On October 16 my partner and Technical Analyst Cory Venable sent me the following long-term chart of the US dollar index suggesting key support at $75.
Yesterday the U$ Index did hold $75 and is bouncing today. The importance of the dollar trade since March cannot be over-stated. As the U$ dollar has fallen the past 8 months, most other assets have soared into bubble Dom. Who knows what staying power this dollar bounce may have, but while it holds, a long-overdue correction in other risk assets (including gold) is likely to follow.
The supply demand picture for gold continues to be bearish: increasing supply from producers spurred by soaring prices is overwhelming weak consumption demand. The World Gold Council today announced that Q3 2009 saw a 30% year over year drop in jewellery demand. Investment demand which includes gold ETFs, bars and coins was down 46% from Q3 2008, and even retail investment demand for bars and coins remains 31% below the third quarter of 2008. We note that despite the weakness in demand numbers, the World Council entitled their report “Gold demand remains robust.” On the other hand, they do admit that “World Council’s mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders.” At least they openly admit their bias!
Meanwhile gold mania has gone mainstream see ABC video: Gold Fever. I received a media call Tuesday asking if I could be “the gold bear” on Fox Business. You know bulls are raging, when Fox has trouble finding a gold bear in all of North America!
I admit that a gold rush does strike me as a very crazy trend.( Maybe it's all the black and white film clips of the Klondike Gold Rush I watched at Mother's Pizzeria as a kid) But crazy trends can go crazy for long periods, and I am not brave or insane enough to insist that gold prices must collapse any time soon. That said to surive as an investor one must keep our eye on objective markers and to this end we note two important points for Canadians:
-since gold is priced in US dollars and the Canadian dollar has gained strongly against the U dollar since March 2009, Canadian investors have so far made negative gains in gold bullion over the past 9 months and are up less than 13% year to date- a lot less than bullion prices may suggest.
-Despite all the sound and fury, the Canadian gold mining Index (XGD) has so far failed to break through its March 2008 high north of $23. Canadian based investors in the gold mining sector have not made positive gains in this very volatile area for more than 20 months.
None of this is to say that gold is not going higher, or that gold company shares won’t actually break out one of these days. But rather than fall passionately in love with a bull or a bear case, I suggest we focus on net results as the basis for a rational investment thesis.
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