Starting The Week With a Big, Big Gold Bang

We start the week with a prediction. Not our prediction, but an assessment from Deutsche Bank.

Deutsche's paper, “Estimating Fair Value For Gold” contends that the price of the yellow precious metal must drop substantially to bring valuation levels back towards historical averages.

"Gold would need to fall towards $750 per ounce to bring prices in real terms back towards long-run historical averages," said Deutsche. 

Deutsche ran prices through several models to determine "fair value" for the precious metal. 

The Deutsche "gold price model,” which factors in world growth, the U.S. dollar, money supply and central bank gold purchases, estimated fair value at $785 per ounce.

The long-run average price in real terms – using the Consumer Price Index – was $770. Using the Producer Price Index, gold’s long-run average price was $725.

"In real terms gold prices would have to fall to as low as $750, suggesting that even at current levels gold can still not be considered cheap."

In the paper, the correction sounds imminent.

"We believe financial forces imply fresh lows in the gold price in the months ahead," said the bank. "We believe the adjustment in U.S. long term real yields and the U.S. dollar is still incomplete and interest rate and dollar markets will continue to move higher heading into next year and beyond."

However, Deutsche also says that falling crude prices could be supportive of gold. Right now, as we all know, oil seems to be entering another price trough. However, most people view the trough as relatively short term and most experts are looking at $75 per barrel in twelve months’ time.

Gold is down a few dollars today, the falling dollar unable to compensate for predominant sellers in the market. We are of a mind that regular trading has to be watched much more carefully than dollar fluctuations because trading provides us with raw sentiment about gold.

West Texas Crude fell again today and is trading in mid afternoon in the low $47 area. Brent is down almost 3%, the world benchmark starting to teeter toward the brink of $52 per barrel.

No pun intended, but today we have China on our plate, and it’s a heaping helping of bad, even ridiculous, news. The Shanghai index was down 8.5% today and it helped drag down all equities. One can describe the China problem as being “lost in the funhouse.” Nothing is as it appears.

The chief problem is that fewer and fewer analysts and investors trust China’s economic data. (This is even before we examine the sly manipulation of the stock markets there.) Raw materials importation is way down. Exports are down or hovering near stagnant. Credit is harder to come by, yet GDP remains in the heady 7% range. Some A-level stocks have not traded in over 45 days out of fear they will join the sell off.

U.S. equities markets were down on Asia’s belly flopping, although stocks are (barely) up off their lows in New York. In Europe, the DAX and CAC did not have as much time to rebound and closed 2.50% lower. The FTSE was down a little over 1.00%.

Where is all the money headed? Toward an undervalued euro (or at least a euro that is perceived as such) and to the Japanese yen, Swiss franc and the venerable British pound.

We also have to keep an eye on commodities, which are falling. Base metals are mixed to down, an indication of industrial demand. Lumber is also down, and has been down, an indicator of future building activity. Major agricultural field commodities are down across the board today except for cocoa, a market with its own mind and dynamics. Meat animals are mixed.

Wishing you as always, good trading,