From Market Rap:
Gold gets bombed... Europe was pretty quiet. The big news overnight was, in honor of the NATO bombing campaign, the Bank of England decided to bomb the gold market. It came out and said it was going to sell half the reserves over time, and in the next few months it would sell about 3 percent. If the bank sells half its gold holdings, it works out to about $3 billion. The amount it has deemed appropriate to sell in the next few months works out to be 200 contracts a day in a market that trades easily 50,000 contracts. So it's really not a very big deal, but psychologically it did its damage. Almost immediately after the news gold was down 10 percent and closed down $7 on the day, just under 4 percent.
I'd like to share with you a couple of quotes from people whose opinions I respect and are astute observers, and have not been known to be friendly to the gold market. Joanie said the following regarding the Great Britain announcement: "No wonder, either. With the short in gold rumored to be at historic levels, the powers that be know exactly what they have done and must be sweating peanut butter. Serves them right."
Dennis Gartman made an even stronger point in his morning piece, which came out before the news was released. He said: "The strength in gold will almost certainly cause the G7 monetary authorities concern, for it is clear that they have wanted to drive gold prices down via their consistent and concerted announcements regarding potential IMF sales."
So then later in the day, when the Bank of England news was announced, he said: "Further, the Bank of England's decision announced earlier today to materially liquidate its gold reserves, seems rather late in coming and rather almost too obvious in its intent. Where was the bank in the past several years, holding gold as prices fell relentlessly? Why is the bank suddenly now becoming bearish? For what purpose is the bank making this announcement? We suggest it is as we noted earlier today: An attempt by the monetary authorities of the G7 to jawbone gold lower so that they can point to gold's weakness as evidence of the validity of their monetary policies."
What will be interesting is the point in time when the gold market spits in the face of one of these announcements and starts to rally. That would be a signal that maybe some powerful up move may start. Here's something that's as hated as stocks are loved, and at some point it will be a very interesting market to be long.
Silver stays strong... Silver, on the other hand, was a stalwart. After being down over 20 cents overnight in the early going it was actually unchanged. Doing its best imitation of The Little Engine That Could, it closed up 5.8 cents on the day - a little over a percent - indicating that maybe the leader of the precious metals brigade prospectively will in fact be silver. The other precious metals, palladium and platinum, were also more or less unaffected as well. So for once there was a differentiation in the metals market, and potentially it may end up helping gold out as well.
This is one of the reasons why I have consistently favored silver over gold. First of all, the supply-and-demand story is better. And maybe more importantly, the central banks don't have any silver to manipulate the market with, or to bomb the market with even if it's not manipulation. Second, if investment demand ever shows up, seeing how the silver market is so much smaller, it will move disproportionately as well. It's going to take investment demand to move gold, and I don't see that demand happening until such time as the stock market is stopped being perceived as a riskless place to make 25 or 30 percent a year or, in the case of Internet stocks, a day.
So even though I've been friendly to gold longer term, I have not really been advocating it. I made a stand last fall when the market was breaking and some of the gold stocks, the bigger ones, actually did all right, such as Anglo Gold (AU) and Getchell Gold (GGO). But the smaller gold stocks have been hurt generically pretty badly.
Live stock quote
(Delayed 20 minutes)
ANGLOGOLD LTD ADS
AU 22 15/16 -1 3/16
GETCHELL GOLD
GGO 31 3/4 -6 3/16
GENL ELECTRIC
GE 109 15/16 +1 11/16
MICROSOFT CORP
MSFT 79 1/16 +1 1/8
AT&T CORP
T 60 7/16 -1 1/2
GOLDMAN SACHS GROUP INC
GS 74 1/8 +6 3/16
FEDERAL NATL MTGE
FNM 72 1/8 +3 9/16
Last updated 6:00pm ET.
For more details on these stocks and more, go to Company Research.
I do find it kind of humorous that the gold market panics at the thought of a $3 billion seller. It's a very small amount when you think that the world's central banks own $500 billion worth of gold, plus all the other gold that's out there. But people rejoice and go berserk when companies like GE (GE), Microsoft (MSFT) or AT&T (T), with billions of shares outstanding, say they are going to bring some more shares. The Goldman Sachs (GS) IPO raised more money than the Bank of England intends to sell if it sells half its stake. It just goes to show you that we've got a preference for one and not another. But someday if all this money decides to go someplace else there will be a lot of fireworks.
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