August showed surprising drops in price for all four of the major precious metals, though all traded off their lows at month’s end. Gold and platinum showed especially strong movement in the second half of the month, and gold and silver looked to gain notably when September begins.
Gold’s movement is probably attributable to the infusion of liquidity to the financial markets by the Fed. But, like silver, it appears to retain its allure to investors, who seem to be jumping on the drop in prices to secure positions in anticipation of continued upward movement. Another aid to gold’s upward movement is a reduction in gold sales by central banks of late.
Silver appeared to bounce off its new support line and moved again toward its earlier support near $13. Those who watched the bounce profited smartly to the tune of 6.9% off the low — this despite word that Mexico had increased production by 25%.
The big issue now is the global economy and the immense infusion of liquidity by the Fed. With large institutions selling their holdings to meet obligations, none of the precious metals could stay long at their lows; one presumes that investors are seizing bargains and will continue to do so as long as possible.
Gold/Silver Ratio
During August, the gold/silver ratio – the quantity of silver (in Troy ounces) required to obtain one ounce of gold – rose steadily for the first half of August to a multi-month high in the mid-50s. In the last half of the month, the ratio fluctuated in a range between 55 and 56.6.
| August Spot Price Summary (U.S. Dollars) | ||||
| Silver | Gold | Palladium | Platinum | |
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| High | $13.21 | $676.85 | $370.50 | $1301.50 |
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| Low | $11.15 | $642.70 | $317.50 | $1228.00 |
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| Open | $12.80 | $661.60 | $366.00 | $1281.00 |
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| Close | $11.92 | $668.68 | $333.00 | $1272.00 |
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CONTENTS
ABOUT NORTHWEST TERRITORIAL MINT PRECIOUS METALS MONTHLY
Combining market summary information and insightful analysis, this publication offers an insider’s perspective on the numbers, trends, and moves that drive the precious metals market, allowing you to stay on top of the most important investment news each month without investing hours of your precious time.
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CHARTS
The following charts display the daily low and high spot price of each metal for the month of August, 2007. Source: Northwest Territorial Mint spot prices as posted at nwtmintbullion.com.
The following charts display the daily spot price range of each metal for the six months ending August, 2007.
Has Gold Lost Its Safe-Haven Status?
by Ross Hansen
Typically, gold moves in the opposite direction of the stock market. When stocks slide, gold has historically gained. That's why gold has been trusted as a store of wealth by so many investors for so long. But recently, when the Dow Jones Industrial Average (DJIA, or Dow) plunged, gold spot actually declined. Some commentators have suggested that gold may have lost its safe-haven status. Are they right, or could there be another explanation?
Gold and Dow Have Moved Together
Over the past several years, the price of gold has risen substantially as the Dow has surged to reach record highs. While gold spot has seen a net increase of 7.5% during this past year, the Dow has increased by nearly 15% during that same time period. This is certainly notable, since precious metals and stocks are acknowledged as negatively correlated assets. Gold has traditionally been viewed as a hedge against equities and tends to move in the opposite direction of these paper-based assets, a pattern confirmed by a comparison of the Dow and gold in recent decades. This comparison is represented numerically in a standardized measurement known as the Dow/Gold ratio.
Exploring the Dow/Gold Ratio
The Dow/Gold ratio is obtained by dividing the Dow's point total at any given time by the spot or market price for gold at that time. A lower ratio reflects higher gold prices and declining stock market value. Conversely, a higher ratio results when gold spot declines and the Dow rises. This ratio has long been used by analysts as a reliable tool in measuring gold's overall performance as an asset in comparison to equities. Below are two examples from the recent past, both of which show gold rising on the heels of a major drop in the Dow, resulting in a declining Dow/Gold ratio. The third example cited below, which highlights events from July and August of this year, illustrates a divergence from this pattern.
1974
In the early 1970s, the Dow was on an uptrend. In fact, the Dow closed the year in 1972 at a then- record high of 1,020. The price of gold per ounce at that time was approximately $60. Consequently, the Dow/Gold ratio hovered near 17. Between the end of 1972 and September of 1974, the Dow had lost nearly 40% of its total value, sinking to just above 600. Gold, however, was trending upward on the news, heading as high as $185 per ounce in early 1975. This dramatic divergence was reflected in the Dow/Gold ratio, which had dipped to 3.2. As inflation in the U.S. increased throughout the remainder of the decade, the price of gold continued to rise, capping at a record high of $850 before adjusting downward. In January of 1980, the high point for gold, the Dow/Gold ratio was at just above 1.
