Gold market disconnect: Record prices, but not demand

Gold remains in a powerful bull market as measured by prices in the futures market, where speculators can run rampant.

But third-quarter supply and demand data from the World Gold Council show that the surge in the metal’s price to record highs ($1,146.40 an ounce as of Friday) hasn’t been accompanied by record demand for the real thing.

The recent peak in demand for physical gold, in fact, was in the third quarter of 2008 -- before the financial-system meltdown accelerated.

The World Gold Council’s report on supply and demand in the quarter ended Sept. 30 put total global demand for gold at 800.3 tons, down 34% from the 1,205.6 tons purchased in the same quarter a year earlier.

Demand in the recent quarter also was below the 1,029.8 tons bought in the first quarter of this year, though 10% higher than the 724.8 tons of the second quarter.

Gold demand was down in the third quarter versus a year earlier in every major category of consumption, including jewelry (the biggest single source of demand), industrial use, official coins and purchases by exchange-traded funds.

The drop in physical demand partly reflects simple price-sensitivity: As gold goes up, some buyers back away.

Jewelry demand, for example, reached 673.3 tons in the third quarter of 2008, when gold’s price was mostly below $900 an ounce. In the third quarter of this year, with the price mostly above $900 and on its way to $1,009 by the quarter’s end, jewelry demand totaled 473.5 tons.

The global recession also has played a role in depressing jewelry demand this year compared with 2008, of course.

So how can the price of gold be flying when demand for the metal itself is well below recent peaks?

"This has been a speculative fund-driven futures rally," says Jon Nadler, a veteran analyst at Kitco Metals Inc. in Montreal. In other words, traders who play in the futures markets are betting on higher gold prices. But they aren’t interested in owning the actual metal.

This kind of disconnect can happen at any time in commodity markets. Remember oil in 2008?

Besides, in any market the price is set by the last buyer, whether the trade is for a huge sum or a tiny sum.

In the case of gold, it could work out that speculative demand in the futures market will be followed by a big revival in physical demand if more people around the globe decide that they must own the metal as a hedge against paper currencies, inflation, financial calamity or other reasons.

Interestingly, the Austrian government mint is betting otherwise, at least in the near term: The mint, the world’s biggest marketer of gold coins, recently said it planned to cut production by 32% in 2010, figuring that an improving global financial system will slash gold demand from investors.

The U.S. Mint, however, is siding with the bulls: On Dec. 3 it plans to resume production of American Eagle gold coins in half-ounce, quarter-ounce and tenth-of-an-ounce sizes to supplement its production of one-ounce coins.

Production of the smaller coins was suspended in 2008 because the Mint couldn’t get enough blanks from its fabricators, but that supply problem has been solved, said spokesman Michael White.

-- Tom Petruno

Photo credit: Kim Jae-Hwan / AFP/Getty Images

Bad combo: Speculators fear 'double-top' in key markets

Has the "carry trade" become too tired to carry on in the short term?

Thursday’s session in global markets saw a reversal of the recent rush into gold, emerging markets and stocks in general, and a rebound in the beaten-down dollar.

That spurred talk that the army of hedge funds and other speculators engaging in the carry trade -- the popular (maybe too popular) strategy of borrowing in dollars at rock-bottom interest rates to invest in risky assets worldwide -- might be getting anxious to lock in gains after markets’ powerful run since July.

"It’s prime time to take some profits," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

The percentage changes in markets Thursday weren’t huge -- the Standard & Poor’s 500 index lost 1%, to 1,087.24, while the DXY index of the dollar’s value against six other major currencies rose 0.7% -- but some traders were pointing nervously to a potential "double-top" pattern on their charts. (Think: Bactrian camel.)

The S&P 500, for example, pulled back Thursday after briefly surpassing the 1,100 level. The index also had failed to hold above that level after topping it intraday on Oct. 21. That prior failure gave way to a sell-off that took the S&P down as low as 1,030 by Nov. 2, a drop of more than 6% from the Oct. 21 high.

The same potential double-top pattern may be playing out with the euro, which in recent days has made another attempt to push decisively through the $1.50 level, without success. The European currency ended Thursday at $1.485.

The euro also peaked out around $1.50 on Oct. 26, then fell to near $1.46 by Nov. 3, before making another run for $1.50 this week.

