In the wake of Friday's disappointing jobs data, the fate of future Federal Reserve tightening beyond November can reasonably considered to be in doubt. So it's not surprising that the dollar retreated sharply after the report while gold futures rallied to a six-month high, recently up 1.2% at $424.50 per ounce. In the process, gold broke through $420 per ounce, piercing a downtrend line connecting to its April peak that recently had served as resistance.
Veteran technician Martin Pring of
The InterMarket Review
noted that the Amex Gold Bugs Index had broken above its 2004 downtrend line heading into this week, a positive development suggesting "the
metal's rally still has plenty of potential before becoming overextended." (The index was recently up 3%.)
There's definitely a view out there that gold and gold shares are overextended and due for a pullback. "Base and precious metals markets are vulnerable to a sharp selloff," UBS London-based analyst John Reade wrote Wednesday. "Not only is speculative positioning getting extended, but also external factors -- notably any increase to U.S. interest rate expectations -- could prompt a broader selloff in risk assets, which would include commodities."
Obviously Reade's comments came prior to Friday's jobs data, which resulted in fed fund futures lowering odds of a December tightening to 24% from 38% previously. (Odds still strongly favor another rate hike at the Fed's November policy meeting.)
A potentially less aggressive Fed, China's renewed growth spurt and ongoing geopolitical unrest make it possible to argue a bullish short- to intermediate-term scenario for the yellow metal -- more especially if
Aaron Pressman is right about a potential slowdown in housing activity also putting a crimp in the Fed's tightening plans.
Yet gold has seemingly become the forgotten sister of the commodity community, taking a back seat this year to more dramatic advances in oil, copper, steel and even
silver. The relative absence of "buzz" about gold is arguably a good contrarian sign, but it's also understandable given the metal's recent history.
To briefly recap, gold and related stocks have dramatically outperformed equities in the past five years -- the Gold Bugs Index (HUI) is up 160% in that period -- and by a solid amount in the past 12 months. But after peaking in January, gold and related stocks have struggled in 2004, with the HUI down 5% as of Thursday's close, underperforming major averages. After becoming momentum plays in 2003 -- as discussed
here -- many individual shares have fared far worse, with onetime highfliers such as
off between 14% and 18% year to date, while industry heavyweight
is off 6%. Meanwhile, the average gold and silver fund is off 5.4% this year, according to Morningstar.
The lackluster performance comes amid relative stability in the dollar and "many delays and disappointments in the sector," including feasibility studies and environmental shutdowns delaying certain mines, said Frank Holmes, chief investment officer at U.S. Global Investors. Also, "there's a lot of second-guessing trying to monitor energy needs of individual
the sector is not universally as robust as a lot of people had hoped." (U.S. Global's
Gold Shares fund, which I am long, is down 7.8% year to date but up over 41% in the past three years.)
In addition, a very strong Rand "wiped out the profits" of many South African gold stocks, Holmes noted. For example,
is off nearly 25% year to date.
Unless gold can break above its April peak of $430, Holmes believes the metal is going to remain rangebound until after the election. "Gold is basically the best hedge against the dollar declining, and odds favor the dollar will decline after the election," he said. "Gold is anticipating
this and acting better because of those implications."
Prior to Friday's setback, the Dollar Index was up 1.6% for the year but down 4% since May, and it appears to have recently hit a near-term peak. "Aside from increased doubts regarding the fate of the Fed's tightening cycle, the dollar is seen pressured on the foundation of slowing economic activity, especially from higher oil prices, which the Fed deemed to have stabilized at the last FOMC statement" on Sept. 21, when oil was around $47 per barrel, quipped Ashraf Laidi, chief currency strategist at MG Financial Group.
Rumors of the dollar's demise have proven premature in recent years, but it remains very much in a long-term downtrend, which has long-term bullish implications for gold. On Thursday, Dallas Fed president Robert McTeer said: "Over time, there is only one way for the dollar to go -- lower," and warned "rapidly rising interest rates and a rapidly depreciating dollar" would result if and when the rest of the world stops funding the rapidly expanding U.S. current account deficit.
Such frank talk from a Fed official is unusual. Notably, McTeer's comments came during a week in which several Fed officials -- notably governor Ben Bernanke -- made statements rightly or wrongly interpreted as meaning the Fed is rethinking its "measured" approach to tightening and might even pause after November (Friday's comments by Minneapolis Federal Reserve President Gary Stern to the contrary notwithstanding). Such an outcome would presumably be negative for the dollar and positive for gold.
Add to that
simmering concerns about the Fed's need to encourage inflation via a weaker dollar because of the ongoing dis-deflationary threats of China's and India's rapid growth, plus high levels of U.S. household indebtedness, and you have a formula for higher gold prices.
Aaron L. Task is the managing editor for RealMoney.com. At the time of publication he was long U.S. Global's Gold Shares fund. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to