Gold’s spectacular swoon on Friday provided fresh evidence that a red-hot bull market is in no imminent danger of cooling off. The initial plunge was orchestrated by bullion bankers and other promiscuous borrowers of gold when some unsettling financial news out of Dubai triggered a misbegotten panic into, of all things, dollars. Smelling blood, gold shorts pulled their bids when it looked as though the dollar was about to soar. Alas, the buck barely got off the launching pad before gravity re-asserted itself with a vengeance. The rally was so short-lived and feeble that it will have significantly diminished the dollar’s bizarre status as a “safe haven.” That in turn will make it harder in the future for the central banks of Europe, Japan and the U.S. to kick off an inevitable dollar-support operation with some “news” annnouncement designed to promote a short squeeze. Conversely, gold’s powerful, market-driven surge will now be even more difficult for officialdom to suppress, since Friday’s rebound was so swift and steep as to purge all doubts that bulls are overwhelmingly in charge.
Indeed, fleeting swoons like the one we saw on Friday are the hallmark of the secular bull market. Selloffs are typically quick and nasty, but they are reversed just as precipitously, rewarding investors who are not easily spooked. If the swoon gave you a moment of doubt, you can take encouragment from our current forecast, which calls for a run-up in the Comex December contract to at least $1337 an ounce — 14 percent above current levels. Morover, Friday’s robust performance suggests this target will be hit sooner rather than later. We’d expected it to take four to five weeks, but it wouldn’t surprise us if our Hidden Pivot target is reached by mid-December.
Profligate Developer
Concerning the news from Dubai, we learned that Dubai World, perhaps the most profligate real estate developer in human history, is in danger of defaulting on an estimated $60 billion of debt. This may seem like small potatoes in comparison to the sums that have been advanced U.S. and Western banks to sustain the illusion of their solvency. However, it would appear that Dubai World’s problems are just the tip of the financial sector’s latest iceberg (or perhaps a premonition of OPEC’s version of the subprime disaster).
Signs of renewed troubles in the financial world were already visible in the lackluster performance of Goldman Sachs stock, which has been falling since mid-October. In a recent commentary, “Goldman Weakness a Noose Around Bulls’ Necks,” we wrote as follows: “Concerning Goldman shares, we’ve advertised the stock not merely as a stock-market bellwether, but as THE bellwether for the bear rally begun on March 9. Now, because Goldman has probably topped out, it seems unlikely that the broad averages will make much headway from this point forward.”
Gold as Safe Haven
So far, that would seem to be the case. To the extent the world’s stock markets have been driven sharply higher since March by the banking system’s supposed recovery, the absence of market leadership by bank stocks has made any further upside by the broad averages impossible. Meanwhile, we’d be astounded if Dubai World’s problems do not metastasize in a financial system where disbelief has been held in suspension for nearly a year.
The day is surely coming when financial panic seeks a safe haven, not in U.S. dollars or Treasury paper, but in bullion.
Hi Rick,
This huge correction in the gold market is healthy. Nothing goes straight up. But with zero U.S. short term interest rate’s and Mr. Bernanke in control of the Federal Rerserve, IMO, the dollar carry trade is still on. I read in BW that the public is still negative on U.S. stocks and are putting their money in the U.S. bond funds(talk about a bubble)! Gold had a twenty year bear run from 1980 to 2000, and now it is suddenly over(I don’t think so).