Doug Pollitt Posted by John on August 19, 2015

Market-Letter-August-2015-PaperGold

Good morning,

“So: gold is taken down by 10% over the last two months — 5% of that in two short minutes — and is headed lower yet, apparently, because a) interest rates are going up and b) the metal didn’t “perform” when it should have, namely, during the Greek crisis. Market sentiment has followed suit with popular media piling on: “Why Gold Doesn’t Matter”, “It’s Time to Surrender”, and, best of all: “Let’s be Honest about Gold: It’s a Pet Rock”, headlines that put shame to the FT piece back in the late ‘90’s: “The Death of Gold”. Spec short interest is at the highest since 2000. It is pretty much the end of the world. Again.

“We suspect these pundits would have felt much the same way if the starting point of the most recent downdraft had been $2000/0z, $1500/oz, $1000/oz, $500/oz or the price of Pet Rock at the corner store. Put differently, gold trades in a vacuum where the right price is whatever the price is now, plus or minus fifty dollars. Unlike copper or potash or met coal, governed as these are by the tyranny of supply and demand, price discovery in gold amounts to an arm wrestling contest over which way the wind is blowing.

“The bearish analysts on the Street are calling for a sub-$1000 bottom. If gold is unmoored to any underlying then why stop there? Why can’t it trade at $800? Why can’t it trade at $400? The industry was arguably cash flow negative, (at least on a sustainable basis), at the highs of the last cycle. But if the paper market solely determines pricing, then what’s to stop gold from going to the lows of last decade?”