Thoughts on Markets

Friday, August 15, 2008

What's With Gold These Days?

Gold below $800 does not seem at all rational. However, it is fact! Justice Little of Taipan Daily believes that since gold did not sky rocket on the Russia - Georgia fiasco, that traders bailed out. One would certainly expect that gold would have taken a big move upward in price with any conflict in the mid east or within the old USSR, but gold just sat there. There was no reaction, so traders got worried and jumped ship. In the Gold Miners (GDX) graph above, check out the Volume on August 11th. The volume in shares went through the roof. It is significantly the largest volume on the graph and the price dropped drastically immediately.

There is no doubt that there is a great deal of manipulation of the prices of precious metals and commodities, but there was activity in addition to the standard intervention. The traders were bailing out in mass.

Additionally, we are being treated to all the "good" rhetoric coming from suspect sources. We are being told that inflation is under control, that the credit problems have been solved with the new legislation, that the wars are going well, that banks are back on solid footing, and the rest of the rosy pictures which are being painted for our benefit. Have the fundamentals really changed?

There is one indication of change. It seems that the Europeans are entering a period of slow down similar to ours. Thus, the Euro has lost part of its glamor in comparison to the dollar. This has given the dollar a boost. Also, the renminbi has lost ground for the last four weeks. That is a plus for the dollar, as well.

As we turn back to the fundamentals, we find that real price inflation "right here in River City" continues to plague consumers. While gasoline prices have abated some, we are still paying many dollars to fill our tanks. Food and utility prices continue to rise. Jobless claims for last week came in at 450,000 and the prior week's figure of 455,000 was revised to 460,000. That is far from good news. The national debt continues to rise into the stratosphere and will only be repaid, if it ever is, by new dollars added to the supply of unbacked currency in circulation. Even the "fixes" in subsidies for strapped home buyers and bailouts for failing banks are daily adding to this supply. This can only result in more price inflation while jobs, wages, and hours worked are shrinking.

A free market would cause an unwinding or balancing of the books from the depreciation of the dollar since 1971, the recent housing collapse, and the credit binge. This has not been allowed to happen, as central banks and the government have pulled out all the stops in an attempt to give us a recovery or, in the worst case, a "soft landing." In stead of the free market temporary pain and quick recovery, we have seen a huge increase in the supply of dollars and virtually every paper currency in the world. This is like pouring gasoline on a fire. It is using the fuel from which the fire started to put out the fire. The best that it does is to postpone the day of reckoning. It will come! And when it does, the pain will be much greater and last for a much longer time.

The fundamentals of our economy and our dollar have not changed. However, there seem to be many out in the markets who believe that there have been sea changes and that the dollar will be much stronger for a long period of time, maybe even eternity.

The mining stocks are in bargain price ranges now, but I am holding off further purchases until we can see a turn about in the price of gold and silver. I did add to DROOY holdings yesterday and it is 5.11 now. All the mining stocks are down today. This can be a result of the pinch on profit by the lower price of the metals. After the Olympics and the August expiration date, we may see a big change.

By the way, the morning news paper says that the U.S. is putting missiles in Poland. This is an escalation of the tension over the Russia - Georgia battle. Russia lashes back with threats. I wonder how gold will react to the greater straining of relationship between the U. S. and Russia. Will gold ignore this, too?

I am holding fast to a long term perspective. In spite of the present disaster in prices of precious metals, I believe we will see a lower dollar and higher dollar prices for precious metals. When is in the hands of our Lord and Savior Jesus Christ. I rest in the love and care He exercises for His people.

Best to each, Doug


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