In the case of the euro and other favored targets of the carry-traders, "You couldn’t take out the [October] highs today, so some traders are throwing in the towel," fearing a serious loss of momentum, said Brian Dolan, currency strategist at Gain Capital Group in Bedminster, N.J.

Some traders also may be wary of betting further against the dollar in the near term with the U.S. again jawboning for a "strong" greenback and amid reports that Thailand, Russia and other countries have been buying dollars to try to slow their own currencies’ advances against the buck.

The point is, if the carry trade is about to see a respite, the dollar could get a bounce -- and all of the things bought with borrowed dollars could shift into reverse for a while.

-- Tom Petruno

Dow at new one-year high as stocks jump worldwide

The bears are being routed worldwide today as investors find plenty of reasons to buy stocks and not many reasons to sell.

The Dow Jones industrial average was trading at a new one-year high at about 11 a.m. PST, up 176.84 points, or 1.8%, to 10,200.26. That tops the recent closing high of 10,092.19 on Oct. 19.

Other major U.S. indexes also are up sharply, though still below their recent peaks. The Nasdaq composite, up 34.30 points, or 1.6%, to 2,146.74, is within 1.4% of its closing high of 2,176.32 on Oct. 19.

Today’s rally is rooted in faith that the global economy won’t go back into the soup. That sentiment got a boost after finance ministers and central bank chiefs of the G-20 nations met over the weekend in Scotland and pledged not to rush to remove fiscal and monetary support programs.

"We agreed to maintain support for the recovery until it is assured," the group said in a statement.

That helped stoke investors’ appetite for risk-taking as markets opened today. Emerging-market stocks are among the day’s biggest gainers. The Indian market jumped 2.1%, Russian stocks surged 5% and the Brazilian market is up 2.4% so far.

Commodity prices also are broadly higher, led by oil, corn, cotton and gold, with the yellow metal at a new all-time high of $1,102.20 an ounce, up from $1,095.10 on Friday.

With risk takers on a roll, the dollar is the day’s loser -- but it’s clearly not hurting the mood on Wall Street. The DXY index of the dollar’s value against six other major currencies is down about 1%.

As for concerns that the U.S. House’s passage of the $1.1-trillion healthcare reform bill would hammer medical-related stocks -- well, not today. Most major drug stocks are trading higher (Merck is up 65 cents to $33.24) and an index of 11 big HMO stocks, including Wellpoint Inc. and UnitedHealth Group Inc., is up 1.5% to a new 52-week high.

Even the bond market is cooperating with stock bulls today: Despite the dollar’s slide Treasury bond yields are flat compared with Friday.

-- Tom Petruno

Photo: Richard Drew / Associated Press

Gold bulls bet the real crowd has yet to arrive

The gold-bull bandwagon is a popular ride, and getting more so every day. The latest big-name investment newsletter writer to wax glowingly about gold’s prospects is Fred Hickey, editor of the High-Tech Strategist letter in Nashua, N.H.

What does gold have to do with tech, or vice-versa? Exactly the point: The metal -- which hit another record high on Friday, up $6.40 to $1,095.10 an ounce -- is finding fans among investment pros far afield from the corps of the eternal gold bugs.

Hickey actually has been bullish on gold since at least the start of this year (which means he benefits if he can talk up the price further), but in his latest letter he suggests that the groundswell of interest in the metal is just gaining steam. He believes that interest is being driven by "a loss of confidence in the U.S. dollar and U.S. government policies around the world."

ZeroHedge blog excerpts some of Hickey’s comments from his letter:

"The psychological barrier of $1,000 gold has been broken. That $1,000 number might as well be $100. There is no longer a limit to the upside. . . . I doubt that what we're seeing is the final blow off. I have no idea when it may come. It could be months or years from now. I just know that it hasn't yet occurred. In the meantime, prepare yourself for a lot more company (besides the smartest of the hedge fund managers) and more head-fakes. In the end, the public will come in en masse. They'll also be buying gold stocks with abandon. That is clearly not the case today.

"Gold is no longer being driven by jewelry demand, as in the recent past. It is investment demand that's wagging the yellow dog's tail. It's a loss of confidence in the U.S. dollar and U.S. government policies around the world that's driving gold to record levels. As it has been for thousands of years, gold is the safest store of wealth, not so much something to be fashioned into a necklace."

