The Mystery of the Gold Market
Conclusions on the Selling Pressure
Kenneth J.
Gerbino
Archives
Kenneth J.
Gerbino & Company
Mar 20, 2008
It was very obvious to me after
35 years investing in the mining sector that something was very
strange when two very unusual facts were present in the bullion
and gold mining share market over the last nine months.
- The junior mining stocks were
going nowhere while the big cap stocks were relentlessly strong
since the summer of 2007 as gold went from $650 to the recent
high of just over $1,000. The fact that the gold move was that
strong and the juniors were not participating had never happen
before.
a
- Both Goldman Sachs and Morgan
Stanley were both issuing bullish forecasts for gold in the summer
and fall of 2007. A first, as far as I can recall.
I have no doubt that the U.S.
Treasury and the Fed were very aware of the sub prime problems
long before it became headline news. I am also sure that they
had concluded and decided that if the situation did get out of
hand they would basically have no choice but to put as much liquidity
and cash into the system as was needed. At all costs they were
not going to let the financial establishment of the United States
go down in smoke and then have to deal with the aftermath.
Since the establishment banking
elite in this country and most other countries are either Keynesians,
Samuelsonistas, or Galbraithians, (the three worst famous
economists that ever lived beside Marx) they are very comfortable
with printing money anytime it is useful to them politically.
The extent of the eventual
investment crisis that ensued was most likely not envisioned
by the Fed or the Treasury but I am sure they knew that there
were going to be plenty of problems.
My thesis is that the following
happened:
1. Insiders, cronies, major
$10-$30 billion elite fund managers and friends who hob-nob in
high places were aware of two things: That the banking system
may have to take a big hit in late 2007 or early
2008 and that the Fed would print as much money as needed and
lower rates dramatically to handle these problems. Therefore
buying gold was a no brainer. The Fed would easily do what would
be bullish for gold.
2. These well connected and
savvy players then became short term believers in gold, (knowing
little about gold philosophically). They did know, as time went
on, that indeed the banking situation was getting worse and possibly
out of hand.
3. They were probably not told
outright in a conspiratorial manner about the intentions of the
Fed but they knew that the Fed was probably without a doubt going
to turn on the spigots and lower interest rates which would move
gold even higher and the dollar lower.
4. Hedge Fund managers with
the momentum of the bullion market and the major gold mining
stocks then joined the party.
5. Then as the gold buying
reached a high point, a perfect selling opportunity to "sell
into the news" presented itself when the most outrageous
bullish event took place for gold. That was this Monday, March
17.
6. The bail out of Bear Stearns,
the lowering of the discount rate and the _ reduction of the
fed funds rate signaled to anyone that gold was going to go through
the roof. A perfect time to sell and take profits...
since they and the gold price had already discounted this action
evidenced by the huge move since the summer.
7. One of the clues to the
possibility that this thesis was true were the facts above, but
the fact that gold enthusiasts usually buy majors, intermediates
and the junior mining companies [???].
These groups usually move in tandem when gold is very strong.
If only the majors were really moving, then this new buying was
coming from big money and it was new money.
If the gold price was not bulled
up abnormally by this new well informed and confident group it
could easily still had a strong and respectable advance from
$650 to let's say $800 from last summer to this March.
If that had been the case,
then the announcement by the Fed on Monday (which was very bullish
for gold) may have likely seen gold jump $100 to $900. But that
did not happen because this bullish news was discounted already
and that is why gold was over $1,000. Gold is now [Wed] $958. It is still up significantly
since last summer. The gold stocks and bullion bought by this
new money group are being dumped in the markets right now. Other
players are following along as well making things worse.
What to do now
Along with this "new money"
buying gold, the metal also had become over extended, jewelry
demand was drying up in China, India and the Mideast, and the
dollar was so beaten up it was due for a rally or at least a
dead cat bounce. These other circumstances also helped create
selling pressure as well, and combined with the usual panic selling
that accompanies any market that is retreating badly all worked
together to create the situation we are now faced with.
Wait for the dust to settle
and be patient in the short term. This could be the start of
a decent correction. Gold could reach $830-850. But there are
also plenty of money managers and investors that missed the gold
move the last few years and have been waiting for a correction
to jump in. Therefore the extent of the correction could be shortened
by these investors.
The facts remain the same:
- The Fed will print as much
money as is needed and bail out the big names.
.
- The big Wall Street banks
and other institutions still have exposure to third party defaults
that have not been declared or acknowledged or are even known
about at this time.
.
- There are plenty of deflationists
believing in a financial blow up who will buy gold to protect
themselves.
.
- There are plenty of others
believing in inflation who will also buy gold to protect themselves.
.
- Inflation is in the pipeline
and everyone sees it everyday when they buy goods. This is a
global phenomenon and will take gold higher in the coming years.
Gauging a Price for Gold
The one misleading analysis
that is in print on many pro gold websites is based on taking
the gold price at its very high of $850 from 1980, then adjusting
it for inflation and coming up with a gold price of over $2,000
for 2008. This is a grave error. The gold price then had nothing
to do with economic reality. It was a four-month spike
that did not reflect anything from an economic standpoint except
fear and greed and speculation. It collapsed shortly afterwards.
The gold price adjusted for
inflation from 1789 (when our Founding Fathers were in control)
to 1980 should have been around $360 based on wholesale price
increases. Adjusting the gold price since then based on inflation
to 2008, (using an untrustworthy CPI index from the Bureau of
Labor Statistics from 1979 of 72.6 to February of 2008 of 211.7
the increase in prices is 191.6%) one comes up with $1,050 as
a reasonable current price for gold. This price to me is reasonable
and leads one to the conclusion that owning mining stocks that
can produce gold for less than $400-450 an ounce in the coming
years has to be a smart way to think.
I remember back in 1974 when
gold peaked out at $200 in the face of plenty of bad economic
news and plenty of inflation. By 1976 it hit $103. Then it took
off to $850 in 1980. We could be seeing the same sort of reaction
here before the resumption of the bull market. Luckily for gold
investors there are some major new developments this time. These
are: India, China, money supply increases now that make Nixon
and Burns (ex Fed Chairman) look like choir boys, the derivative
market, and the Wall Street banking crisis brought on by the
U.S. housing speculation and two decades of easy money policies
by Alan Greenspan.
Conclusion:
Gold is going a lot higher
but right now in our managed accounts we are waiting until the
dust settles and buying only three types of mining companies,
I suggest you do the same:
1. Companies with the goods
in the ground and close to production.
2. Producers with reasonable cash costs and growth from projects
in the pipeline.
3. Companies with huge mineral resources that could be acquired.
Good luck.
For more information about
gold, the economy, and Wall Street please visit our website at
www.kengerbino.com.
Mar 19, 2008
Ken Gerbino
Archives  Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com
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