The DOW and TSX were up 200 points today for the first time since the Obama rescue package was approved. But my gold portfolio declined about 10% today and is now 1% below the Feb. 5th benchmark while bullion is up 5.7% over that same period. Gold futures fell over $35 today.
Bloomberg's published wisdom explaining the cause for this correction is "gold falls as demand ebbs after rally to $1,000". Unfortunately we can't verify or confirm that demand "ebbed" because SPDR inventories have remained unchanged for the past 4 days at 1,028.98 tonnes. For now I would tend to explain this correction as an adjustment that is quite typical of markets. I'm inclined to wait and see how gold moves over the next few trading sessions. If gold can't recover fairly quickly then the notion that we have been participating in a sucker gold rally gains more substance.
There appear to be a couple of incompatible notions about gold's future that I've heard. The first notion, which is most logical in my mind, is to expect gold to do best when we see the rescue package being put successfully into action because this stokes inflationary fires in the long run. That thinking seems straightforward enough. The other, more miserable notion, argues that gold will do best if the rescue package doesn't work because deflation and the related failure of government programs to kick start the economy will enhance golds desirability as a store of value. This 2nd notion seems to fit more closely with recent gold market behavior.
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I don't personally believe that in the long run gold, or any other commodity has much desirability as a store of value, but, pragmatically, its desirability does depend on whatever investors are willing to pay for it.
ReplyDeleteMarketWatch says "Gold futures fell Thursday ...as higher stock markets and crude prices reduced safe-haven buying."
ReplyDeleteThe big three indexes are down on the day. What have you been smoking, MarketWatch?
I think both of Jeff's notions above affect the price of gold. (1) The inflation one is actually the expectation of relevant future inflation by market participants, so the technical analysts could never measure this directly. (2) The other one is that although the future value of gold is uncertain the future value of other investments is even more uncertain, especially when our economic stimulus does not seem to be working (and the perception of this will change over time).
All of this suggests a complex interaction of at least these two factors, and if someone can even predict one of them please let me know!
In the case of gold mining companies, there is at least a third factor: (3) The profitability of the company will be affected by the effectiveness of management in controlling costs, finding new reserves, estimating the amount of reserves, merging/selling off parts of the company for strategic reasons. The other two factors would only play in the value of the reserves of the mining company, which value would be discounted by the expected effectiveness of management.
Soooo, if you know a mining company that is only involved in operations, then their revenues will be determined almost entirely by the effectiveness of management, especially at controlling costs. (In a cost-inflationary environment it is difficult to estimate this.) The extraction contract has to be with a resource owner who is willing to continue to work with the mining company management.
I don't know how one gets a quote or follows the trading of the Kinross warrant....
ReplyDeleteInteresting article on the changing perception of the US downturn: http://www.nytimes.com/2009/02/28/business/economy/28recession.html?th&emc=th
ReplyDeleteI acknowledge security prices are a leading indicator for economic activity. Still, I am starting to think security prices will contract further in the next 3-6 months. Of course, this will not be monotonically downward, but cyclical, depending on daily events that shift investor expectations.
What about commodity prices? Houses will be worth less, vehicles will be worth less also because of the aging of the fleet. Higher-cost producers will reduce cost or go out of business. Lower-cost producers will continue to have a viable business model but will be challenged by other producers and falling aggregate demand. The same with low-cost commodity suppliers. I've got to think that this cost/price environment would continue to challenge commodity prices.
Is gold a special case? Refined commodities can be scarce because of the underlying supply of raw material, because of the difficulty of the refining process, and they can be scarce in relation to demand. I think gold is special, but I don't know if that means an overall increase in the price of gold, or just that the price of gold will not decline as fast as the prices of other assets.
What about cash? Cash has potential for a huge decline in value as a result of inflation. But other asset prices seem to be falling right now and any remaining business momentum is shifting to lower-cost producers and suppliers. Even in overall equilibrium some prices go up and some go down. So it depends on everything else! Cash and near-cash may possibly continue to hold most of their value.
And just in case these comments are valued based on the financial track record of the author, I hold 3 securities and lost $1000 yesterday.
Market is open.
ReplyDeleteNearly everything is down.
Gold and related mining are doing better than most.