Commodities | Jun 14 2006
By Greg Peel
"The current correction is going to end up [as] the last great buying opportunity in what…remains the greatest secular bull market in gold’s history." Peter Grandich, Grandich Letter (as reported by TheStreet.com)
Grandich may seem like a lone, and possibly mad, voice in the wilderness at present as Australia braces for even more carnage in the markets following the biggest meltdown in metals since the early 1990s. But Grandich believes the downside risk in gold might still be another US$25-50/oz but the upside potential is more like US$200-500/oz.
Ironically it is inflation fears driving this metal market correction. But gold is a hedge against inflation, isn’t it? Yes, but when quoted in US dollar terms there is a conundrum. If the Fed raises rates to combat inflation then the US dollar rises and, by definition, US dollar gold falls. Hence it is the Fed, not inflation, driving the metals down, and only through words and not (yet) actions.
When gold ran up hard into May, it was moving as fast as it had moved in a very long time in an upward direction. Market commentators such as Dennis Gartman were astounded at the extent of one day jumps. Who was driving gold then? "Hot" money – speculators, gold funds, country club members, water-cooler chatters, cab drivers, mums and dads, anyone who had not jumped in earlier in the game.
This correction has had one particular feature that not all corrections have – it didn’t have one big horrendous shake-out like a Dow crash all in one day. It has been accelerating, as more and more inexperienced or leveraged speculators have waited until deciding to up camp and run – run as fast as they can while shouldering fellow investors out of the way and trampling over others.
"The mindset right now is that gold is not quite through consolidating and so many traders burned by the recent moves in the yellow metal will stand aside and let the blood-letting finish" believes Kevin Kerr, editor of Global Resources Trader (as reported by MarketWatch). What he means is that no one – just no one – has been stepping into the breach to buy gold until the panickers are out. This only exacerbates the falls.
What the market now needs, says Kerr, is a "rallying level event". This would be some development that persuades short-sellers to cover and provide the market with some impetus. It might be a breakdown of talks with Iran. It might be another terrorist event. It might be something else again.
Or, suggests Kerr, if the Fed raises rates then that’s what everyone expects anyway. But if it doesn’t? The turnaround would likely be spectacular.
