The Case for Gold
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PLEASE NOTE THAT THIS INFORMATION EXPRESSES THE VIEWS AND OPINIONS OF SEABRIDGE GOLD MANAGEMENT AND IS NOT INTENDED AS INVESTMENT ADVICE. SEABRIDGE GOLD IS NOT LICENSED AS AN INVESTMENT ADVISOR.
Tailwinds Driving the Gold Market
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Fed Fears Bring Down Gold
Like everyone else, we were surprised by the relative strength of the October US jobs report released last Friday. None of the employment sub-indices in other recent economic reports hinted at a better number. The market response was swift: surely the Fed will raise rates in December, so the dollar went up, commodities fell and the gold price took another hit. We had predicted a gold price correction two weeks ago but yesterday's drop made for a deeper correction than we had expected.
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Gold: to Correct or Not to Correct?
Gold has had a nice move from the lows of late July. Will it continue or correct? We are firmly of two minds on this issue but if we had to decide, we would say that a correction is probably more likely.
The Fed is Wrong (Again): America is Slowing Down (Fast?)
Our consistent view has been that the US economy is not in a recovery, that the Fed will not be able to increase short term rates and that Fed credibility would suffer, opening the way for a lower dollar, a higher gold price and a deep correction in the stock market. Let's look at some new evidence.
What Does The Jobs Report Mean?
Today, we got a very surprising (to some) US jobs report for September. The number of new jobs fell well short of expectations, wages were flat, hours worked were down and the job totals for July and August were also marked down sharply.
Short Covering Propels Gold Rally: Will New Longs Follow?
At last, a short covering rally seems to have begun in gold. After a number of bear raids that failed to break the gold price below $1100, the shorts appear to be throwing in the towel, at least for now. Going into today, large speculators were sporting outsized short positions and small speculators, the proverbial contrary indicator, were likely holding a record net short position.
The Bear Thesis on Gold Unwinds
As we have been saying for many months, the powerful anti-gold thesis ultimately depends on confidence in the Fed. Today, that confidence took a very serious hit.
The Gold Basis: Pointing the Way Higher?
In our view, the gold basis is indicating that market players are positioning for a move lower in the dollar and higher in gold.
Raising Rates: Just How Will the Fed Do It?
Everyone seems to assume that if the Fed decides to raise the short term interest rate, all they will have to do is wave their wand and the rate will magically go where they want. Historically, that's not how it was done. The Fed sold securities into the market, reduced liquidity and the market took the rate higher.
It's Not Just China
The Friday-Monday stock smash was blamed on China's market crash and slowing economy. The proof, according to market commentators, was the short-lived recovery in US equities on Tuesday after the People's Bank of China "stepped up its credit-easing efforts by slashing interest rates and flooding its banking system with new liquidity, its second such combo move in two months aimed at battling a deepening economic slowdown and its worst stock-market selloff in decades." (Wall Street Journal, August 25, 2015).
Risk Aversion Grows: Good for Gold?
Gold generally trades inversely to financial assets. When investors are willing to take on more risk and pay up for financial assets, gold does not do well. When they become more risk averse, gold tends to do better.