Gold riding records as spec-funds rally

Good Morning,

Gold’s sentiment-al journey continued virtually uninterrupted overnight as the “another day; must mean another record” mentality remained manifest among spec funds. In effect it has become rather difficult to discern whether such daily gains (absent any substantive news of the really worrisome kind) are fueling sentiment or whether sentiment is fueling the subsequent gains. Nevertheless, the self-feeding loop sent prices to within $2 of the $1,286 target that some technicians had labeled as part of a flag & pennant formation on the charts.

At any rate, the gold market opened the final session of the week with significantly pared gains from the levels attained in the wee hours; spot bullion started off with only a 60 cent gain, quoted at $1,276.10 the ounce. The metal turned negative ($1,274.50 was seen) within the first five minutes of trading as nervousness and book-squaring/profit-taking made an appearance on the volatile scene. A brief firming in the US dollar (back up to 81.28 on the index) and crude oil still under $75 per barrel added to jitters in the complex.

Today’s headlines will most certainly be built on mainly two words: “gold” and “record” – but if gold is that inflation-combating panacea that it is thought to be (a correlation which, amazingly, by the way, stands only at a positive 10% historically) then the real headline to possibly be taken into consideration by latecomers to the gold party ought to be the one that might not make the news marquis this morning: “US Core Inflation Rate Change: ZERO”

Nothing should be discounted as a possibility at this point. Equal, though uncertain, odds that $1,300 or $1,250 could be visited before the weekend might still be factored in here. Rules thought to apply, no longer really do so. Like the one that historically points to India buying gold right around this time of the year. Sources told us overnight that – for a fourth day – locals postponed shopping sorties to local gold outlets as they remained unconvinced about the sustainability of 19,257 rupees (per ten gram) gold price tags.

Silver, which touched a spot offer price of $21.03 overnight also opened with more muted gains this morning. The white metal rose 6 pennies on the open, quoted at $20.86 the ounce. No respite in the speculative fund-fueled rise for platinum; it started the day off with a $17 gain and a quote of $1,624.00 on the bid side (albeit it had seen a $1,637.00 print earlier). Palladium dropped $3 out of the starting gate, and was last bid at $546 (after it made a sortie to fly over the $561 mark early this morning).

Once again, there is enough level-headed and sober perspective on offer amid the euphoria, but, no one appears to be very interested in tuning in just yet. To wit, while in accord that current conditions may justify present values and possibly higher ones in the yellow metal – and for a while longer, at that – Deutsche Bank analysts who spoke to Kitco News’ Allen Sykora yesterday also offered this bit of caution to investors: “In what it [DB] calls a “mean reversion exercise” gold, along with other commodities, have the most to lose from potential future mean reversion. If gold’s mean returned to the long-term average real price over the next 10 years, it would lose “a huge real adjusted 7.9% per annum.”

It is precisely this ‘reversion to the mean’ that was alluded to by this writer in the presentation on gold’s fundamentals at the Kitco eConference earlier this week. Lest we all now believe that markets have totally broken loose from such time-tested phenomena, consider…every other asset that has invariably done so. Consider also that when gold was but $252 an ounce, erudite studies, publicized by none other than the World Gold Council, attempted to convince would-be gold investors (a rare species at the time) that ‘reversion to the mean’ – in terms of gold versus equities or vice versa –was inevitable. Indeed, it became reality, just as the overshoot of prices since 2007 has now pushed that equation into a place where the opposite extreme is apparent.

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