That said, commodity speculators do get it wrong, on more than just one occasion. For example, as a group, funds lifted their bullish commodity bets for the first time in a month-and-a-half just prior to the complex experiencing its largest…drop since last October. Oops. Meanwhile, investors pulled $357 million out of commodity funds by last Wednesday and they pulled $349 million out of precious metals.
Then again, such bets-gone-sour are not the exclusive domain of hedge funds. Retail investors have been pummeled by holding on to a wide range of gold mining shares. The old view that the miners offer “leverage” to the price of the yellow metal they mine has actually turned out to be true of late; in the opposite direction, that is. While gold lost nearly 10% since February’s high, the mining shares have fallen by some 21%. Marketwatch’s Peter Brimelow writes that “lagging gold shares have been the albatross following the great post-millennium gold bull market. Gold stocks have historically been tremendous money makers in bull markets and a rebound has been several times forecast.” Frankly, we have lost count of how many “several times” represents at this juncture. But, one of these days, who knows?
For mega-investor John Paulson that day cannot come soon enough. In April, his Advantage Plus fund lost 6.7% as the cratering in gold mining shares made its impact felt. Mr. Paulson is pedaling hard, trying to reverse the spectacular (record) losses he incurred last year. Commenting on the divergence between bullion and the miners, Mr. Paulson could only underscore the obvious as he addressed investors via a letter that must have been difficult to compose: “This disconnect has caused a large discrepancy between the gold spot price and the implied valuation of gold through gold equities.”
On the physical front in gold, the only encouraging news to hit the wires of late has been the removal by the Indian government of the excise tax of 0.6% on non-branded jewelry that had gone into effect on March 16 and which caused a massive strike among that country’s bauble sellers. Finance Minister Mukherjee however left a proposal to double the import tax on gold to 4% on the table.
Would-be Indian buyers have to already cope with record (near-30,000 rupees per 10 grams) local gold prices. Consider the metric that reveals that gold demand in Mumbai is currently running at around 250 kilograms per day as opposed to as much as the one metric tonne per day that was apparently being consumed one year ago. This “love trade” has, indeed, been jilted.
Finally, on the analytical and valuation front for gold, we heard from former Kitco commentator and veteran market observer Paul van Eeden. One of the most dispassionate and cogent gold market analysts to date, the President of his own private holding firm, Mr. van Eeden has recently tendered that the real (as opposed to nominal) value of gold lies somewhere in the vicinity of $890 an ounce.