It's not looking good August 18, 2006 The base metals buying frenzy that began around the middle of last year seems to have come to an end. When pension, investment and hedge funds tried to protect themselves from a declining US dollar they pushed metal prices, including gold, too high, and now these metals face a double threat: the expected correction after a run up, and an economic slowdown.
I expect the slowdown we are seeing in the US as the real estate bubble pops is going to spread to Europe, Asia (including China and India) and possibly Latin America and that implies reduced demand for base metals. If I am right then the prices of copper, lead, zinc, aluminum, nickel, silver, etc. have serious downside risk. Since gold was bought along with them during the buying spree, even it is vulnerable.
Since August 9th, copper is down 8.7%, zinc is down 7.7%, aluminum is down 5.2% and gold is down 5.7%. The dollar exchange rate barely changed since August 9th, so it's not dollar related. Gold also fell sharply Thursday, and again, not due to strength in the dollar, which itself was modestly lower against the yen and euro.
The only base metal that has not declined is nickel (it is up over 8% for the week), but that is due to speculation of a large short position. Were it not for this short-squeeze I suspect that it, too, would be down.
These are dangerous times for metals speculators. Back in May I sold many of my positions when I felt metals and stock prices were getting ahead of themselves. I still think the US dollar has a long way to fall, and I still expect to see the gold price exceed $1,000 an ounce in the not-too-distant future. But in the short term, anything can happen: I would equally, not at all be surprised to see gold fall $100 or more from where it is today before it moves up significantly again.
What does one do under such circumstances? My solution is to own enough gold stocks so that I would be happy to see the gold price rally, but also have enough cash so that I would be equally happy to see the gold price fall, since then I could add to my positions at more attractive prices. It's a win-win position and it sure beats sleepless nights worrying about what the market is going to do next week.
Paul van Eeden
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