to reassess the situation after the the next rate cut which is scheduled for the 18th March, but we could get a surprise with the rate cut coming early, although we doubt that will happen. If gold experiences a spike in price then we will consider taking some more profits, if the spike if dramatic enough we will look to shorting precious metals either via the use of 'Put' options or via a limited risk spread bet on the underlying securities of gold and/or silver. The advantage of the spread bet is that in Britain it is classified as gambling and therefore our profit would not be taxed, unlike options which would be taxed.

To short in a bull market is tricky stuff and dangerous and not everyone's cup of tea. We will no doubt suffer the slings and arrows of outrageous emails for even suggesting as much. If you are uncomfortable with this sort of move then don't do it. The summer could be slow and dull for metals bugs so consider it as a buying opportunity. Come Labour Day we will see a repeat of last year when the precious metals market took off, only this year it will be far more dramatic with gold pushing towards the $2000/oz level and silver pushing towards the $40.00 level. Be patient and sit through it and you will be OK. In the meantime we may try one or two trades that are a little different and may just give you a chuckle or two.

Fasten your seat belts the bends are coming thick and fast.

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USD Chart 12 March 08

Gold Chart 12 March 08

Please feel free to add your comments to this article as they will add some balance to this and exciting debates.

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