Finally there's some good news to report. Yesterday the gold price rose 0.4% to $1,225.9 / oz. It's not often we've been able to say this recently, but it was the fourth day in a row that the gold price was in the green. More than that, these four days have equalled the longest run of gains in 7 months.
The turmoil in the equities market is particularly being fed by uncertainty about the global economy. On Tuesday the IMF clearly indicated that it had reduced growth forecasts to 3.3%. In Europe, Germany is being watched with increasing nervousness. Because it is the main driving force behind the European economy, the industrial figures in particular were a major disappointment. Industrial production in August was lower than at any time since January 2009. The American bankers added their own twist to this. The latest minutes from the Fed show that they are worried that the problems in Europe and Asia will have a major negative impact on the American economy.
After having spent months making erroneous statements about the development of the American economy, Yellen finally came clean. The Fed has also reduced the growth forecasts for the American economy and emphasises the worryingly strong rise in the dollar. It also indicated that the labour market is far from recovered, and that inflation is clearly too low. Investors did not let the grass grow under their feet; fear of tapering and accelerated interest rate rises disappeared overnight. Shares rose and the dollar fell. And this time gold also benefited.
Amongst the current developments it is interesting to note that CME decided to cut the margin on both gold and silver contracts again yesterday. This is interesting because it's the fourth time this year it's decided to do so. CME thereby lowered the 'Initial Margin' from $5060 to $4400 and the 'Maintenance Margin' from $6500 to $5500. This represents a further reduction of 13%. Silver margins have even fallen by over 15% on average.
Whilst margins are often raised in a volatile market, the cut could make it more appealing to move into precious metals, since investors need to hold less collateral. In addition, falling margins also release extra liquidity with investors with open positions. Theoretically the liquidity released could be used to take new positions. However, that has not happened in recent months. In practice that has not happened in recent months. But good news may be on its way, since investors are now confident that the price will rise above $1,240 / oz. And that is a good prospect, because that breakout would be a significant bullish signal for the gold price.
Rick Rule of Sprott Global Resource Investments is convinced that we can now genuinely assume that we are witnessing the bottoming out of the gold price. He stresses that we must not forget that the gold price is currently not a realistic reflection of the actual value of the metal. More than that, he feels that in the current tumultuous geopolitical climate it would actually be a good idea to swim against the tide. It's not the first time that investors in gold have had to justify themselves repeatedly, and it certainly won't be the last time.
But that's not what it's all about. It's about the potential of gold. He believes that the current market situation is very similar to that in 2000. Then too we were confronted with a strong dollar and there was little interest in buying at prices of $260 / oz. Yet we all know that 11 years later prices peaked at $1900 / oz. At the time we all said: "If only we'd known…''. But now we do know. But the question is still what you will do with this knowledge. It's always easy to make a judgement with the benefit of hindsight. I agree. The following conclusion is therefore quite controversial, but the technical analysts amongst us might agree to some extent: when it comes to price developments, the rule of thumb 'past results often do offer some guarantee for the future' often applies.
After all, David Morgan has also said it; he is not alone in pointing out that the future market is many times larger than the physical market. Which can only mean that if distrust in the markets grows as a result of economic or worrying geopolitical developments, investors will want to claim their entitlement to physical gold. Then it will be found that there simply is not enough precious metal available to meet this demand, as a result of which you as the owner of gold can enjoy a string of celebrations.
What will you do with this knowledge? Will you join the large group who have already lost confidence? Not without justification, but do bear in mind that even Goldman Sachs - currently one of the largest gold bears - was convinced until last year that the gold price was still well off its peak. And perhaps you remember David Morgan's words: “That's why you really want to be 6 months too early than 6 minutes too late ...”