Friday, January 6, 2012

Gold has bottomed and cleaned out its liabilities from the MF Global scandal

Gold has been steadily climbing since the beginning of 2012, and many of the reasons behind its 20% retraction have finally been flushed out of the markets.  The effects on the futures and gold markets after the MF Global scandal, coupled with the rise in the dollar compared to other world currencies, were the main antagonists forcing gold liquidations across the globe.

In spite of some short-term fixes, there remains no real resolution to the sovereign debt issues in many European countries. We're certainly not spending less money in the US, and now we're bailing out Europe via currency swaps with the European Central Bank. Shouldn't gold be rising?
Yes, but nothing happens in a vacuum. There are some simple explanations as to why gold remains in a funk.
  1. The MF Global bankruptcy, the seventh-largest in US history, forced a high degree of liquidation of commodities futures contracts, including gold. Many institutional investors had to sell whether they wanted to or not. This is similar to why big declines in the stock market can force funds and other large investors to sell some gold to raise cash for margin calls or meet redemption requests.
  2. The dollar has been rising. Money fleeing the Eurozone has to go somewhere, and some of it is heading into US bonds, which means first converting the foreign currency into dollars.
  3. It's tax-loss selling season, something that's also impacting gold stocks. Funds and individual investors are selling underwater positions for tax purposes. Funds also sell their big winners to lock in gains for the year and dress up quarterly reports.
These forces have all acted to depress the gold price.  Jeff Clark of Casey Research



Courtesy of Casey Research

Now that most of these market forces have receded, gold is slowly moving back up towards $1700.  Additionally, the more Europe and the US continue in crisis, the more the chances of central bank easing become assured.  Once that happens, then the upper reaches of QE3 will move the price of gold to new records, make fools of many analysts who jumped at the chance to claim the gold bull market as over.

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