Gold Rallies Into Bond Demise
Philip Gotthelf
Two events caught investors by surprise this week as bonds plunged back below last week's lows and gold exhibited remarkable resilience with a pop from 34600 to 36400 since August 1. The apparent contradiction as stocks
strengthen along with the yellow metal has investors confused. Adding to the confusion is the recent dip in energy prices based upon reports of rising crude inventories. The usual assumption is that gold should weaken as crude prices ease. Granted, crude has hardly made new lows, but energy news is becoming more bearish as the statistics reflect declines in consumption coupled with rising imports.
Technically, gold exhibits a large consolidation "wedge" with an upward slope that suggests a rising secular trend. The propensity for higher lows is based upon declining U.S. Dollar parity. The technical key to appreciably higher rests with a potential breakout above the 36600 trendline that connects descending highs from the February peak. Such a breakout alters the technical pattern and paves the way for a test as high as $400.
Many metals analysts believe $400 is simply "too high" when considering alternative investments. After all, interest rates are finally becoming more attractive and stocks may be on the verge of reflecting a "recovery" rather than a persisting recession. Why, then, should anyone accumulate gold?
The answer may lie in today's news headlines. Over the past several weeks, law enforcement has uncovered a variety of terrorist plots that include plans to import 50 shoulder-held anti-aircraft rocket launchers. The idea was to take down U.S. commercial airliners on the 9/11 anniversary. While this plot has been foiled, some investors believe there are more terrorist
threats in the wings.
We have been boasting that the U.S. has not sustained attacks since 9/11. It has been almost two years and we have, once again, sunk back into feelings of security and well being. After all, a real live action hero is likely to take the reigns of California's governorship! The Republicans are confident that the Terminator can terminate a $38 billion estimated California deficit. Democrats want voters to remember that Arn-hold also starred in Kindergarten Cop!
Seriously, it is important to focus upon the source of gold's recent strength. Where is the accumulation taking place? Along this inquiry, it is uncomfortably clear that physical metal is being accumulated by regions associated with instability and terrorism. Notably, I have pointed out that supplies have been hoarded in Indonesia and Malaysia. This accumulation pattern suggests two possibilities. First, a portion of Saddam's fortune may be preserved as international gold deposits that are unidentifiable. Second, Terrorist interests may be speculating in gold ahead of a major offensive that would surely drive money into this hard asset.
Gold has become a continuing precautionary asset. Recently, there have been a number of presentations by gold advocates who emphasize gold's place within a "balanced" portfolio. Even during the long and painful demise of gold's status as the international monetary mirror that reflected currency parities, gold bugs insisted that holdings of 10% were prudent...just in case. During the late 1980's and through the 1990's there seemed to be no "just in case." What possible value could a non-appreciating and non-interest bearing asset have when interest rates were at 15%-plus and stocks were trekking to new highs each month?
This perception changed with the stock market bust from March 2000 forward. Suddenly, paper assets were vulnerable. The culmination of anti-gold sentiment was smashed after 9/11. Gold is good business during times of war.
Still, caution is in order. My near-term assessment is that the 36600 barrier will hold through August. We are still a month away from the 9/11 anniversary. The cooperation of Russian authorities in the missile sting represents a new era of global cooperation in the war against terror. As easy as it may seem to commit terrorist acts, Uncle Sam is watching and his eyesight is becoming increasingly keen!
Along with gold, traders have been whipping about in silver. Unlike gold, silver is not the commodity of last resort for terrorist organizations. Silver is likely to respond in tandem if gold is pushed higher by some political event. If September silver is able to overcome 53500 resistance, we could see a run to 55000. The problem is that producers will find anything above 52500
extremely enticing. It is difficult to convince producers to hold off hedges or outright selling when they see anything over $4.50 as an opportunity.
It would take a run beyond 55000 to convince those who hold silver to keep holding. I admit there is pent up enthusiasm from years of languishing prices. Nothing would excite commodity traders more than a silver run. In all likelihood, a push above 52500 will generate more interest in the "deficit production" story that is attributed with silver's gyrating strength. As
mentioned in past Reports, economic recovery builds demand for base metals that, in turn, raises silver output. The recovery does not necessarily increase silver consumption in the same proportions as base metals.
The real metals saga is quietly happening in platinum where slow and steady accumulations are likely to be the result of deficit production and industrial hoarding. Users were stunned when platinum's sister, palladium, rocketed above $1,000 per ounce on a Russian squeeze. Platinum was immediately re-embraced as the preferred catalytic metal, but a new situation is emerging. If platinum is hoarded for a new generation of fuel cell vehicles and/or home power plants, palladium will, once again, become attractive. Assuming we don't see a breakthrough in Cold Fusion (chuckle), palladium should maintain a reasonable discount to platinum. Still, palladium can justify more that its current price around $180.
The September palladium chart displays a trading range consolidation with relatively straight 20-day and 40-day averages. The 40 is above the 20 to suggest the near-term is not positive. However, the price just broke out above the 20-day average and will probably activate some technical buy signals.
Keep in mind that palladium and even platinum are thin markets. It is not easy to take a quick bite out of these commodities. Generally, you need a nice trend to make a good profit.
In contrast, October platinum is making steady progress. Traders are seeking a "top" where none is willing to materialize.
The October chart shows $700 as a double-top resistance. Analysts claim platinum is not viable above $680. Frankly, I don't know what "not viable" means. Auto manufacturers have little flexibility in removing platinum loading from catalysts. Progress has been achieved in reducing the amount of palladium used and there was a swing back towards platinum after the
palladium price spike.
My instincts tell me manufacturers are going to have to adopt processes similar to the soda makers in the 1980's when sugar prices were highly unstable. After cane sugar soared above 63 cents a pound, high fructose corn syrup (HFCS) became the desirable substitute. Fructose is measurably sweeter per gram than glucose. When the price-to-sweetness ratio favored
fructose, Coke, Pepsi, and other drinks reformulated for HFCS. When corn prices moved up to make the ration favor cane sugar, the formulas reverted.
Car and truck manufacturers have already experienced the switch from platinum to palladium and back again. I would not be surprised to see palladium-based converters encroaching upon platinum.
Overall, I like the platinum "group." While unconfirmed, I understand rhodium is being used in nitrogen detection devices that can sniff out explosive materials. This application will be particularly critical as we seek more effective ways to screen cargo at high speeds. Uncle Sam has apparently allocated $70 million for airfreight cargo security. Millions more will be dedicated to securing rail and sea cargo. Unfortunately, rhodium is not a futures traded commodity. In addition, supplies are so limited it
would be too easy to corner the market.
August 16, 2003
Philip Gotthelf
Commodity Futures Forecast
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