The US markets had a smack in the face when July’s Job report came out on Friday night.
Economists / forecasters / tea-leaf-readers had been expecting a net loss of 55,000 odd jobs. The actual figure came in at more like 131,000 jobs lost.
The fine print contained more bad news, including a big fall in part time workers. This is normally a prelude to full time jobs being axed.
Where does this leave the US?
Take a minute to look at the excellent chart below from Calculated Risk. The red line skulking around at the bottom of the chart shows what proportion of the work force have lost their jobs so far during the current recession. For comparison, the other lines show what happened during all the other post-war recessions.
You can see we are 31 months in so far. The red line shows us that we are looking at a real possibility of the insipid employment recovery stalling already, and the job numbers getting even worse.
Dire news indeed: The S&P500 answered by falling 1.6% in half an hour.
The strange thing is that the markets then bounced sharply to make most of the ground back, closing down by just 0.2%. What is going on?
The reason for this counter-intuitive response is that the markets are now sure that the Fed will now have to pull out the stimulus measures again. What, because it worked so well the first time?
On Tuesday night the Fed issues its monetary policy statement, so we find out for sure soon. It seems more than likely the printing presses will be turned back on again.
This is bad news for the US dollar. But this is good news for the markets – hence the bounce.
It’s also good news for precious metals prices. Platinum was up by 0.1%, Silver was up 0.8%, and gold was up 0.9% immediately after the news. As editor of Diggers and Drillers, more than half of my current recommendations are on precious metals.
At the end of last month, in Diggers and Drillers I argued the case that the falling gold price would be short lived, and that we would be looking at a new high for the gold price by September. My advice was to make gains by getting onto our gold stocks whilst prices were temporarily depressed.
D&D readers that took this advice will have made up to 18.4% in a week, with the average across our four current gold stocks being 13.04%. Not bad for a week.
The good news for those that missed it is that this should just be the beginning. I still reckon gold will be hitting a new high before too long, taking good gold stocks up with it. My view comes down to the one sided balance in the gold market: supply can’t keep up with demand. This normally increases around this time of year as seasonal factors increase demand further. Now the Fed is putting the taps on again, expect the gold price rise to accelerate further.
Below is an extract from the Diggers and Drillers 30 July weekly update, where I made my case for a bounce in the gold price.
Gold and gold stocks on the cheap until September
The gold-haters have been all over the media this week, with claims that gold’s time is up. This is total bull of course.
What is it about gold? Why do people on both sides of the divide get so passionate about it? I hate to point out the simple fact: gold is just another asset. That’s it! The cats out of the bag – I’m not a gold bug!
What I am is someone looking for investment opportunities where the most impact can be made. One way to do this is to identify the commodities where the price looks secure going forwards because demand is set to exceed supply. Then I find the companies working towards cheaply producing of lots of that commodity cheaply. The basic theory behind what I do aint ‘rocket-surgery’.
To me it’s arbitrary what the commodity it is. I don’t care if its timber, tea or tin. If the tin supply is dwindling whilst demand is cranking (which is in fact the case) then you’ve got a commodity that’s fundamentally poised to rise in price. It’s econ 101.
It reminds me of the letter send to the New York Times suggesting that this same ‘law of supply and demand’ be abolished by the senate because it seemed to be behind the irritating price increase of every day goods. Not even the mighty senate could get around these tectonic economic forces, which are ignored at investors’ peril.
Most of this week’s myopic, gold-hating, mainstream commentary somehow managed to overlook the supply – demand picture completely. This bilious ranting may sell newspapers, but is a bit like discussing Melbourne’s reservoir levels without taking a good look at rainfall and domestic/industrial water-use statistics.
Besides, any call for the end of gold’s bull-market is clearly premature once you take a step back from the day-to-day noise, and look at a ten-year chart.
My point is that a bit of perspective is called for by the sensationalist media.
Gold has fallen 8% in the last month – agreed. It may pull back further – agreed. But one stubbie does not a six-pack make.
Besides, gold is still up for the year, as is the All Ords Gold Index.
Yet the All Ords is not.
The ascent in the gold price has survived many far bigger trips and stumbles in the last ten years, and these are really just noise at the end of the day. The short-term gold price is volatile, but hey – that’s commodities for you.
The yellow line in the chart above is the 200-day moving average. This has clearly acted as strong support each time the price has come close, except during the 2008 crash. If the price falls through this support line (now around $1150), which seems unlikely, then the next stop is 1075. Even then, it’s no big deal. It will just be a brief opportunity to catch gold and gold stocks on a dip before the next move up, which I expect would be as soon as September.
Knowing what caused this recent dip helps to calm the nerves. It is mostly down to two factors. First it is a result of some big moves from the gold derivatives traders, and secondly gold has a fairly predictable monthly pattern which typically causes, at best, a flat price this time of year.
