Monday, November 3, 2008

So That's Why Gold Prices Are Up Today

Those who've followed me for some time know I've been a fan of gold for over 5 years now. So I folllow the news on gold, gold prices, gold mining, gold teeth, gold mining stocks, gold pine cones, gold demand, gold supply, and alchemy pretty closely. Those who've followed me for some time also know how ridiculous I think it is when the press attempts to explain away why a particular market or asset class rose or fell in a given day. MarketWatch has obliged both of these interests of mine today with an article entitled "Gold Rises 1% On Speculation Prices Have Bottomed."

The article begins,

Gold futures rose Monday for the first time in three sessions, adding 1% on speculation that the precious metal's prices, after suffering their biggest monthly loss in October, may have bottomed. Gold for December delivery gained $7.30 to stand at $725.50 an ounce on the Comex division of the New York Mercantile Exchange. The contract had surged to $739.50 earlier.
Now, I'm glad that gold is up, but this type of commentary is ridiculous. First of all, in this market a 1% move in just about anything is little more than noise. There haven't been many days in the past few months when gold hasn't moved at least 1%. We even had a gain in gold of 11% back on September 17th. A 1% move may have been significant in prior years, but a move of only 1% makes for a fairly quiet day of late.

It's even more ridiculous that MarketWatch believes it can attribute a minor 1% move in gold to any particular factor or set of factors. In this case, MarketWatch attributes the rise to speculation that gold has bottomed. How can they know this? If there were only one buyer and one seller who both happened to be cousins of Moming Zhou (the author of the piece), then fine. But this is a market with many buyers and sellers. Some are trading to speculate while others are trading to hedge. There is no way to net out the effect of all of these trades and boil it down to only one factor.

Claiming that a price rise is due to speculation that prices have bottomed is also about as weak an explanation as can ever be given. It's akin to saying that prices are rising because people expect prices to go higher. No kidding?

Unfortunately, this claim and rationale could have been proffered (and probably was) for any 1%+ move in gold over the past few months, yet gold is trading only 8% above its 52-week low. So, even if the author truly believes that "speculation of a bottom" was the reason for this massive 1% rise in gold prices, perhaps he/she could have pointed out that prior bottom-fishing speculations have proven to be a false dawn over the past few months. Also, the gain on the day is much smaller than the fall from the intraday high. Why no explanation for the fall in gold prices from the intraday high of $739.50 to $725.50? This $14 fall seems at least as interesting as a $7.30 rise. Actually, it seems almost twice as interesting.

Don't get me wrong. I hope gold has bottomed. At some point it will. If the press keeps attributing any slight hiccup in the price to "speculation that prices have bottomed," one day they'll be right. Even a blind squirrel finds an acorn sometimes.

By the way, gold is now up only $3. It's down $17 from its intraday high.

Disclosure: The Rubbernecker is long dentistry and golden plant organs and short the press.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.