The Goldwatcher

Black boxes and contrarian investors:

Following a sell off by  large institutional money managers and speculative investors falls in oil prices triggered a steep fall in the prices of commodities and precious metals .  The market focus switched from strong future demand expected in China and other developing economies to weaker demand for oil in the US in response to high petrol prices. Black box traders, institutions and speculators selling out of choice were joined by  others following the herd, forced to meet margin calls or to raise cash. The sell off became a stampede.

The black boxes that dominate market actions are essentially indiscriminate   By contrast contrarian investors are essentially intelligent. And, as contrarian investors  have the most successful track record with gold,  their strategies are discussed in The Goldwatcher.  This blog includes a comment on contrarian investing   and this posting  also addressesmarket volatility.
Last week Frank Holmes, co author of The Goldwatcher, hosted a conference call Insights on a Turbulent Market . Discussion in the call addressed both the background to current falls in commodity prices and fundamentals that support prospects. Also evident from the call are the advantages well resourced money managers command when it comes to coping with and profiting from volatility.
Gold and dollar strength: 
The influence of the dollar on gold is spelled out in this Goldwatcher blog . It ends ‘In a question and answer session arranged by the Financial Times last year  James Burton, the Chief Executive of the Gold Council and the gold mining industry’s spokesperson, was asked:  ’What is the biggest short term downside catalyst for the price of gold?’ He replied:  A stronger dollar. Not much for Mr. Burton to worry about now ….. but never say never…..
$800 gold:
The Goldwatcher identifies the 2008 LBMA analysts forecasts as a track for reasonable expectations.  A summary of the forecasts appears on the LBMA Website. To readers of The Goldwatcher it will have been clear that price fluctuations to $800 and even less and $1000 and more through 2008 have been expected by serious analysts.
Well informed investors will take a view for themselves on the massive bailout of the US economy that has started, on longer term demand fundamentals for energy and commodities and on whether the dollar is strengthening in purchasing power or adjusting in relation to the Euro which has become overvalued.

Shades of the Great Inflation of the 1970/80s:
 
The Goldwatcher’s position remains that the case for gold’s stateless money franchise remains compelling. Nouriel Roubini’s recent posting quoted in Newsweek ends with this comment on inflation -  consistent with analysis in The Goldwatcher: ‘several factors point to persistently higher inflation despite a global demand slowdown. Most of the world’s population already suffers from double-digit consumer inflation. Consumer inflation in developed countries remains in the single digits, but is high after a long period of disinflation in the 1980s and 1990s.’
Investors owning gold as a hedge against inflaion and insurance against financial market turmoil will have good reason to recognise multi trillion dollar credit related losses, current market volatility and geo political insecurity as confirmation of the value of gold’s stateless money franchise. Contrarian investors will be on the alert  for opportunities to profit from market over reaction.