Pop Quiz

Pop Quiz 

Question 1: Does the economic recovery have anything to do with the decline in the price of gold? The answer is "probably not."

A previously undervalued equities market may have lots to do with the migration of money out of gold but the recovery proper? That's a big ixnay. If we look at the first decade of the 2000s, we find that strongest global economic growth occurred from roughly 2004 through 2007, during which time the gold price doubled from about $400 per ounce to around $800.

Does this mean the same thing will happen again? Not necessarily. But here is a point: In those years leading up to recession, stocks were not overvalued but rather their strength lay in rising general prosperity, which, when the housing/mortgage/derivatives bubble burst there was nothing to hold prices up.

Question 2: Is it absolutely certain that there will be no shaking and breaking of the financial system similar to the Lehman Brothers crumble? Of course not. Large-scale, gross mismanagement will be with us forever. Like locusts, rats and in-laws. Scandal can rouse the price of gold.

Question 3: Can the price of gold climb as interest rates do the same? Well, back to history. In early 2004, the Fed began raising short term interest rates from 1% to 3.75% in late 2005. By June of 2006 the rate had risen to 5.25%! And where was the price of gold going? Up, up, up.

Question 4: What does short covering have to do with it all? Simplistically stated, short traders can't go short forever. At some point - we don't know when - those shorts will be covered and long traders will enter the market. It might take 10 or even 20 testings of the "true" bottom, but eventually a bottom will be found. 

Put down your pencils and close your test booklet.

The dollar has given us almost all of the gain in gold today while the it is responsible for about 60% of silver's small uptick.

However, most money has been sidelined as we await tomorrow's employment/jobs-created numbers. Forecasts range widely from 162K new jobs to upwards of 250K (by Deutsche Bank). One thing to watch for regarding the next FOMC meeting is the texture of job growth. Is it diverse? Meaning, does growth spread across all or most sectors? If yes, that's a brighter signal for long term growth and may sway Fed thinking. 

The 10-year bond is hovering right around 3%, having taken a day off from its rise. Oil is up a bit, like gold, but is still within striking distance of under-$90 per barrel.