On gold.
Gold is rising primarily due to sentiment. The mechanism is built on a pervasive expectation of declining dollar and on the demand supply imbalance. Nothing new about that, but it's a reason that's getting old.
The latter practically has zero impact while the former is calling the shots. Is there power under the sentiment? No. In fact, the mining companies are seeing net selling. Same with GLD, the gold ETF. Price doesn't need net positive flow to rise. It needs, and is getting, speculation from Lil Guy abetted with weak selling by pros. This is a dangerous combo.
The pros are selling gold stocks because commodity gold isn't rising as fast as mining company costs. This varies considerably across the spectrum of miners depending upon efficiency of production.
If sentiment reverses, gold stocks will plunge. What could cause that reversal? Rising dollar. Few expect that, but the dollar is likely to rise, and for several reasons.
The most significant reason comes from FED having to raise the ff funds rate. They don't need to raise it much. They can raise it a little without effecting jobs. Raising a little kills gold sentiment.
Amazingly, raising ff rate will have no lasting effect on the stock market. Lowering ff rate will cause the stock market to continue downward. Thus gold and the stock market are moving in their normal inverse relation, but the relation is upside down. Very confusing.
Another inevitable reason for a rising dollar comes from abroad. Foreigners have to get rid of inflating dollars, so they must be repatriated, and in scale. Foreigners will buy US assets and US stocks. This will have the same effect as it had in the late '90s.
The long term disbalance in supply and demand for gold will come into play. It's effect is weak though. It does mean that if gold corrects, it won't fall much in price, because FED fears deflation more than fears inflation.
One factor can drive gold substantially higher outside of all other considerations: inability of China's interest rate level to slow its inflation. Maybe that's why the most sophisticated traders are speculating in gold. |