1987
After gaining considerable momentum throughout the 1980s, the Dow plummeted in mid-October 1987, declining 508 points (from 2246 to 1738, or 22.6%) in a single trading session. In response, gold spot rose to $499.75 by mid-December, its highest level in more than four years. Gold closed the year at $484, posting a gain of nearly 20% on the year, while the Dow finished the year down 5%, closing near 1,950. The Dow/Gold ratio in January of 1987 was 5.3. By the end of the year, it had fallen to 4, dipping as low as 3.3 in late October.
2007
On July 26, the Dow dropped 311 points on widespread concerns of a credit squeeze tied to the subprime mortgage market. Instead of rising on the news, gold spot declined more than $20, falling to near $660 before finding support. Just over two weeks later, the Dow plunged again, giving up more than 340 points in a single session. Gold again declined on the news, retracing slightly to just above $655. At the end of July, the Dow/Gold ratio hovered near 20. After the August 16 stock market slide, the ratio had declined modestly to 19.3, despite a major shake-up in world stock markets on news of a deepening credit crisis.
Why Gold Spot Failed to Spike When the Dow Sputtered
When the market fell more than 340 points on August 16, gold spot actually declined. Why didn't more people buy gold in the midst of this major downturn? After all, investors have long turned to gold in response to economic turmoil. If, after the most recent stock market slide, demand for gold had risen in line with similar events in the past, gold spot should have surged, even if only for a short time before adjusting. As a result, major movement should have occurred in the Dow/Gold ratio. At the time of writing, the Dow/Gold ratio was still near 20. Last year at this time, it was closer to 18. Instead of trending downward, a reflection of the rising strength of the gold market, the Dow/Gold ratio has actually increased in the last 12 months, despite serious signs of weakness in major world stock markets.
While some commentators have suggested that a nefarious anti-gold cartel is responsible for suppressing the price of gold on world markets, many commodities experts attribute gold's lackluster performance in August to other factors. These experts assert that the entry of major institutional players into the gold market has fundamentally changed the way gold spot reacts to significant fluctuations in the Dow. Most recently, cash-strapped institutions with sizeable gold holdings leveraged their gold to gain enhanced liquidity. The result was a major gold sell-off that left gold spot sputtering and many individual investors wondering what had happened. Those looking at the situation through this new paradigm may wonder if it makes sense to buy and hold gold anymore. While gold stayed relatively flat in response to the most recent dip in the Dow, many experts claim that its safe-haven status is still firmly intact. Time will tell of course, but if the problems affecting the subprime mortgage market turn out to be the first in a series of dominoes, gold could soar to levels unseen in recent years.
Ross B. Hansen
CEO, Northwest Territorial Mint
Ross Hansen is the founder and CEO of Northwest Territorial Mint and has more than 30 years of experience as a precious metals trader and broker.
by Jeffrey Christian, CPM Group
First, the good news: Gold has not lost value. You have only witnessed investors shedding an easy-to-sell commodity because they needed to. Long-term investors are still buying gold, silver, and other precious metals.
Here’s what happened.
The prices of most commodities were pushed sharply lower in August by highly leveraged shorter-term investors, notably institutional investors, liquidating positions across all markets to build cash. The markets focused on the problems in the U.S. subprime lending market as the cause. The real reason was a tightening of credit by banks and other lenders to hedge funds, private equity houses, and other shorter-term investment funds that focus on highly leveraged trades. This credit-tightening was only partly related to the subprime lending debacle. However, given the high leverage used by these funds and their dispersion of investments across asset classes — including many commodities markets — even a relatively small tightening in their credit positions was magnified in the markets in which they were invested. So, they sold.
CPM Group takes the position that these problems were relatively limited in scope, and that the liquidity provided by the European Central Bank, the U.S. Federal Reserve, and the Bank of Japan probably was sufficient to protect the general economy.
Like the Fed, the International Monetary Fund, and others, we view the overall economy as relatively strong both in the United States and globally. Real economic growth stumbled in the first quarter in the United States, but was picking up already in the second quarter. Stronger-than-expected growth in India and China, strong growth in the Middle East, and increasingly strong economic expansions in Europe and Japan seem likely to offset any short-term weakness in the U.S. economy.