Because gold pays no dividends or interest, for many investors a bet on the metal is simply a momentum trade -- a bet that many other people will be willing to pay higher prices to own it.

That bet has worked for nine straight years, since gold traded at $274 at the end of 2000. Hickey and other bulls believe that, before this run is over, the ranks of gold investors worldwide will expand dramatically. It may not be early in this game, the bulls say, but they're also sure it's not too late.

-- Tom Petruno

Post-Fed scorecard: Gold at new high, other markets slide

Gold’s latest rally powered ahead Wednesday as the Federal Reserve maintained a dovish attitude toward interest rates.

Meanwhile, the dollar, the stock market and longer-term Treasury bonds all sold off after the Fed issued its post-meeting statement, which repeated that policymakers expected to keep short-term rates low "for an extended period."

Near-term gold futures gained $2.40 to $1,086.70 an ounce, a new record closing high that lifted the year-to-date price gain to about 23%. The metal traded as high as $1,098.50 for the day, after surging nearly $31 on Tuesday on word of the Indian central bank's big purchase.

Not surprisingly, the likelihood of the U.S. maintaining near-zero short-term interest rates was a negative for the dollar, which helped bolster the case for gold. The euro jumped to $1.487 from $1.472 on Tuesday.

The stock market, which rallied early in the day on some relatively upbeat economic data, surrendered most of its gains in the final 30 minutes of the session -- a decline some analysts blamed on the U.S. House’s vote to speed up new limits on credit card interest rates. That slammed bank stocks. The Dow industrials closed up 30.23 points, or 0.3%, to 9,802.14, after being up as much as 156 points.

Some investors also dumped longer-term Treasury bonds post-Fed. The 30-year T-bond yield jumped to 4.40%, up from 4.33% on Tuesday and the highest since Aug. 14.

On the face of it, the markets might seem to be worried about the Fed falling behind the curve in keeping inflation subdued -- except, where do you find inflation these days, other than in asset prices? (OK, oil is a problem again lately, that is true.)

Nicholas Colas, investment strategist at BNY ConvergEx Group in New York, thinks the stock market’s disappointing action is just another sign that "it’s definitely in need of a breather here." Stocks have been struggling since peaking in mid-October as more investors have turned cautious about the near-term economic outlook.

The Standard & Poor’s 500 index, which edged up 0.1% on Wednesday to 1,046.50, is down 4.7% from its one-year closing high of 1,097.91 on Oct. 19.

"The biggest single question is, how are consumers thinking about their prospects going into Christmas?" Colas said. People may think better about their prospects if they have more faith that job cuts are ebbing -- which is why the government’s report Friday on October employment trends will be key, as usual.

As for the sell-off in the bond market, traders noted that the Treasury on Wednesday gave more details about its plan to lengthen the average maturity of the government’s debt load, which of course means issuing more longer-term debt and fewer shorter-term securities. That may have triggered some knee-jerk selling of longer-term bonds.

As I noted in this post, the trend no one would want to see take hold this month (or any month) would be rising bond yields accompanied by falling stock prices. Just something to watch.

-- Tom Petruno

Photo credit: Genaro Molina / Los Angeles Times

Gold hits new high after India's central bank loads up

Gold streaked to record highs today, nearing the $1,100-an-ounce mark, after India’s central bank bought a load of the metal from the International Monetary Fund.

For gold bulls, the purchase damped fears that long-planned IMF sales would drive bullion prices down sharply -- and threaten the now nine-year-long bull market in the metal.

Near-term gold futures in New York surged $31.70, or 3%, to $1,085.10 an ounce. Gold now is up nearly 23% year to date, compared with the 15.7% price gain for the Standard & Poor’s 500 stock index.

Silver also shot higher today, with November futures up 45 cents to $16.89 an ounce in New York.

From Reuters:

The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.8 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.

The sale, which surprised traders who expected China to be the leading buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock. The deal will increase India's gold holdings to the tenth largest among central banks.

It also fueled speculation that other governments -- including Beijing -- may be ready to diversify their reserves even at near-record gold prices, helping soak up IMF supply that the fund may otherwise be forced to sell on the open market.

