WEDNESDAY, SEPTEMBER 15, 2010
Going for the Gold -- Fundamental as Well as Technical
By RANDALL W. FORSYTH
DID SHORT-COVERING by the last big hedger spark the surge in gold prices to their record Tuesday? Or is there something more fundamental afoot?
After the close of U.S. trading, AngloGold Ashanti, Africa's largest gold producer, announced plans to sell up to $1.5 billion in common shares and convertible securities to pay the costs of closing out its hedge positions. In after-hours trading, its American depository receipts (with the perfect ticker symbol, AU, the chemical symbol of gold), plunged 4.5%, or 2.10 to 44.62, owing to the dilution from the financing.
Prior to that, AngloGold Ashanti ADRs had surged 4.8% in regular hours, even more than the Market Vectors Gold Mines exchange-traded fund (GDX), which was up 3.6% on nearly twice its average volume of the past three months. The metal's spot price surged to a record $1,274.80 an ounce, topping its old record by nearly 10 bucks. Meanwhile, the popular SPDR Gold ETF (GLD) jumped 2% on heavy volume.
It's noteworthy that AngloGold Ashanti was the last big gold miner to hedge its production. According to Barrons.com's sister site, WSJ.com, the company's 3.2-million-ounce hedge book was carried on the company's accounts at a negative $2.4 billion. Barrick Gold (ABX) had popularized hedging during the 1990s, when the price of gold was depressed, but gold producers abandoned hedging as the metal's price steadily escalated for more than a decade. Meanwhile, hedge funds managed by John Paulson, a noted gold bull, is the biggest holder of AngloGold, with 43.7 million shares, nearly 12% of the outstanding, worth nearly $2 billion.
Some well-informed or extremely prescient traders profited handsomely from the sudden jump in gold ahead of news of AngloGold Ashanti's plans. One market veteran noted active buying of October $1,300 call options Monday—still out of the money with only 13 days before expiration—for about a buck, or the price of a lottery ticket. Those options had more than quadrupled in price by Tuesday's close, quite a nice payoff, certainly better than any scratch-off card.
Still, there are strong fundamentals behind gold's surge. In contrast to earlier this year, gold and the dollar have resumed their inverse relationship. The metal and the greenback had rallied in tandem as investors sought shelter from the European sovereign debt crisis back in the spring. With that problem papered over by early summer, investors fled the dollar and flocked to gold.
Most recently, investors have been motivated by anticipated actions by major central banks—to print more money in order to shore up their slumping economies and stave off deflation.
Early Wednesday, Japanese monetary authorities were reported to have intervened in the currency market to curb the surge in the yen's value, which has dealt a severe blow to that nation's export-dependent economy. The yen had traded at a 15-year high, with the dollar fetching less than 83 yen at one point in New York trading. Japan's intervention, its first such action in six years, pushed dollar up sharply, to 84.5 yen, in Asia Wednesday morning.
Prior to that, the U.S. Dollar Index dropped 1% Tuesday while the Swiss franc climbed past the $1.00 level for the first time since last December. And the People's Bank of China set a record high rate for its currency of 6.7378 yuan to the dollar.
Taken together, it's apparent the dollar is in retreat on all fronts. Adding to the pressure is increasing speculation that the Federal Reserve could resume expanding its balance sheet—QE2, for the second phase of quantitative easing—as soon as the Sept. 21 meeting of its policy-setting Federal Open Market Committee. Notably, Treasuries have gotten back on the rally track this week, in part because of possible stepped-up buying by the Fed.
Politics dominates these monetary-policy decisions as never before. The Japanese forex intervention followed the government's ruling party staving off a challenge by an insurgent who had advocated curbing the yen's strength. Tokyo clearly wanted to put the market on notice that, notwithstanding the internecine fight, it would not stand by idly while the yen's rise choked off growth. How effective their efforts will be is another question.
The Chinese officials' accession to a stronger yuan seems timed to mollify U.S. Congressional critics ahead of midterm elections. A stronger—but not too strong—yuan also works to China's interest. It helps curb inflationary pressures, especially on commodity prices, as Chinese officials attempt to restrain a domestic economy in danger of overheating.
Whether they admit or not, November's elections also loom large for the Fed. The flagging economy will be the key question for voters as they head to the ballot box. Bernanke & Co.'s preference would be to maintain the status quo at this month's FOMC meeting and hold off on any shifts in policy to the following confab, which winds up Nov. 3—the day after Election Day. The bounce in the stock market this month and less dreadful economic data may buy the central bank some breathing room.
That said, expansionary monetary policies around the globe seem aimed at avoiding a too-strong currency for virtually every central bank. With the possible exception of the Swiss National Bank and the Bank of Canada, nearly every central bank is pursuing an expansionary policy to sustain recovery. The Bank of Japan is pushing down the yen while the Fed may be contemplating further security purchases. The European Central Bank has to deal with the sovereign debt crisis, which continues to simmer. Chinese authorities continue resist a full appreciation of their undervalued currency.
So, with every major central bank effectively seeking a relatively cheap currency, the decade-long bull market in gold is intact. That it took so long for gold producers to halt the hedging their output is the main surprise.
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