Based on this view, we thought it proper that the Fed initially did not cut interest rates in response to the financial market liquidity problems. The current situation is like past market liquidity crises, including the 1987 stock market crash, the 1990 recession, the 1997 Asian currency crisis, the 1998 Russian debt default and Long-Term Capital Management collapse, the 2000-2001 recession, and the 2001 terrorist attack on the United States. In each instance, monetary authorities provided massive infusions of capital to limit the damage in the financial markets. They did this primarily by buying back their own debt with newly printed money. They also bought other debt. In the more critical events of 1987 and 2001, they also slashed interest rates for a time and undertook other steps to encourage banks to be accommodating to their customers during a time of sharply reduced liquidity.
Then, on August 18, the U.S. Federal Reserve Board lowered its discount rate by 50 basis points to 5.75%. In doing so, the Fed termed the move a temporary change in its discount rate to promote the restoration of orderly conditions in financial markets. Additionally, it extended to 30 days short-term financing for banks borrowing from the Fed, allowed the borrowing banks to renew such loans at their discretion, and said it would continue the policy of the past few days of accepting collateralized mortgage obligations and other assets as collateral for discount-window funding to banks. The Fed emphasized that it will keep these policies in place until it feels that market liquidity “has improved materially.”
Given the severity of the current liquidity crunch, and its particularly notable impact on hedge funds, it seems now that the volatility of all financial markets, including commodities, may continue over the next two and a half months, at least.
CPM Group analyses have suggested that 2007 would be a year in which volatility picked up sharply in interest rates, stock values, currencies, and financial markets in general. This had been the case even before the past three weeks, which have only intensified these trends. Volatility may remain high through all of September. In addition to downside volatility, equities and commodities markets seem likely to remain weak.
Some of the mechanical aspects of markets will assure this, as will the effects, perhaps unintended, of some recent changes in financial markets and market regulations. More than a month and a half ago banks announced they were going to tighten credit on private equity and hedge funds, so liquidations of heavily leveraged positions by these funds was well anticipated. The degree to which these liquidations of positions would damage market values was grossly under-estimated by the markets.
One factor that suggests volatile and weak markets in September is the potential for heavy withdrawals of investor money from hedge funds at the end of the month. Most hedge funds give their investors the right to withdraw money once a quarter, specifying that the intention to withdraw money at the end of each quarter must be relayed to the funds in writing no later than 30 days before the end of the quarter. More positions — from commodities to stocks to debt securities — will need to be liquidated between now and the end of September in order to have sufficient cash to meet the redemption requirements. This is an advance notice of further weakness in any markets in which these funds have been aggressive buyers — including stocks and commodities.
And equity and commodity prices continue to fall much more precipitously than in the past because of the reduction in the role of market makers, floor traders, and locals who traditionally provided a buffer to heavy selling in downward spikes. In the 2001-2002 equity market decline, the Nasdaq average fell 71.8%, the S&P 500 index 36.8%, and the DJIA average 29.8%, respectively. Part of this reflected the large presence of tech stocks and smaller issuers on the Nasdaq, but a critical factor was the absence of market-makers and other intermediaries to serve as a brake against runaway prices on traditional floor-trading exchanges.
Though the selling in all markets has extended longer than we expected, we think that there should be some respite in the gold and precious metals markets. That said, should increased turbulence in stocks, bonds, and commodities continue through September and possibly October, prices for commodities may remain weaker and more volatile during this period as well.
Natural-resource investments generally have been higher-performing assets than many other asset classes this year. This suggests that as funds seek to liquidate assets to raise cash in the weeks ahead, they may focus on natural-asset investments, from commodities to mining equities, as assets that can be sold at a profit.
Over the past several weeks commodities have not been trading based on their fundamentals, but on financial market developments. This is likely to continue. The need for cash, de-leveraging, and the general unrest in financial markets have been negative for gold prices, and prices of precious metals and commodities in general. We expect that to reverse.
Open interest in many commodities futures contracts has held up well, making it clear that price weakness reflects liquidation of positions primarily in the over-the-counter futures and options markets by shorter-term funds and proprietary trading desks at banks and brokerage companies. Longer-term investors have been turning to gold and silver, as would be expected, as hedges against financial market turmoil. The price is falling because of shorter-term leveraged investors’ liquidations, which is masking this longer-term investor trade.
