Gold Sell Off: Time to Sell or a Chance to Buy?

Adrian Ash - Tue 15 May, 2007

Gold failed to break above $692 per ounce last Monday the third failure in three weeks. In fact, it began the week trading at a lower price year-on-year the first such loss since the bull market began in 2001. Is last week's sell-off our cue to quit or one last chance to buy gold again before the next "remorse price" hits and we come to regret not buying more below $700...$750...even $800 per ounce...?

- If you're looking for a reason to sell gold right now, we've got them in spades today.

- Twelve months on from gold's quarter-century spike to $730 per ounce, the Dow is up, the Dollar is up, Treasury bonds are up. So whatever fate holds in store for America's "Empire of Debt", it certainly isn't bankruptcy in May 2007.

- Gold, on the other hand, failed to break above $692 per ounce last Monday – the third failure in three weeks. In fact, it began the week trading at a lower price year-on-year – the first such loss since the bull market began in 2001. (You can see the size of gold's disappointment here:

"Gold - May 2006 Revisited"

http://goldnews.bullionvault.com/gold_may_2006_spike

- Between Wednesday and Thursday alone, the world's largest exchange-traded gold fund - StreetTracks GLD - saw net sales worth five tonnes. The spot price sank nearly 3% over those days. If only ETF gold buyers could trade outside stock market hours, GLD traders could have avoided trying to sell into the sharpest falls.

- In the futures market, more than 200,000 long gold positions in Comex June contracts began selling off, too.
Speculative investors, gritting their teeth and sticking with the "Trade of the Decade", now need to roll their bets forward to the next quarterly contract. So far, the June contract has dropped $20 from a week ago.

- Is last week's sell-off our cue to quit – or one last chance to buy gold again before the next "remorse price"
hits – and we come to regret not buying more below $700...$750...even $800 per ounce...?

- "Fourteen of the 31 traders, investors and analysts surveyed by Bloomberg from Sydney to Chicago on May 10 and May 11 advised buying gold," reports the eponymous newswire today. "Eight said to sell and nine were neutral. Five of the past six bear markets in the US Dollar led to a higher gold price. The metal is up 5.4% this year while the dollar has fallen 2.4% against the euro. The Bloomberg survey has forecast prices accurately in 99 of 159 weeks, or 62%."

- Indeed, "the market sees a falling gold price as a gift horse," reckons Jon Bergtheil, head of metals at J.P.Morgan Chase in London. "The fundamentals are still very positive."

- How positive exactly? Other than the price – and the volume of noise - nothing has changed since Monday last week. Here at BullionVault.com, just as at The Daily Reckoning, gold remains a raging buy.

- On the supply side, world gold mining output is struggling to rise, as the recent rash of quarterly reports shows. AngloGold Ashanti, the world's third largest gold mining company, just reported first quarter output down 1% from last year; it dropped 10% from December. The decline came despite a 25% rise in capital expenditure. Cash costs rose 7.4% per ounce.

- Gold Fields Ltd of South Africa, the world's fourth largest gold mining company, saw output drop 3% between Jan. and March. Total cash costs were nearly 16% higher from a year earlier. Newmont Mining, the world's second- largest gold company, is now forecast by Wall Street to suffer declining revenues in 2008.

- All told, says GFMS – the widely respected London consultancy – we should expect total world gold supply from central banks, miners and scrap jewelry to decline for the third year running in 2007.

- The bubble in gold-mining stock mergers, meantime, far outweighs spending on trying to find new sources of ore.
Non-ferrous exploration budgets hit a record $7.13 billion last year according to the Metals Economics Group. But M&A spending in the gold sector alone was more than two-and-half times as much judging by Merrill Lynch estimates.

- Over on the other side of our Trade of the Decade, meantime, "I believe very strongly that a strong dollar is in our nation's interest," said Henry Paulson in an interview on Friday. The US Treasury Secretary's timing looks impeccable, but you've got to wonder who in the hell he's trying to kid.

- Yes, the dollar last week pushed the euro down to a one-month low – more than 1.5% off its record top of April 27th. Yes, gold retreated 2.6% all told between Monday and Friday. But ailing near long-term support on its trade-weighted index, the dollar priced against other currencies is as low today as at any time since the mid- 70s. Measured against gold, the US dollar has more than halved since 2002.

- Paulson hasn't told Congress to slow Washington's spending – and he didn't order Ben Bernanke at the Fed to hike Dollar interest rates way ahead of inflation.
Instead, he's moaning that the Chinese Yuan needs to float freely; somehow, in Paulson's prime-time philosophy, that would make the Dollar stronger.

- But repeating the word "strong" when speaking of dollars does not make for a "strong dollar policy". Mere cant and spin cannot replace higher rates of real interest in defending the dollar – nor yuan, yen, Swiss francs or euros – from the slow decline towards zero.

- Threats of a base-rate hike to 5.75% here in the United Kingdom would put real rates of interest after inflation and tax right around zero. For every £8 in the world this time last year, another £1 has since been conjured into existence by the nation's twin bubbles in consumer and corporate debt.

- Gold, in contrast...well, they're having real trouble making that any more. 

Regards
Adrian Ash
for The Daily Reckoning

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