Thursday, December 09, 2004

Prudent Investor: Explaining Gold's Decline

Explaining Gold's Decline
In last week’s newsletter your prudent investor analyst said,

“The US dollar has fallen to a record low against to Euro (1.345!!!) while its trade weighted dollar index is similarly below the 81 level or at 80.92 for the first time since May of 1995 and this should entail for a big bounce considering the rather steep and prolonged fall.

“In sum, over the short term the US dollar has been greatly oversold and is over due for a big rebound against the free floating currencies as the Euro, Sterling, Francs, while against the managed floats as most Asian currencies, and for a possible remimbi adjustment this may indicate for continued upward movements for the Asian currencies.”

Since there were no signs of a dollar crash it is quite evident that after a frothy run by free floating currencies as the Euro, and the precious metals as Gold, the US dollar was poised for a big rebound as Timesonline’s commentator Anatole Kaletsky aptly describes as, “the characteristics of a financial speculation reaching its climax.”

The US dollar finally made its long awaited counter reaction after being pummeled for ELEVENTH consecutive week against the Euro reversing in a dramatic fashion to gain .8% in a single day as reflected by its trade weighted index. The US dollar index was down 8.4% as of last Friday’s close from the week ending Sept 24th

While the Euro plummeted by.9%

Quoting Aaron Pressman, Senior columnist of, “The dollar was helped by a confluence of macro developments including a weak GDP report from Japan that depressed the yen, plus renewed comments by European bankers threatening to intervene and drive down the euro. Central banks in Canada and Australia also declined to hike their rates, a move that would have made their currencies more attractive relative to the dollar. The Treasury's surprisingly successful $15 billion auction of five-year notes also helped.”

US Treasury yields fell as Central banks bought into the US dollar, dispelling recent rumors of currency diversification

Naturally Gold and its sibling precious metals, which has been moving in consonance with ex-dollar currencies followed the anti-dollar sentiment and plunged 2.9% alongside silver (crumbled by 9.5%) and copper (dropped by 2.7%).

In TECHNICAL lingo as seen in the charts above, the EURO and GOLD are notably overbought while the US dollar index depicts an extremely oversold position, ergo, the natural CORRECTION phase as anticipated. Although fundamentally and on the long term outlook, the bearish case of the US dollar and the bullish proposition for the metals remain.

It was quite a surprise to see that local investors reacted strongly to the Gold and its sibling’s recent price movements as the Philippine Mining Index dropped by a stunning 6.8% the largest among its peers in a generally mixed bearishly inclined sentiment.

In the past, price movements of the metals relative to the local mining issues were largely uncorrelated, meaning that even as the precious metals prices surged, these were hardly reflected in the mining issues stock prices. Does this mean that local investors have now come to their senses to see that the underlying prices of these metals are the fundamental drivers of the mining companies’ share prices?

Finally, it is important to note that since the Mining Act of 1985 have been rendered constitutional by the Supreme Court, there has been a notable stream of portfolio money flows into the industry. Today’s activities registered P 11.986 million worth of inflows reflecting 20.2% of cumulative turnover mostly to Index component Lepanto Mining in spite of the carnage. If the recent foreign money flows were to be a gauge of the efficacy of recently ratified law, then the intended benefactors appears to manifest on the direction as anticipated. Hence, these corrections pose as propitious opportunities to accumulate, instead of the knee jerk consternation brought about the recent decline of its underlying fundamentals.

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