The Great Gold Trading Frenzy
Bill Bonner - Thu 10 Dec, 2009
Golds Historical Trading Day
Johannesburg , South Africa
We are high over the African veld... at least, we think it is called veld. That’s ‘field’ to you and us. And we’re so high above it we can’t see it anyway.
After a few days in Johannesburg, we’re on our way to Dakar. Why would Bill want to go to Dakar? We asked the same question. But Dakar is just a stopover on the way to Washington.
Meanwhile, there are things to be reckoned with.
When we left the ground, it appeared that we were finally getting the shakeout in gold that we’ve expected... and maybe the beginnings of a shakeout in stocks too.
(Whoa... we just landed in Dakar... got an internet signal. Seems gold is down another $22. The Dow, however, rose 51 points yesterday.)
On Friday, the London gold market saw the highest volume traded in history.
London gold expert, Dominic Frisby, sent this commentary:
“After peaking last Wednesday at about $1,220 an ounce, the price has fallen almost $100 in just four trading days. Friday’s capitulation – some $60 – was particularly ugly. It shows just how much speculative, hot money there is in the sector.
“So what now?
“In the week to last Wednesday 7 December, almost $300m of call options (options betting the market will rise) were traded in the largest gold exchange-traded fund (ETF), GLD.
“That is more than the entire call volume of the second and third quarters of this year – in just five trading days. On Wednesday alone, trading volume in GLD calls amounted to almost 50% of what the market traded in the entire second quarter.
“That is a sign of extreme speculative excess. It is not the time for short-term investors to buy. At such extremes, you have to ask: where are the next buyers going to come from?
“The time to buy is when the put volume (bets that the market will fall) is at record highs. Or, as the Wall Street proverb puts it: ‘When there is blood on the streets’. I daresay there will be just such opportunities again.
“As we head into year end, there are a lot of fund managers who will want to lock in their profits for the year.
“I’m afraid that means they will sell their gold – and anything else they own that has done well – at the slightest hint of a turn in the markets, because they will want to secure their gains (and their bonuses) on what will have been an excellent year. That’s what we saw on Friday and why the market fell so hard, so fast.
“In the short term, this does not bode well for any market – except one. “It may be that we are finally seeing the end of the ‘Great Reflation Trade’, this astonishing rally out of the crash.”
Click here to view a larger version of this graph
As anticipated, the dollar is staging a rally and gold is headed down. How far will this correction run? Don’t know.
But don’t imagine that the dollar is in any way similar to a strong currency. It is going ‘the way of all paper’ – to the trash bin. But between here and there, it could be an exciting ride.
Nothing goes down in a straight line. Prices bounce. Sometimes, they bounce so high you think they’ll go up forever. That is what happened in the stock market since March…
People think we’re in a new bull market. It’s just a bounce.
We’re in a depression. Depressions take time. And depressions undermine prices... businesses... plans... and confidence. That means they boost up paper currencies.
No matter what you’ve got or what you produce, a depression will generally bring it down. Because, in this period of adjustment, people have to cut back. That leaves fewer bidders in the marketplace... and lower prices.
Another way to look at it: a depression corrects the errors of the previous expansion. Those errors were errors of commission... generally, doing too much of something. Building too many factories... putting up too many malls... borrowing too much money... or shopping too much.
How do you correct such errors? Bankruptcy. Workout. Default. Repossession. And, of course, by omission. By NOT doing dumb things.
And that means fewer dollars are spent, invested or lent out. Thus does the supply of dollars naturally contract during a depression.
Trouble is, the errors of the boom era almost all involved debt. And most of that debt is denominated in dollars. And most people now need dollars to pay their debts.
The world may want to turn up its nose at the dollar, but it won’t be able to do so as quickly as it might want.
Is the dollar doomed? Yes. Is it going to disappear tomorrow? No.
More news: A bigger natural resource crisis than oil?
“A growing resource crisis is threatening to unleash conflict, famine and disease across the world,” Joss Smith of The Zurich Club.
“The resource in question is not oil or coal, but water. Compared with the headline-grabbing resource stories of oil and coal, it doesn’t receive the major coverage it warrants.
“But the problem was serious enough for the United Nation Secretary General, Ban Ki-moon, to make this dramatic statement at the 2008 World Economic Forum in Switzerland:
“The challenge of securing safe and plentiful water for all is one of the most daunting challenges faced by the world today ... Too often, where we need water, we find guns instead.
“Population growth will make the problem worse. So will climate change. As the global economy grows, so will its thirst. Many more conflicts lie just over the horizon.”
