Gold to break through $US1500 an ounce?

Gold looks like breaking through the $US1500 an ounce level in overnight trading. This new nominal historic high comes as no surprise due to the metals relentless march upwards in a primary bull market that has lasted 10 years.

What is surprising is golds recent correlation with all other risk assets (e.g equity markets, commodities etc) has inverted – with European and US markets down 1-2% (Greece down almost 3% at time of writing) although “King dollar” is rallying against the majors, with US Dollar Index (DXY) up slightly.

This recent spike may have been driven by the news that the University of Texas has taken physical delivery of almost $1 billion of gold, instead of relying upon a paper contract. From Bloomberg:

Dallas hedge-fund manager J. Kyle Bass helped advise the University of Texas Investment Management Co. on taking delivery of 6,643 gold bars, worth $987 million on April 15, now stored in a bank warehouse in New York.

Bass, who made $500 million with 2006 bets on a U.S. subprime-mortgage market collapse, said managers of the endowment, known as UTIMCO, sought board approval to convert its gold investments into bullion this year. A board member, Bass, 41, said he was asked to help with that process.

The Texas fund’s $19.9 billion in assets ranked it behind only Harvard University’s endowment as of August, according to the National Association of College and University Business Officers. Last year, UTIMCO added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The fund’s managers sought to take delivery of bullion to protect against demand for the metal overwhelming supply, according to Bass.

But more likely, speculators ran on the ratings outlook cut on the US economy by Standard and Poors. From The Wall Street Journal:

Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable while keeping its Triple-A rating on the world’s largest economy.

“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” said Standard & Poor’s credit analyst Nikola G. Swann.

U.S. stock futures plunged on the news, with Dow industrial futures falling 167 points. Bond yields rose.

Although this is hardly surprising, the market has responded with a “where did that come from?” response. More here and here.

Disclosure: The Prince is a full time equities trader, running a personal account. I may have positions (long and short) in some or all of the securities, commodities or other investments mentioned above. This post is not advice or a recommendation to buy or sell. Do your own research and consult an adviser before allocating capital.

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  1. I found it interesting that the HUI (and SIL ETF) has continued to fall even with Gold on the cusp of US$1500.

    Is this non confirmation a sign that Gold should soon experience a short term correction… or just a sign that the related stocks won’t be the “safety haven” that the metals themselves are?

    Will have to wait and see, but I will feel much more comfortable about the rally when Gold/Silver stocks are following the metals higher.

    • Gold hasn’t done much in terms of AUD, and additionally most mid-tier miners are finding their fixed costs have actually been going up (if that makes sense?).

      The cash cost of many of these miners is quite high, couple that with the strength of the dollar and they all seem to have decoupled from the POG with the possible exception of NCM.

      • Also, how many ‘miners’ are actually producing any significant gold let alone making a decent margin?

        I bought a bunch of gold stocks more or less at the bottom in ’08, thinking that they might be a good bet. But with a couple of exceptions, the most notable being Conquest (CQT), they are complete dogs. Take for example Norton (NGF), now carrying enormous liabilities due to an idiotic ‘hedging’ policy. The small amount of gold they produce, coupled with their cost of production means there will be sweet FA for the shareholders anytime soon, if ever.

        Norton is probably trading at fair value, even against the $. So at least I know they are not in a bubble.

        • Norton looks like it could be on the improve in the next few years, though i haven’t had an in depth look at this stock for some time. Ofcourse management has been VERY incompetent in the past.

          The best goldie at the bottom was OGC, i regret not purchasing that one sub 30 cents. They probably have the best management of all the smaller to mid cap goldies aswell.

          you’ve probably made money overall with CQT despite the others being losers. That’s why the best strategy when buying goldies is to spread the cash over 5 or 6 of them. Most of the time the one that performs can recoup all the losses from the dogs and then some.

          Goldies always have the same problems:

          – operational issues/delays (which leads to increasing costs and decreased production at the same time)
          – poor management

    • “Will have to wait and see, but I will feel much more comfortable about the rally when Gold/Silver stocks are following the metals higher.”

      Me too. Currently i am very uneasy about the gold stocks i own. Unfortunately as a former DOM holder i am getting beaten up holding my KCN. Seems the hedge funds are still shorting it and the operational delays have not helped.

  2. I think its more of the same issue around physical gold versus ETF gold.

    I expect to see a bigger rush to delivery and/or allocated gold and away from the ETF’s for a time – and this may translate into a correction in spot prices, but then a new reflation thereafter.

    The gold/AUD correlation worked well last night: AUD down 0.5% meant gold in Aussie dollar jumped higher than USD.

    If Bernanke is stupid enough to keep rates low or enact QE3 I don’t think you need to wait for gold/silver stocks…..

  3. I’ve been considering buying physical gold for a few months now, hold then sell after its gained say 10-20% – then I chicken out when reading an article saying gold is overvalued and about to crash.

    What do you guys think about buying bullion as opposed to gold stocks? I was planning on going with the Perth Mint and yes theres the whole fractional reserve thing, with potential to buy a paper gold note and they won’t honor it… Or would you get it delivered to a bank like the Texas uni mentioned in the article?

    • Peter have a read of my previous articles on gold.

      There is a substantial difference between the physical and the paper/electronic.

      I own physical gold through my SMSF – its my crash insurance.

      Gold stocks (I assume you mean miners) has considerable risks beyond storing the physical stuff – management, hedging, costs, etc, that come with running a business.

      You shouldn’t be owning gold with a view to it rising in value: it has the same value regardless of its spot price (yes Dorothy – gold does have an intrinsic value).

      Remember, its a Minsky metal – an insurance hedge against financial instability. The best time to buy it is when nobody else wants it – when financial systems appear very stable, but when in fact they are nowhere near robust.

      Don’t be surprised at the coming volatility in gold – it’s market price is beholden to speculators like me and others, based on the perception of what is going on.

      • Thanks for your reply, I’ll try have a look at your articles.

        What you mention about volatility though – thats why I’m interested in buying! I keep thinking man if I bought for $1280 when I started looking at it, and sold today I’d be kicking my banks 6% deposit rates arse!

        So you say buying physical gold and then selling it isn’t the safe way to go about all this?

        Or should one trust these bullion places and buy and let them “hold” it for you?

  4. You hold physical gold? If yu can get to it within 24 hrs then yes you do. And if yu need physical, then youll prolly need food and water even more….but yes i think the AUD gold price will be going alot higher than what it is 2day…And depending how the housing market goes, i dont think the AUD is going to fare well when TSHTF. A world of physical gold swapping for day to day stuff dam thats mad max, but i can understand paper $ that has gold backing/convertibilty to keep inflation in check, so when theres creeping inflation people can xchange paper for physical which would lead to a curb in lending/spending.
    I dont think the banks and govs would appreciate this kind of scenario tho hehe.