NEW YORK -- The spot gold price suffered a $9 collapse just before the Friday close of trade on Comex, striking an intraday low of $345.60 per ounce before recovering to between $347-8/oz. Silver also appeared to be stalling after a tremendous break through $5/oz. It was last trading just above $5.10. It was just Thursday last week that the gold price launched an aggressive assault on $360/oz, matching the forecasts of technical chartists who called forward gold’s apparent eight week up-cycle. Mild intraday corrections were predicted, but clearly nothing like the breakdown that bulls suffered today which crashed well below mooted support lines at around $353.
Gold authority figure Jim Sinclair – who has been leading the bullish view in a manner akin to Joan d‘Arc – warned what he calls that “Cartel of Common Interest” that they were going to hell “on the short line they have put out from $368 down.”
“This time I wager you they do not get a chance to effect cover because I, and many others, are going to take our final positions in the futures, at the market the minute we smell power a down trend breaking and momentum accelerating. I'll bet you we take out $368 in a straight line up at that time, and then after getting the Cartel shorter, we go directly through $375,” he wrote on his Web site on Thursday.
The gold price sunk as the US dollar firmed on broadly positive interpretations of American economic data. The dollar index has rallied back from a mid June low that marked a near one-quarter decline from 2001-2 peaks that topped 120 points.
Initially the fall was halted at $350/oz as the euro recovered some mild losses and helped drag gold back to $354/oz the where it was stopped dead at every advance. By midday, selling set in with a vengeance to drive the gold price down in quick step losses.
The London Afternoon Gold fix was set at $352.35, the lowest fix since 22 July.
The consensus view apparent from today’s market reports is that the incredible reversal in bond yields, reflecting a collapse in bond prices, points to a strengthening American economy.
The 10-year Treasury Yield Index has soared to its best level in a year, and the Treasury yield curve has steadily become more convex. The 10-year swing is the biggest monthly move since 1984, costing those who bought at the top of the market in mid-June a bundle and then some. Much of the activity has been linked to mortgage hedging in expectation of higher interest rates in future.
At the same time, swap-market spreads have piled on the pain with the 10-year interest rate swap spread widening more than 20 basis points in the last three days and 30 basis points in the week in recognition of investors hedging interest-rate risk. Similarly, yield margins have risen sharply impacting corporate bonds negatively.
The exploding swap-market spread could be good for gold because it implies higher risk while the rising yields carry inflationary expectations.
Stock valuations
Consequently, today’s fall in the gold price is rather confusing and counterintuitive. Yet investors were content to leave precious metal stocks largely unchanged.
Movements of the Philadelphia Gold Index divided by the gold price are a rough early warning indicator for the gold price. For example, gold stock ratings began to appreciate in November 2000 as the final nails were hammered into the equity bull market. That preceded the gold price turnaround in April the next year. Then investors sold down stocks a month before the gold price peaked this year in early February, buying again in March to lead the gold price by another month.
The ratio has moved mostly sideways, generally ignoring the correction from late May and early June’s highs. Today the ratio stands near its highest levels of the year. Without a significant mark down in the ratio, it would appear that there is confidence in a higher gold price
