Resurrection

I am back.

Let's revisit the gold & silver markets, shall we?

Firstly, let's agree that the precious metal markets are driven ENTIRELY by SPECULATIVE CAPITAL FLOWS. Gold & silver have such trivial industrial demands relative to their speculative demand (at these price levels) that their consideration proves specious (apropos adjective, no?), at best.

Hence, we can examine the components of this speculative demand to determine possible future price movements, as I assert that industrial demand doesn't matter at these prices. For those who claim Jewelry provides a source of demand, I remind them that the mark-up on non-crap Jewelry (i.e. stuff traders buy for their mistresses at Bergdorf Goodman, not the nightmare that is the post-classical Arab/South Asian aesthetic aborted into golden form you buy from some sweaty bastard at a slight premium to spot) ranges from 500-2000% of COGS. As one major Jewelry CFO told me, "I couldn't care less about metal prices."

If you look at a gold chart, priced in dollars AND euros, please focus on the period from the Fall of 2009 to the Summer of 2010. At the end of 2009, was there a massive liquidity squeeze? No: in fact, Treasuries were range-bound until the Greek situation became critical towards the end of April, 2010.

Gold had its HUGE move UP, in fact, cooincident with the first major bump-up in Greek yields, which occurred around the end of December 2009/early January 2010. Then, both Greek yields and gold receded, only for both to surge even higher in June 2010. HOWEVER, if you look at the RELATIVE PERFORMANCE, gold in EUROS handily outperformed gold in DOLLARS. Please look at a chart comparing gold in EUROS to gold in DOLLARS from this period, and you can see for yourself.

What does this tell us? It tells us that the SOVEREIGN UNCERTAINTY OF THE EU is the catalyst for GOLD UPSIDE. I interpret this, for myself, as meaning that unless the EU totally collapses, it would take a US sovereign-debt crisis to send gold even higher.

Well, considering Obama has already done the right thing with the military (cutting it, meaningfully) and hopefully will do the right thing with entitlements, I see long odds of the US having a similar fiscal crisis.

The black-swan for gold upside remains a big war in the Middle East, which, of course, we covered here about a year ago.

What has gold become, then? It's become the anti-Euro trade, it seems, especially as it hangs tough these days despite a weakening EUR/USD.

My personal feeling is that we're due for a huge spike in gold in 2012. Why? Well, firstly, Spanish banks have yet to reveal the extent of their distress, and they are surely quite distressed! The problem with Spanish banks, though, is that they are a PRIVATE credit event that has SOVEREIGN implications for Spain: this is very complicated, politically, to compass, and so resolving this ought to prove quite difficult. How do you get the ECB and EU to bail-out Spanish BANKS, PRIVATE debtors? It's quite one thing to bail-out Italian STATE: that's a relatively palatable medicine. However, to forestall a deflationary crisis in Spain due to SPECULATION in real estate USING EU & ECB funds... politically, that could be suicidal for many EU politicians and impossible for the ECB to indulge given its supposed mandate for price-stability and moral-hazard control. My opinion: the EU & ECB give in, but not before a proper auto-da-fe and perhaps a few burning of cities and infidels!

In conclusion, gold has upside so long as the EU remains in doubt. If the EU has its "Gettysburg" moment (this is a reference to Greenback convertibility to gold during civil war peaking at Gettysburg) in 2012, then even another Gulf war would only provide cushioning for a sustained bear-market in gold, since the only other catalyst, a US fiscal crisis, remains quite far off.