Should average investors follow India's lead -- or stay away from gold at these levels? In this earlier post I spotlighted two opposing views of the metal's near-term prospects.

-- Tom Petruno

Buy gold at these prices? Two views

Gold, which hit a record high of $1,072 an ounce in mid-October, made a run at that level in Asian trading on Tuesday, reaching $1,066.90 an ounce before pulling back.

The metal had jumped $13.70 to $1,053.40 in New York trading on Monday as its bitter rival, the U.S. dollar, slipped after rallying on Friday. UPDATE at 10 a.m. PST: Gold has reached a new high of $1,085 an ounce in New York.

Would you buy gold at these prices, after nine straight years of gains? And if so, what’s your motivation? Inflation? Deflation? Fear of global pandemonium?

Two Wall Street figures now well-known for warning of the financial mayhem of a year ago -- hedge fund manager David Einhorn of Greenlight Capital, and New York University Economics Prof. Nouriel Roubini -- have two very different views of gold, at least in the near term.

Einhorn, who began buying the metal itself and shares of gold-mining firms after the financial crisis unfolded last year, said in a speech last month that he’s still big on gold as an insurance policy and as an alternative to major currencies and "cash" accounts.

From the speech (link from zerohedge.com):

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

"Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

"When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the 'stimulus' black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The euro, the yen, and the British pound might be worse.

"So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield."

By contrast, Roubini thinks that anyone expecting significant appreciation in gold soon from this point is dreaming.

From an interview Roubini gave last month with IndexUniverse.com:

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10% in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

"The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30% unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon."

Who makes the more convincing argument?

-- Tom Petruno

Photo credit: Frantzesco Kangaris / Bloomberg News

The dollar rises, and (almost) nobody is happy

Blame the almighty dollar -- or, uh, the slightly less anemic dollar.

Friday’s big sell-off on Wall Street and in the commodity pits was accompanied by another rise in the greenback’s value against other major and minor currencies.

The DXY index, which measures the dollar against six other key currencies, rallied 0.5% to 76.3, the sixth increase in seven trading sessions.

The euro fell to $1.472, down from $1.501 a week ago. The dollar was worth 1.76 Brazilian reals, up from 1.72 a week ago.

The dollar had mostly been declining since late April, a reflection of global investors’ willingness to abandon the relative haven of the U.S. currency for riskier assets -- including emerging-market stocks and raw materials.

And with U.S. short-term interest rates near zero, investors also have taken to borrowing in dollars to fund purchases of investments worldwide. That’s the so-called carry trade.

But in the last two weeks, as worries have mounted about the strength of the U.S. economic recovery, the dollar has staged a modest comeback.

On the face of it, that’s counterintuitive: If the U.S. economy struggles, shouldn’t that mean a weaker dollar?

It should, over time. But in the short-term, concerns about the U.S. stoke fears about the global economy as well. And that is helping to drive some investors and traders out of the riskier assets that have been so popular since March, and into "safer" things -- including U.S. Treasury securities.

"It’s the unwinding of the carry trade," said Marc Pado, U.S. market strategist for brokerage Cantor Fitzgerald.

As long as that’s going on, it’s bullish for the dollar.

It’s no coincidence that the recent low for the DXY index -- 74.97 on Oct. 21 -- also marked the recent high for the Reuters/Jefferies CRB commodities index. The CRB index is down 4.8% since then, including Friday's 2.1% drop.

Crude oil futures fell $2.87 to $77 a barrel on Friday, the lowest price since Oct. 14.

The iShares Emerging Markets Index exchange-traded stock fund has tumbled 9.6% from its recent high reached Oct. 14, as stock markets in Brazil, South Korea, India and other emerging economies have tripped.

Why, though, should U.S. stocks fall just because the dollar rebounds? The fundamental reason is that a stronger dollar hurts U.S. exporters by potentially raising prices of their goods abroad.

But the knee-jerk reaction of traders may be a bigger factor kicking the U.S. market lower: If hedge funds and other traders are buying the dollar they’re automatically going to be selling U.S. stocks, just as they were simultaneously selling the dollar and buying stocks for much of the last seven months.

As long as the formula works, there are plenty of players for this game.