Jeffrey Christian is the Managing Director of CPM Group, a leading commodities research and consulting firm. Clients of Northwest Territorial Mint are able to receive a free one-month trial to the CPM Weekly Commodities Advisory here.
Hedging with Gold and Silver
by Joe Nicholson
There’s a longstanding consensus that a minimum 10% of any portfolio should be in gold or precious metal, but some rethinking of this maxim has occurred due to the metals’ failure to provide protection in a stock market sell-off. Even if we accept that some of the traditional relationships no longer hold, understanding the protection provided by an allocation to metals can still allow for timely entry and sizeable returns over the long term.
The underperformance of gold and silver during the ongoing credit crisis is widely reported and, frankly, hardly surprising given that these represent two of the most inherently valuable and liquid assets in the world. The parabolic ascent of metals in 2006 and the proliferation of metal-backed ETFs once more gave gold and silver high profiles. Unfortunately, that only exacerbated the shift away from gold as the primary safe-haven asset and toward paper derivatives. When the market for collateralized securities evaporated — ultimately taking most of the commercial paper market with it — the multitude of institutional participants holding significant profits in their metals positions cashed them in because they were a natural source of liquidity.
But any long-term investor should already intuitively understand this type of rainy-day scenario is exactly the reason for owning physical metal. Yes, speculating in futures or with the ETFs can generate short-term returns; however, these investment vehicles should not be counted toward your 10% portfolio hedge because they do not serve that function over time. A simple examination of price action in gold relative to the Fed funds target rate over the last 20 years clearly illustrates the utility of a long-term physical metal position and suggests how it can be maintained at a profit.
After an intermediate top in 1987, gold declined into the early 1990s as the Fed funds target drifted down to 3%. The logical point of accumulation, therefore, was not where the Fed cut rates, but in 1992, where it stopped cutting. In 1994, the Fed funds target peaked at 6% and the next intermediate top in gold followed shortly thereafter. Gold settled into its next low in 1998 and began moving higher as the Fed again began raising the overnight interest rate. If this sounds counterintuitive, compare history to the current situation. You’ll see that the Fed cuts rates in periods of relatively low liquidity, those times when gold and silver fall victim to the virtue of their own inherent value. The target rate rises after a period of easy money creates a surfeit of liquidity, the partly psychological aspect of which ushers in a new round of inflation — and a bull market in metals.
Now, if inflation hit all parts of the economy equally and at the same time, this hedging strategy would do little more than preserve buying power without increasing wealth. Fortunately, as we have seen, this is not the case. Therefore, precious metals, being highly sensitive to inflation and expansion of the money supply, are among the first assets to appreciate during inflationary periods. As their dramatic outperformance over the past five years demonstrates, gold and silver certainly respond more quickly than stocks. (Probably more quickly than most salaries and savings accounts, too.) As excess money works its way through the economy, gradually lifting the cost of everything from food to services to housing, ground zero for inflation is energy and metal, the commodities that make for profits.
The decision of what to do with metal positions during a time of relatively tight money is a personal one and should be made with careful consideration. Though the Fed is currently playing coy about lowering the Fed funds target, it is using term repos to inject liquidity at an increasing pace, which only works to increase the total money supply. Even if the target rate is never formally lowered, the inevitable solution to a credit crunch is new liquidity, the likes of which sets in motion the cycle of inflation and the commodities bull. Therefore, while volatility is likely to remain for weeks or months more, anyone invested for the long-term should be able to ride out the storm at the least — and smart investors will profit. This is particularly so seeing as how the 50-week moving average in gold continues to be strong support and, importantly, in an uptrend. Even if you only buy the major dips, they are coming successively higher.
Silver, probably because it had been the outperformer until recently, has suffered the most during the credit crunch. It was mentioned last month that silver could fall through support levels and enter a lower trading range for the near term, which it now has. Of course, for the long-term investor, this is an outstanding buying opportunity, since, as the chart below shows, a fourth-wave consolidation here is the prerequisite for the fifth-wave move to new highs.
Though the most recent events may have altered some thinking about metals as the first line of defense against a major selloff in equities, clearly the 10% rule for portfolio diversification remains relevant in today’s market. And while more choices of vehicles through which to make that allocation are now available, only outright ownership of physical metal provides the combination of liquidity, profitability and security appropriate for a strong portfolio hedge.