Joss believes these global water conflicts are coming sooner than most people think, with “bigger repercussions than previously imagined”.
“In the last century, the world’s population has tripled. And yet water consumption has increased six times over.
“In the next 50 years, the world population will probably grow by another 40%-50%. All of these people need clean water to survive. But many are not getting it.
“Right now there are 2.6bn people without proper sanitation in their homes. This causes 1.7m deaths each year.
“It’s estimated that by 2030, two billion of the global population will live in slums. These are usually places without sewerage treatment facilities or pipelines for safe clean water.
“Meanwhile, the climate is drying up water sources.”
Of course, it’s not easy to think of water as a scarce resource. Not here in the UK, for sure. You want a drink of water… or to have a shower… you just turn on the tap and it’s there.
You don’t think of water as scarce like oil… or gas… or gold. And so most investors ignore it as an opportunity.
But Joss thinks this is a big mistake. In fact, in a recent report for members of The Zurich Club, he shows how to profit as governments start to pour billions of pounds worth of investment into new water technologies.
He’s uncovered an investment that could “put you at the vanguard of the world’s quest for clean, safe water.”
But now is the time to get in, before this becomes the big story of 2010.
You can read this groundbreaking report on the coming “water wars” and how to profit in the latest issue of The Zurich Club Communiqué.
This is a members-only publication. But it is just one of the reports you can access immediately by accepting a no obligation trial membership to The Zurich Club.
You’ll also discover the Club’s much talked about “blue chip landlord” strategy – an incredible, but simple way to enhance the performance of your investments.
Take a look here for details.
Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
And back to Bill who has some more thoughts...
*** Actually, we don’t have any other thoughts. So, we’ll let our old friend Issy Bacher do the talking.
“I grew up in Johannesburg...” he began.
“It has changed so much, I barely recognise it. It’s booming. Especially now that the World Cup is coming.
“The biggest change is probably that the blacks have more and more money. I don’t know exactly where they’re getting it... maybe it’s the result of BE, as we call it – Black Empowerment. Maybe not. They’re starting businesses. They’re very entrepreneurial. Everywhere you look, there’s a new business starting up.
“Look at this area. It used to be cow pasture. Now, it’s shops, malls, and housing developments. It’s a real growth economy... with a huge low-cost labour pool... just like China. But with English language and Anglo-Saxon business standards... it has a lot of advantages.
“My wife and I went out to a restaurant last night. It was the most luxurious restaurant I’ve ever been in... more luxurious than anything I’ve seen in New York or London. It’s owned by a black guy... a friend of my sons. It was our anniversary; he gave us dinner for free.
“ Johannesburg is flying high now. So is all South Africa. You know, this is a resource economy. And maybe it’s making money because it is exporting resources.”
Colleague Dan Denning was less confident.
“I don’t know. South Africa has some big problems ahead of it. I was watching a guy on TV yesterday. He managed to invoke two dumb ideas... communism and racism... in a single sentence. ‘The whites still control the means of production,’ he said.
“I mean, it’s crazy. Didn’t he learn anything from the last century? Both racism and communism are dead ends. But apparently, he has a lot of popular support.
“And I hear crime is very bad. There is razor wire all over the place. It’s there for a reason, I imagine.”
But Issy defended his homeland:
“Well, most of the criminals are not from South Africa. They’re criminal gangs who come down here from Nigeria. They’re in the drug business. You have the same problems in the US.”
Issy is a technical trader. He is also the inventor of a computer software system, called Cycle Trends, that aims to predict market prices by interpreting cyclical movements.
We had to ask: what’s ahead for gold?
“It’s topping out for this stage of the cycle. Of course, we haven’t seen the final top. But gold is in a downtrend now. I don’t know how long it will last.
“The interesting thing is the action of the South African gold mines. Even with gold over $1,000 they still aren’t profitable. They’re very deep mines and their costs are too high... largely because the rand has risen so much against the dollar.
“I’m a chart guy. And what I notice is that the stocks are bumping up against their upward limits. They’re going to bust out soon. And then you’re going to see some real fireworks.
“People talk about the South African mines as if they were history. I don’t believe it. I think they’re going to skyrocket. They’re like options on the price of gold. When the price of gold goes up enough, these stocks will soar.”
Until tomorrow,
Bill Bonner
The Daily Reckoning
Editor’s note: By the way, Dr Issy Bacher’s Cycle Trends software isn’t just about gold. Sure it’s been successful in predicting the gold market in the past… and we’ll certainly pay attention to what it’s predicting now. But Cycle Trends can also be used to predict stock market moves. We sent you details of this fascinating system last year and the software is still available here.
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