SCHMIDT'S GOLD THOUGHTS ( 28 September 2010):
Have Gold Bugs managed to infiltrate the central banks? Or, do we have another indicator of the frothiness of the current Gold market? From CNN.com and Financial Times we read,
"In the CBGA's(Central Bank Gold Agreement) year to September, which expired on Sunday, the signatories sold 6.2 tonnes, down 96 per cent, according to provisional data. The sales are the lowest since the agreement was signed in 1999, and well below the peak of 497 tonnes in 2004-5.(27 Sep 2010)"
In 1999, at near the bottom, the central banks were selling Gold. Now, with Gold at a record high, the central banks are hoarding their Gold. In recent times they have actually been buying. Have we found an investor's dream, someone who is always wrong? That may be more valuable than someone occasionally right. One would have to conclude that the Central Bank Gold Indicator is flashing a do not buy signal.
Enthusiasm of speculators for Gold has helped to create the beautiful pattern in the above chart. That pattern is a classic parabolic curve. Such formations are important as they are totally unnatural. They defy financial gravity, for a short time. Ultimately, financial gravity regains control, causing speculators to crash. Margin calls can be stronger than any widely accepted fundamentals.
Parabolic curves work just the opposite of the way nature intended. When we toss a ball into the air, the momentum of that ball slows until gravity becomes the dominant force. The ball then falls to the earth. In a parabolic move, the "ball" actually rises faster as it rises. The slope of the curve becomes steeper. It does so until the speculators are exhausted, and then it falls to earth.
The penalty phase of a parabolic curve is not enjoyable. When the end arrives, and they all do end, the discomfort can be down to 40-60% of the high achieved. Some may actually exceed that depending on the nature of the speculation. Gold, with much of it held in strong hands, may only decline 30-50% from the high.
A characteristic of the late stages of a parabolic move is the widespread discovery and fanciful creation of fundamentals and outrageous forecasts. Analysts begin to create price forecasts in a race to grab headlines, and spur speculators on. Am still waiting for oil to reach, what was it, $250.
One particularly false fundamental tossed around with abandon is that "they are running the printing press." As the above chart shows, no one is running the U.S. dollar printing press. They may do so in the future, but at this time the printing press throttle is closer to being on idle.
One need only look at the charts of Silver and the MVDXJ to observe the level of speculative fervor being expended. While the long-term case for Gold rests on the intellectual bankruptcy of Keynesian economics and politicians, when the Street discovers an investment with gusto caution should be exercised. Gold Bugs have lived through price troughs before, and survived. They may have to again do so.
"What about fear?", an email asked this morning. What fear? Anyone buying $Gold at more than $1,300 has no fear at all. If they have fear, it is fear of being left out, of not being part of the locust swarm. When one looks at Silver and small mining companies the conclusion must be that no fear exists at all. If anything, we should fear the lack of fear.
Do not disturb your Gold holdings, but sit on your wallet. Buying is not appropriate at this time. Those that have speculative trading positions in Silver and small mining stocks should be booking profits. Better to take profits early, perhaps leaving some on the table, than taking losses later.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts, about weekly. To receive these reports, go to: www.valueviewgoldreport.com