The announcement of QEIII has had a somewhat muted response. Gold has risen from the $1,730 region to around $1,770. We will be going some more light selling at around the $1,780 level.
Our gold mining stocks have had a better response – some are up over 20% over the last couple of weeks and we are selling into this considerable strength. This doesn’t mean that we believe that some kind of “top” is in but trading positions must be sold into this kind of strength.
It is clear that the big money in gold is 90% certain of QEIII being announced in the next month or two. If this indeed confirmed, then the gold price will really take off and we will most probably see the nominal high taken out. That will make us very happy on the one hand (our core positions will be worth significantly more than we paid for them). On the other hand, we will regret that we didn’t buy even more at lower prices. Oh well, if you are successful in investing you have to get used to that feeling. In any case, it’s much better then the regret that you bought too much at too high a price.
The flip side of the current situation is that if there in no QEIII announcement in the next couple of months, there will be a serious correction. On the one hand, this will good in that we will be able to continue accumulating gold and gold related securities at low prices (we are, after all, net purchasers of assets). On the other hand, it will be hard, psychologically, to see the chance of booking large profits disappear – it is good to be able to do this once in a while. For this reason, we have decided to open a protective leveraged short on the gold price. This small premium will be lost if there is no correction – in which case we won’t care very much. If, on the other hand, the gold price dramatically corrects – at least we will be able to book some profit and this will make it much easier to face lower prices.
We do what we need to do in order to stay with the program – buy weakness and sell strength and over the long time, increase asset levels and increase cash levels.
It has just been announced that U.S. payrolls rose less than expected in August – just 96,000 jobs were added against an estimate of 130,000. The somewhat muted response to Ben Bernanke’s speech a week ago was due to his comments that although the U.S. economy was in a serious state, the Fed would be looking for further evidence of deterioration before they embarked on further quantitative Easing.
Well, this news will have made the case for QEIII much stronger and that has sent gold up over $20 – it’s currently sitting at $1,725.
It is often said that you should trade the rumour and not the news and we have decided to sell a little gold into this strength (gold that we bought at much lower prices) and book some more profits.
It may be that things are about to get interesting.
Well, I think that a lot of people thought that after Ben Bernanke’s speech on Friday Gold was going to finally break through the $1,700 barrier. After all Ben basically said that the state of the U.S. economy is far from satisfactory and it was taken by most financial journalists as a signal that more Quantitative Easing (QE) will follow soon.
A new round of QE would, of course, be very positive for gold, especially if the Fed starts to get really serious will the amount of ‘easing’.
It is clear today that the $1,700 barrier is not going to be breached quite so easily. On the one hand this is a little disappointing – gold has been on the back foot for many months now and it would be nice to be able to get back into profit booking mode. On the other hand, the longer that gold remains on the back foot the greater the opportunity for accumulation, which will increase our eventual profits when the gold price finally gets into mania territory.
We are happy, therefore, to bide our time and stick to the program.
In his speech at Jackson Hole, Ben Bernanke described the U.S. economy as “far from satisfactory”.
He went on to say that the current level of unemployent is a “grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years”.
His comments were generally taken to mean that the Fed would likely ease monetory policy if the economy does not improve soon, and gold rose by $36 to $1,691.60.
We have sold some gold into this strength.