From a NY investment bank:
PRECIOUS METALS OUTLOOK
November 18, 1997
Over the past few weeks, despite the tumoil that has enveloped global financial markets, gold has produced what can fairly be described as a less than stunning performance. This turmoil which was borne from the collapse of Asian equities markets, spread quickly to other major financial centres but failed to inspire even the slightest positive knee-jerk reaction in gold. Conversely, the market reacted by moving another 10% lower, amidst a barrage of hedge fund sales and constant rumours of German and Swiss Central Bank proposed sales of the metal. There has been no respite for gold, and a quick glance at the daily chart shows the market to be in a well established down-trend. Psychologically, the all-important USD300 level has been flirted with, and on its first attempt, held successfully. Apart from periodic bouts of short-covering, there is good reason to remain of the view that gold will continue its current down-trend. Most importantly, reference Alan Greenspan's latest comments before the House Banking Committee, when asked how important the Federal Reserve viewed the price of gold as an inflation indicator : 'It was one of the major indicators we would employ to make judgements about inflationary expectations'. On that basis alone, the price has reacted in line with what fundamental economic analysis suggests.
Gold's demise has accelerated since the Asian crisis took hold, moving from USD338 on Oct 1 to USD299.25 on Nov 14. The rally towards USD340 was driven by a combination of producer buybacks and fund short-covering. The failure at the highs was dismal, and such failures generally evidence a strong trend in progress. Rumours and denials with regard to a supposed massive planned sale of gold by Swiss National Bank have been the order of the day over the past few weeks. Whilst any major disposal is unlikely in the short term, the net effect appears to be that the market is almost accepting that gold is gradually becoming less important as a reserve asset over time. Certainly, sentiment has been damaged. Just when many thought the Australian Reserve Bank's sale was possibly the end of the rot, something else comes up and catches the market on the wrong foot. Gold's latest assault on the USD300 level, is probably just a culmination of this sentiment, leaving the market vulnerable to pressure from hedge funds.
Certain pundits are now claiming that comments from some in the industry to the effect of ' It's all over, gold is gone forever', point to the fact that gold is almost at a major long-term bottom. This logic does not hold a lot of weight. For a start, one would need to see a far greater degree of "in your face" journalism, headline material. Sure, it is possible gold has reached a short term low. That does not, however, suggest we are about to embark on a stellar rally. Technically, there is no argument the market is in a downtrend. Take a look at a daily gold chart(enclosed). It's very simple. The structure is pleasant viewing. Small recoveries, followed by fresh lows and then a period of consolidation, and the process is repeated. Healthy downtrend. Prices still at extremely low levels. No one can argue with price. Open interest is bogus at the best of times in its ability to predict whether a market is stretched either way. So many times gold has exhibited extreme open interest levels over the past 12 months, but the price still falls. No news headlines yet to suggest it is all over.
Fundamentally, the story gets worse. Witness Alan Greenspan's latest comments : '...there is no doubt that the decline in the gold price in the recent past parallels the decline in inflation expectations which we see alsewhere. I don't think there's any question the Asian crisis has imparted a degree of disinflation to the rest of the world. I think that's evident and I don't think we see the full impact as of yet...' Greenspan is no fool, and he is telling us gold is still a very meaningful tool and its price tends to parallel inflation levels. He is also suggesting that the Asian crisis will have disinflation effects further on. Logically then, gold should remain depressed. That is, if one subscribes to Mr Greenspan's views.
The shockwaves from the Asian crisis have naturally culminated in an upsurge in volatility in global financial and commodity markets, precious metals being no exception. In a short few weeks implied option volatility in gold has moved from 14, 13, 12% to 21, 18, 17% for 1,2,3 months respectively. We have not seen these levels for some time. Psychologically, the USD300 level has for a long time been a very important level, and the prospect of the market nearing that level, plus general volatility in other markets has been enough to sustain such high levels of implied volatility in the gold market. Whilst the market may soon get used to such low prices and even sub-USD300 levels, volatility should remain at high levels in gold, as well as in all global markets, while the shock waves from the Asian crisis take effect and producers contemplate the real meaning of gold prices below USD300. |
