In watching the markets on a daily basis one can’t help feel at least a slowing, if not bottoming, in fund liquidation.  The notion of fund liquidation has been beaten to death by this point, but being that it’s the main driver of this deflationary deleveraging process, it’s worth noting the change in trend.

This liquidation of assets has been indiscriminate in picking its victims.  Whatever assets that were liquid were sold in order to raise cash to meet margin calls.  It didn’t matter what the fundamentals of the underlying asset were.
As this process slows and eventually reverses, we need to begin to look at where to put our money.

Reflation Driving the Metals

As markets were liquidated new currency and credit were created to match, and exceed the deflationary affects.  As you know, that growth in the monetary base was directly infused into the banking system and also used for direct investment in several firms (Fannie Mae, Freddie Mac, AIG, etc.).  We’ve also seen half a trillion dollars committed to backing money markets, as well as muni bond markets and Detroit.  Here’s a chart that better displays what I’m talking about.

All of this money was created out of thin air as the race to deflate around the globe was on.  It takes time for an explosion of money and credit to show up in asset prices, but I expect those U.S. dollars to start leaking into financial markets.

The only asset in the world whose driving fundamental is to represent growth in money supply is our favorite yellow metal.  Gold also happens to be one of, if not the only asset left that is nobody else’s liability.

Gold Divergence Continues To Weaken

I know I’ve written extensively about the divergence between the gold cash market and the COMEX gold prices.  There’s been some further developments regarding this fundamental farce that I wanted to share with you.
Jim Willie has recently reported a major gold transaction in Canada (millions of dollars in size) that settled at $1075 /oz equivalent (deal settled in Euros). He also reported that 400 metric tons of gold was moved into storage with the Canadian Royal Mint.

What we have here is a situation where physical gold exchanged hands at $1075 /oz, while paper gold equivalents traded on the COMEX is being bought at $730 /oz.  When these markets converge, it will be gold futures moving to the upside, and the moves will be spectacular.  All of this comes under the assumption that there isn’t a major default on one of the gold futures contracts.

For those of you who are interested, the gold continuous contract appears to be at a major point of support that could see this market rally.  Have a look at this chart.

Gold’s top of $730 /oz reached in May 2006 coincides with our current price level.  I just thought this was worth noting.  I also feel the timing is getting closer to what we are looking for.  The last upleg that took gold to four digits began in Dec. of 2007 along with oil.

The fundamentals and the technicals all seem to be aligning for the next leg up.  It’s time we start discount shopping for our favorite mining stocks and other PM investment options.

Nicholas Jones
Analyst, Oxbury Research