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Looking for gold price moves over the past few years has been like watching grass grow - there just doesn't seem to be anything happening at all. The entire trading range for gold for the past 24 months now has been a low of $274 (a 19-year low reached in August of 1998), with a high of $315 or so. That's a less than 15% swing in TWO YEARS.
In other words, not only is gold cheap, but it's been boring to watch. Increases in U.S. Postal rates have been more dramatic.
The rise in gold stocks this week was the result of a comparatively glacial move in gold, from $283.80 to $286.90. But maybe there was some substance to this tiny move.
As we reported here on April 20th, short interest in gold is at record levels in the U.S. And, of course, 'shorted' gold has to be bought back at some time in the future.
For years, a strategy of leasing gold at tiny interest rates, and replacing it at lower prices, has been profitable for many traders and hedge funds. Central banks have been eager to earn something on their gold holdings, no matter how meager, and they have been leasing out their gold at 1% - 2% interest rates in order to earn some return.
The Federal Reserve Bank's interest is also in seeing gold prices stay down, as a sign that their fight against inflation is successful.
Large gold mining concerns are also short gold. Producers (mining concerns) have been major sellers of gold in the futures markets for years. They lock in their profits now on gold that may take years to get out of the ground, much like a farmer sells ahead of time his wheat or corn crop that won't be harvested for months. In this way, producers assure themselves a fixed price for their product.
No one can deny that shorting gold has been a profitable strategy for many years now. Miners, traders, hedge funds, central banks, and the Fed have all been pleased with lower gold prices. Pleased, also, are those who make a living pushing equities. Gold has been conveniently out of sight, out of mind.
Gold's traditional role as an economic indicator, inflation monitor, panic detector, canary in the fiscal coal mine, whatever you may call it, has just about been forgotten by a whole generation raised on the bull market in stocks from 1982-1999. To this dedicated-to-equities crowd, gold is a 'retro' concept, as much an artifact of the 1970's as shag carpeting and avocado-colored kitchens.
Thus, it's intriguing to imagine the possibility of gold drawing new attention as a value sector. With stock market leadership over the past few weeks being shown by the likes of Alcoa, Phelps-Dodge, DuPont, Exxon, and a host of other commodity, energy, and natural resource stocks, anything seems possible. And with huge short positions out there in the gold markets, a move to the upside has the potential to be swift and strong.
Will a rotation of interest into 'value' eventually find the ultimate value in gold? Hard to say. Of course, our clients and readers have already found the value in gold, and appreciate its monetary history, both past and, no doubt, future. Speculating in gold is not their goal, owning value is. And our website ONLYGOLD will never be a gold tout sheet.
We'll simply repeat our opinion that the price of gold has been artificially held down for years, and we're possibly at an intriguing turn in the gold market. (For a look at some of the market forces at work in gold, we refer you to John Hathaway's April 1999 commentaries on the always informative and readable Tocqueville.com website.)
Today, could we possibly hear a positive "buzz" about gold?
The previous time gold was a topic you heard discussed in mixed company was during the disco era, January 1980, when gold spot prices briefly exceeded $850, and the word "buzz" meant the sound made by a bumblebee.
Since that time, conventional wisdom has been that "gold is dead," and we certainly haven't heard it discussed in mixed company for a long time.
But if you start to hear that "buzz" anytime soon, you can be sure of this: whoever is short gold, is going to get stung.
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