Joe Nicholson is an independent analyst and the resident metals specialist at www.TradingTheCharts.com. His work regularly appears at Safehaven.com, Financial Sense University, Gold-Eagle.com, Market Oracle, Trader's Log, and Der Invest Informant, and was recently featured on the cover of Futures magazine.
Understanding and Applying Trend Analysis
by Northwest Territorial Mint Staff
One axiom of trading in any market is to follow the trend. While this generally refers to the benefit of riding an upward trend line, decisions about when to buy an asset or when to enter a particular market are often calculated on analysis of a downward trend. In either case, gaining information about where the trend for a given asset is heading is the key to successful investing. But since accurately predicting future price movements on a consistent basis is impossible, how can investors identify when to wait and when to act? The answer lies in obtaining knowledge of some of the fundamentals of trend analysis.
What is a Trend?
A trend is defined as the general direction of a market or asset. Markets trend in three different directions: up, down, and sideways. Though they move in a definite direction, trends never move unilaterally or smoothly. Instead, they are made up of a series of peaks and troughs. An upward trend is composed of a series of rising peaks and troughs; a downward trend shows a declining pattern of peaks and troughs; and a sideways trend shows a horizontal pattern of peaks and troughs contained within a narrow range.
Identifying and Confirming Trend Lines
A trend line is a straight line that connects two or more price points. These can usually be generated easily by examining price changes over even short periods of time. However, there are instances – especially in volatile markets – when highs and lows don't fall neatly along a trend line. The accepted rule is that two price points connected by a straight line constitute a trend line and a third point confirms its validity. Trend lines that extend beyond a second price point are typically preferred because they are more reliable in gauging support and resistance levels. (For more on support and resistance, please see the May 2007 edition of this publication. For charts that illustrate trends, please see the Joe Nicholson article above.)
Trend Duration
Just as trends are defined by direction, they are also identified by their duration. Commodities experts speak of three classes of trends: primary, secondary, and minor. The primary, or major, trend typically has a duration of at least six months and can easily be identified by a month-to-month price comparison. Despite gold's recent decline, for example, the major trend for this metal is still clearly positive. Corrections and reversals within the major trend reveal secondary and, finally, minor trends. Secondary trends last between three weeks and three months. Minor trends typically last up to three weeks. While the secondary trend for gold is still positive, recent corrections in the gold market have caused the minor trend to slope downward.
How You Can Use Trend Analysis
One of the fundamental benefits of trend analysis is that it offers a visual snapshot of the market. Investors who know how to read trend lines can make informed decisions about when to buy, sell, or trade a given commodity based on their own price preferences and thresholds. Proponents of trend analysis claim that it can provide advanced warning of market corrections and offer reasonably accurate predictions of impending price breakouts. For most investors, however, it serves as just another tool to better understand market cycles, helping them as they formulate their personal investment strategies.
Precious Metals Worldwide
News & Trends from Around the Globe
Pollution May Halt Development at One of the World's Largest Gold Mines
Barrick Gold Corp. is negotiating with the government of the Dominican Republic in hopes of moving forward with the development of what is expected to be one of the world's largest gold mines. The site, known as Pueblo Viejo, was actually mined by the Dominican government for two decades until operations ceased there in 1999. Barrick wants the government to help pay for the environmental cleanup of the area surrounding the site, which includes vast fields of mineral waste. The mine is expected yield 18 million ounces of gold. Barrick plans to invest more than $2 billion to reopen the mine, contingent on reaching an agreement with the Dominican government on the terms of the cleanup project.
Pan American Silver Mines Undamaged in Peru Earthquake
Pan American Silver Corp. recently reported that its mining operations near Lima, Peru suffered no significant damage as a result of the 7.9-magnitude earthquake that occurred there on the morning of August 16. Though company officials temporarily suspended underground operations at its mines near Lima, they have since reopened these sites after rigorously inspecting both above-ground and underground infrastructure.
Fifth Annual Global Mining and Metals Forum Focuses on Asian Market
The Fifth Annual Global Mining and Metals Forum, an international mining and investment conference sponsored by Omega Investment Corporation, was held from August 27 through August 30. This year's event, which was attended by precious metal mining industry giants Newmont, Anglo Gold, Barrick Gold Corp. and others, was held jointly in two different locations: Hong Kong and Singapore. Omega officials cited the increasing importance of consumers from Asian countries in the precious metals markets as the rationale for hosting the events there.