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The Bullion Report For Nov 23, 2011: Holiday Volatility

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Nov 24, 2011 2:50 am

There is no candy-coating the economic woes facing the U.S. and Europe. Stalled growth, high unemployment, and an unprecedented economic climate have investment markets nervous. Add to that mix the continuing saga of the back and forth regarding European debt. Not a day goes by without another announcement that drives markets up or down, keeping volatility abnormally high. Stir in the MF Global bankruptcy and missing money and what does it suggest about the state of the financial industry, the health of the economy and the impotence of government regulatory agencies? And more to the point, what does it mean for precious metals prices?

[i]Past performance is not indicative of future results.

***chart courtesy of Gecko Software[/i][/center]

As more and more defaults and bankruptcies occur, increasingly more investors become timid and fearful, along with becoming less aggressive. Typically, during such times investors seek to find a safe haven investment. Throughout recorded history gold has been often considered and used as such an investment. Then why are we not seeing precious metal prices respond in such fashion? What forces are at work? Don't forget - this is also a holiday-shortened week, which should also be taken into consideration.

Recent inflation statistics have been lower than expected in October and a steady dollar has appeared to slow demand for the precious metal as a group. U.S. Labor Department data this past Wednesday showed the cost of living in the U.S. declined in October. This slow down of economic activity and relative stability of the dollar may have dampened gold as a currency alternative. Gold is priced in dollars and appears more expensive to buyers who use other currencies when the dollar rises. With a daily trading range of around $40-50, or 2%, now common in the gold market in recent weeks (even larger for silver) cautious investors are staying away. The markets are thin and therefore every price reaction gets exaggerated.

It is the thin conditions that may give rise to understanding why precious metal prices haven’t reacted by moving to new highs. When you think about it, though, they really aren’t so distant from those highs either. As Bill O'Neill, a principal with Logic Advisors puts it, “the increased volatility makes gold more dangerous to trade from a safety standpoint.” Investors sense this and as a result many stay away.

There has also been a recent need to cover margin commitments and cover losses in other sectors and that along with fund liquidations have contributed to keeping gold under some pressure in the short-term. The gold market broke below the 100 day and the 50 day moving averages ($1710.60 and 1711.50) yesterday with gold back below $1,700.00. More than likely this has the chance to see some consolidation and minor price adjustments heading into the remainder of the holiday shortened week. The bright spot of news it that there is reason on a technical level to expect to see the $1,680.00 area be supportive.

Listening to the talking heads perform you’d think gold was falling off a cliff. They always need a “breaking news” story and any substantial movement in the gold price is always worthy. Yes, to some it may seem odd that prices have dropped given the shuddery economic environment. It may seem out of character, but remember markets are extremely thin right now. Markets are confronting the holiday week, essentially a four day holiday for many, combined with reluctance on the part of many traders to be aggressive. Another confidence-buster that is not going away is the brewing MF Global situation. Many MFG customers are missing money and cannot trade. This takes away further liquidity.

Prices of key “outside markets” have been bearish for gold, as the U.S. dollar index firms and crude oil prices move lower. Near-term technical damage has been inflicted in precious metals charts and bears now have the slight near-term technical advantage. Yet, markets act funny near tops and bottoms.

Governments keep printing more money. They do this as it may just get them through the current issues, but in the long-term higher debt could push the world into a global depression. The yield on the 3 month T-bill in Spain has doubled to over 5% from last month. The current levels are close to both Greece and Portugal.


Precious metals may be experiencing large price swings and volatility remains high, causing investors to back away. That leaves the markets vulnerable, but that vulnerability is in both directions. While investors may have seen metals receive pressure on prices, they can just as easily surge upward again. Or as Kyle Bass, recently put it, “Buying gold is just like buying a put against the idiocy of the political cycle, it’s that simple.”

[b][i][u]Disclaimer:[/u][/i][/b] The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.