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THE
ROCKET SCHOOL OF ECONOMICS


Volatility Time, Again!
by Professor von Braun

May 28th, 2001

It is interesting to see the bullish consensus for gold rise rapidly every time the gold price spikes upwards. The September 1999 price spike had everybody's juices flowing it seemed at the time, with the bullish consensus peaking at 75%, but that rally was very short-lived. Since then gold has spiked late January 2000, late May 2000 and again in May 2001. Each time the bullish consensus rises rapidly, (last week saw it at 72%), only to fall just as quickly once the unsustainable rally begins a sharp decline.

Each of these occasions has seen the same group of commentators quickly proclaim that a new bull market in gold has begun. This time it appears is no different. This same group of commentators are once again saying a new bull market has begun. No apologies for their previously erroneous calls, no real explanations as to why this time is different, just a bunch of the same old stuff; appearing because gold spikes up, as has been its want on rare occasions over the last three years, and then begins another decline.

Sure, gold stocks have had a better than 50% rally from a very oversold decline, that's how markets work. The fact that the gold price has not risen 50% off its lows suggests that at these levels some of the gold shares are becoming overvalued. Many of the gold funds are winding down and have a need to sell into any rallys, they are not net buyers any more. Gold fund analysts are an ever-diminishing group, as are gold fund managers.

Yes there has been some action in the gold price, but any activity that starts on the New York Comex on a Friday afternoon, after the London market has closed, usually does not last long. This has been a feature of this market for several years.

So what's different now?

We do not believe that a 21-year bear market will end with a whimper. The market makers (remember the price is still fixed daily at the LBMA) have been in control of this market for some time and it is unlikely they will give up this control lightly. The price setting members of the LBMA include those bullion banks/investment banks that have some of the largest short positions of all and it is safe to assume that their respective central banks will bale them out if need be. How long that can continue, well that's a different story, but there does not appear enough pain there yet.

Would Alan Greenspan allow a rapidly rising gold price to undo the 5 interest rate cuts he has recently implemented? After he made a comment that Central Banks stand ready to mobilize their gold reserves should the price begin to rise? The wonder of the dollar as the reserve currency still appears to be there and there are a lot more dollars out there than there are gold bars.

Certainly it is possible that one or two hedge funds have entered this market and are taking long positions in both metal and selective gold stocks but are they longterm holders? Or are their black boxes telling them that it's a momentum play and that there are enough gold bulls remaining that still have some cash that can be removed from their accounts by starting another "rally" in the gold price?

Yes there is an unsustainable short position in the gold market, but for several years now it has been sustained. Given the propensity for gold to close year end at $290 per ounce which suggests that that is a figure that is relevant to a housekeeping exercise in terms of year end book keeping, a sustained rally above this figure may provide a clue to the ability of the price fixers control. But it needs to be sustained for longer than a few trading days.

It is safe to assume that, should gold hold above $320 for any period of time longer than a month, then a few more Ashanti-type dilemmas will appear, which may not be beneficial for hedged gold producers' share prices. Remember how quickly Ashanti's share price fell when the extent of their margin calls became apparent? Even after the management repeatedly said all was well!

This scenario would also cause problems for the member banks of the LBMA, who are responsible for setting the price and have some large balance sheets behind them should problems arise. Certainly on a collective basis their combined balance sheets far out weigh any single hedge fund, especially one that is testing the waters in the gold market.

We advise caution when it comes to gold stocks as this is a market that is very messy, fraught with danger from undisclosed hedge positions and far from being a new (again) bull market. As for comments about gold going to the moon, personally I would prefer that it stays here on the planet Earth. The thought of having to pay the Russians $20 million to hop aboard a space flight so that I can get some bullion does not appeal at all.

;-)


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

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  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
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  • 28 May 2001 -- Volatility Time, Again!
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  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
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  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
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  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
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  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
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