Can we conclude anything from Wednesday and Thursday's big rally in gold and gold miners on the Federal Reserve's decision not to taper stimulus? What can we determine, moreover, from the subsequent punishment dished out to the metal and to the mining sector Friday?
Well, we can't conclude much. I think the big move up pretty much represented surprise and short-covering when the Fed didn't deliver a new reason for the price of gold to fall again. As for the selloff Friday, the move looks to me like profit-taking ahead of a weekend.
Although -- and it's an important "although" -- I do wonder if there aren't investors still looking at the fundamentals of the Federal Reserve's balance sheet, and are willing to bet that inflation and a debased dollar aren't just around the corner.
The gold December contract fell 2.7% Friday, dropping $36.80 to $1,332.50 per ounce.
Mining shares took even more punishment. Newmont Mining (NEM) was down 5.7%. Barrick Gold (ABX) dropped 4.3%. Yamana Gold (AUY) plunged 6.8%, and Goldcorp (GG) declined 5.5%. Kinross Gold (KGC) tumbled 6.5%.
The drop in gold futures still left the metal above its pre-Fed-surprise Sept. 17 price of $1,307.60. Still, the Friday drop certainly took some of the air out of Thursday talk that had gold bulls dreaming of a climb to the 200-day moving average at $1,474.
I think the Wednesday-and-Thursday rally was a reflection of exactly how pessimistic the market had become on gold. It also showed that shorts -- who had made money on that pessimism -- had started becoming quite worried that the easy money had already been made.
In July and August, the talk on trading floors had increasingly turned to worries about a short squeeze -- that rising gold prices would force shorts to cover by buying gold, which would then send gold even higher. The talk then was that weak shorts, or those who had come in at $1,250 to $1,300, would quickly feel vulnerable on any strong move above that level. That's exactly what seems to have happened when gold went from $1,307 Tuesday to $1,369 Thursday.
Gold has been so volatile lately that I don't think anybody with a decent profit after Wednesday and Thursday would feel inclined to hold positions over the weekend. But certainly Friday morning's comments from St. Louis Fed President James Bullard didn't help. Bullard, a voting member of the Federal Open Market Committee, decided to remind Bloomberg TV viewers that the Fed could still decide to taper quantitative easing in October. That went directly against the emerging conventional wisdom that the Fed wouldn't have enough new information to act until its December meeting.
Suddenly, the tapering issue was back in play.
Also, traders seeking reasons to hold gold after this rally would have had to conclude this: Nothing this week has made it seem that inflation is about to turn hot enough to restore gold's glitter as an inflation hedge any time soon. That hasn't helped, either. Even for those of us who are afraid that a debt-ceiling battle will crush the dollar, we know that the Treasury prices and the greenback rose after the last debt-ceiling battle and the consequent U.S. credit-rating downgrade. Such is the strange way that rising fear can push money into liquid markets, like Treasuries, even if the U.S. is the source of the fear.