I’ve compiled the chart below from institutional data showing the average monthly price change in the US dollar gold price since 2005. I’ve made the chart show the cumulative monthly gain, so that the red line shows the net effect over the course of the year. The blue line shows the trend. It is well known that July and August is normally a lousy time of year for gold. Gold’s run typically kicks off in September, and has finished the year up 9.21% on average for the last five years. This is all down to which markets are buying and when. Stocking up for the Indian wedding season, and Chinese New Year are big factors for example. Last year was a perfect example.
These short-term dips are great buying opportunities for anyone that appreciates the underlying supply – demand fundamentals. The supply picture is outlined nicely by the chart below. Mining supply (navy blue in the chat below) is slowly falling, despite pouring money into exploration. The easy gold has mostly been mined and an increase in production is looking highly unlikely. Scrap supply (light blue) has been tapped up a fair bit in the last few years and is now decreasing. To top it off, official sector sales (central banks – in red), has ceased. In fact, central banks overall are now buyers of gold. You wonder if, just perhaps, they know something.
The net effect is that supply has levelled off.
Total global supply seems to be capped at 4,000 tonnes a year, despite rising prices and rising demand. What the media hasn’t woken up to on the demand side of the picture is the explosion underway in Chinese gold demand. The government has made intentional changes to increase gold investment by the general public. This waking dragon is the one single factor that has the scope to tip the gold market into deficit in no time at all. A quick look at the volumes of physical gold traded on the Shanghai Gold Exchange you can see how fast this market is growing.
in 12 months
The bottom line is this: Supply is tight, demand is rising, so the gold price will rise.
The price rise will be volatile, and may possibly even pull back further in August first. But when the gold price sets new highs again in September or October, expect to see the frenzied media quoting the gold bulls once more like long-lost friends.
Until then, there is going to be some good buying in gold and gold stocks.
Dr Alex Cowie
Diggers and Drillers
For Money Morning Australia
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cb…part answer to your question, previous thread. Currently sitting in airport. watch the ABC’s Landline episode (9 august) on the loggers.
http://www.abc.net.au/iview/?gclid=COaBw4SCq6MCFQMjbgodBF4K3w#/view/616255
Gold went down last night.
keep watching PF…I’ve heard that for the past 10 years!
Thanks, Nick. My machine does not like iView very much, but I will persist.
PF – Prices today seem pretty much like they were yesterday. If anything, slightly higher, especially silver.
http://www.perthmint.com.au/metalPrices.aspx
Gerald Celente we are going to have unemployment worse than the Great Depression
Gerald Celente on The Alex Jones Show Mon 08.09.2010
http://geraldcelentechannel.blogspot.com/
cb – it went down very slightly in the US last night.
http://money.cnn.com/data/commodities/
Nothing to be concerned about.
Ah about the movements in the gold price. For what it’s worth, my view of it is that the more times, and the lower they manipulate its price in the paper market, the better for the metal’s outlook. That may come across as a perverse take on matters, but there is a logic to it.
Basically, the price is being manipulated down through the paper market, where paper gold is being sold with abandon for any dupes that care take the other side of the trade. It costs the manipulators nothing, and they are getting paid for selling nothing. But what this means for the physical market is that the lower the price is being manipulated, the more buyers move in for taking delivery of the physical metal. This process, slowly but surely, is going to exhaust the physical reserves of the complicit central banks and the ETF’s, as gold is removed from their vaults and transferred into private hands, and the strong hands of other central banks who are accummulating physical metal for their respective treasuries, i.e., those of Russia, China, India, etc.
In the end, the manipulators will not be able to keep the price down, or they will lose all their gold reserves to those who are awake to the scam of fiat currencies backed by nothing, and are accordingly exchanging those currencies into real metal.
Anyhow, the short and long of it is that there are plenty of people and governments who want the real McCoy, and who have plenty of pretend ones to throw at it, so that the creation of more and more pretend ones will only serve to accellerate the process. The more pretend ones that are created, the more ammunition, and the more motivation, to get the real one. It is that simple.
Ah, thanks PF. Yes, at around the 15% pullback mark in AUD, it is a good time to buy. If anything, I would like to see a much better pullback, maybe 25% – 30% to around $1,100 in AUD, and that would create a terrific buying opportunity. Alas, there are probably far too many in line to buy for that to happen, but with a decent move in the exchange rate it is not impossible.
cb – I agree, if the Aussie$ falls to USD$0.80 or thereabouts it is a good time to sell gold and buy back in when the AUD$ rises.
With exports from China at all time highs, and internal consumption increasing annually by around 20% it looks very good for our mining industry, so any major falls in the AUD$ could be rare.
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