Global Agenda: Gold regains its shine

The most significant moves in the markets are usually those that were unexpected but also lack convincing explanations.

gold coins 88 (photo credit: )
gold coins 88
(photo credit: )
The most significant moves in the markets are usually those that were unexpected, and hence unpredicted, but also lack convincing explanations. The abrupt rise of gold and other precious metals prices this week is of this sort - and hence worth paying attention to. Only last week, gold was languishing well below $600 an ounce in what the analysts were then terming a well-established range of $570-$600. "Well-established" is a relative term and in this context it meant that gold, after falling sharply in September, had been unable to regain the $600 level and had bottomed-out ("found support" in the lingo) in the lower $570s. The fact that gold has a well-documented tendency to seasonal strength in the fourth quarter didn't seem to be helping and hence had dropped out of the daily and weekly patter. The market's focus was dominated by two themes: the Indian wedding season - because, as everybody in our global and multi-cultural society should know by now, people in India get married at certain times of year and not others, and when they do, gifts of gold are customary; and the apparent link between the price of gold and the price of oil - the two had recently tanked in tandem and seemed to be going everywhere together. Of course, the more traditional link has been the inverse one between the price of gold and the value of the dollar on the currency markets: a weak dollar translates into higher gold prices, and a strong dollar into falling gold. However, this relationship had collapsed some time ago and had certainly not been observable for many months. Gold had clearly broken up with the dollar and they were not an item any more - instead, the new focus was oil. Here, oil was weak and was taking gold with it, so gold bulls were worried and the more independent analysts couldn't see gold doing better than holding its own in the $570-$600 range. However, here we are one week later and gold has sailed through a series of "barriers" invented by the traders and analysts - the $600 level; the 200-day moving average at around 604 (if you don't know, don't ask - your life is better as it is); "resistance" at $605 and also at $610, with perhaps more at $615. Yet by Wednesday night in New York, gold was past all that and approaching $620. Of course the analysts now knew to tell of additional resistance at $620 and $630 - but what they didn't have was a convincing explanation of why the price had shot up about 5% in one week. Some spoke of dollar weakness. This is largely nonsense, except in Japan where the yen did strengthen and - who knows - may have triggered buying of gold. Others, having given up on the Indians and their weddings, rediscovered Christmas and good old Western consumers who, believe it or not, have also been known to buy jewellery. A few - surprisingly, painfully few - made the connection between the strength in the grains markets, noted here last week, and the rise in gold. There is a very long-standing link between these markets, especially soybeans, although why that should be has never been clear. What was crystal clear was that the idea that oil and gold had something in common was dead: oil prices jumped up, down and all around, but gold went its own way - up. Finally, there were those who made the obvious, but totally illogical, connection between the slew of data pointing to a weakening US economy and the sudden desire to buy gold. How this fits with the traditional idea of "gold as the ultimate inflation hedge," when Treasury bonds are rising sharply on renewed expectations of interest rate hikes, is an open question. The one certainty is that gold and other precious metals are up while base metals have generally fallen, oil is weak and the dollar is struggling. The easiest thing would be to blame the hedge funds - that they are simply shifting money into new targets to generate some returns and improve their limp performance. The sophisticated thing would be to explain how the smart money is fleeing to gold because it knows that something big is in the offing (e.g. Bush strikes at Iran after the mid-term elections). But the fun thing is to follow the market action while keeping track of the consensus expectations, the rationales behind them and how these change as the market moves.