-- Tom Petruno

He foresaw the mortgage mess; now, he sees an inflation wreck

Investors who are convinced that serious inflation looms -- but who’ve been putting off buying gold or some other potential hedge -- will want to read the latest client letter from Kyle Bass, the hedge fund manager who made a fortune betting against mortgage-backed securities in 2007.

Count him as convinced about inflation, too, even in the face of the deflationary forces now bearing down on the economy.

Bass, who heads Hayman Advisors in Dallas, writes:

Western democracies, communistic capitalists and Japanese deflationists are concurrently engaging in what may be the largest, global financial experiment in history. Everywhere you turn, governments are running enormous fiscal deficits financed by printing money. The greatest risk of these policies is that the quantitative easing will persist until the value of the currency equals the actual cost of printing the currency (which is just slightly above zero).

Get out the wheelbarrows!

Bass’ March client letter carried a warning about looming inflation, too. But back then, he declared the U.S. to be "in relatively better shape than the rest of the world," and thought that the dollar would be "a safer currency than any other."

The dollar, however, has been dropping since then, a downtrend that made headlines again on Tuesday.

In the latest letter, Bass seems much more concerned about the U.S.:

There have been 28 episodes of hyperinflation in national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz, professor emeritus of economics . . . at the University of Basel, has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, "Monetary Regimes and Inflation: History, Economic and Political Relationships," Bernholz analyzes the 12 largest episodes of hyperinflation -- all of which were caused by financing huge public deficits through monetary creation. His conclusion: The tipping point for hyperinflation occurs when the government’s deficit exceeds 40% of its expenditures.

Uh-oh. Office of Management and Budget projections, Bass says, "imply that the U.S. will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. One has to ask whether the U.S. reached the critical tipping point? . . . In fact, the recent price action in metals, the dollar and commodities suggests that the market is already anticipating the future."

But maybe the dollar still has a chance to be the best of a bad bunch: Bass goes on at length in the latest letter about the extreme risks that China and Japan face given their own free-money economic policies.

Where is Bass’ money now? Once short mortgage securities, he now has 50% of his portfolio in them, lured by the plunge in prices. He also has been buying what he believes is bargain-priced corporate debt.

And, given his inflation outlook, Bass says he owns precious metals, though he doesn’t say which ones or in what form.

-- Tom Petruno

A dollar meltdown? Not today

The dollar is having a tough day, but this isn’t a meltdown -- despite what the hot action in the gold market might suggest.

The DXY index, which measures the dollar’s value against six other key currencies (euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc) was at 76.32 at about 1:15 p.m. PDT -- a decline of just 0.4% from Monday’s level of 76.64.

The index fell as low as 76.10 today, but even that was above the recent low of 75.83 on Sept. 23. And there’s still quite a bit of breathing room above the decade low of 71.33 reached in April 2008.

The euro has risen to $1.472, a modest gain of 0.4% from $1.466 on Monday.

The wild move today in gold, up $21.90 to a record $1,038.60 an ounce, hinted at a bigger hit to the dollar. Gold often plays the roll of the anti-dollar.

But the greenback's decline "has been very orderly -- it’s nothing to alarm policymakers" in Washington or overseas, said Dan Katzive, a currency strategist at Credit Suisse in New York.

The world can live with an eroding dollar, as it has for most of this decade. But no one wants a sudden collapse.

One catalyst for today’s decline in the buck was a fresh rumor that Middle Eastern oil exporters want to move away from pricing crude in dollars on the world market, to escape the penalty they face from a weaker U.S. currency.

But that rumor has been around for a long time, and it still isn’t clear to anyone how that might actually happen.

"I don’t attach a lot of credibility to it," said Brian Dolan, currency strategist at Gain Capital in Bedminster, N.J.

The biggest reason for the dollar’s renewed weakness may just be greater optimism that the global economy is coming out of its funk, as reflected in the Australian central bank’s decision to raise its benchmark short-term interest rate.

That highlights the gulf between near-zero U.S. rates and rates in the rest of the world, and pushes more money toward the countries with higher rates.

Investors betting on a recovery drove U.S. stocks sharply higher today -- the Dow industrials closed up 131.50 points, or 1.4%, to 9,731.25 -- but also poured money into many foreign stock markets, which automatically benefits other currencies at the dollar’s expense.

-- Tom Petruno