Gold Correction Continuesby Joe Battaglia
Posted: April 16, 2009
Gold and silver fell heavily this morning with gold down $12 and silver down $.48. Gold is testing support at the $880 level and some analysts think that will give way. Standard Bank indicated this morning that gold will have to trade down to the $850 to $870 range before substantial buying resurfaces. Fortunately, gold is fairly close to those levels. The important thing to remember is that the bull market remains intact. Gold is going through a correction and consolidation period seen so often in the course of this bull market.
Part of the reason we are seeing more volatility in the gold market is that the market seems to be quite thin. Investors are reluctant to make commitments to any assets in volume. Nevertheless, gold has remained solid within the $880 to $950 trading range. At the previous low, a few weeks ago, gold actually dipped down to $862, but came back pretty quickly. In fact, we saw gold go from $862 to approximately $1,000 in a matter of weeks. Therefore, one has to have the courage of ones convictions in markets such as these. Bull markets always operate in a fashion to discourage investment and to keep the less convinced out of the market. The purpose of corrections is to shake out the weak players and leave an asset in the hands of those who are more knowledgeable and convinced of the ultimate necessity and performance potential of that asset. This is true for all investments.
One of the factors creating some negative influence on gold is that first time weekly jobless claims fell 53,000 to 610,000. Also creating some reduction in the demand for safe haven gold was the better than expected earnings from JP Morgan Chase Bank. The speed of the decline in the metals this morning and breadth of that decline suggests that there may have been one big seller in the market. Perhaps that was a central bank looking to push down Comex gold prices.
Looking at the economic situation, the second largest mall operator in the U.S. filed for bankruptcy protection. Their CEO said the bankruptcy filing was not because they aren't doing well. They actually have excellent cash flow and their business model is working satisfactorily. They have 92% occupancy in their malls. However, they have mortgages that are due to be rolled over and there is no financing available. It is amazing that a company could go into bankruptcy simply because it cannot borrow the money it needs to renew its mortgages.
Yesterday, I was discussing the fact that the credit crisis resulted not from a lack of desire on the part of people to borrow more to keep the financial game going. It was rather the lack of funds to borrow. This is also going to be impacting the U.S. government and other governments in our country in the near term. If they cannot borrow, they will be forced to create money out of thin air to pay for the programs that are being put into place. That then depreciates the value of the currency, which in turn improves the value of gold.
One of the most positive developments in a long time is that the President has proposed the first stages of the construction of high-speed rail throughout our country. We are the only major country in the world that does not have high-speed rail. That is largely because the automobile manufactures and oil companies have always blocked high-speed rail programs. They would rather have us driving our cars on congested highways to they can keep selling more cars and more gasoline. I think developing high-speed rail is long overdue in this country and it would be a project that would create jobs immediately and over the longer term. It would also help greatly to improve commerce and travel throughout the United States. This is the most worthwhile project that the President has proposed in my opinion. However, once again, we do not have the money to pay for these projects.
Given the propensity of governments to continue to spend whether they have money or not and ultimately to be forced to devalue their currencies, is a factor that I think we can count on because it has repeated itself so many times throughout history. These are among the many reasons that I choose to own gold and many others feel the same way.