GoldMoney Alert - 23 November 2008

The Message from Friday

Gold soared $50 this past Friday. It began the day at $748 and was trading at $800 when the day ended.

It is rare for gold to achieve such a huge one-day gain. In fact, I checked my records for the past twenty years and found only one other instance when gold climbed $50 or more in a day. Interestingly, the other occurrence was on September 17, 2008, barely two months ago. That rally also took gold back above $800.

That these two rallies - unique and rare in their magnitude - occurred so near to one another is significant. Is there a message from these two events? Yes, indeed!

Gold itself is telling us two things. First, there is an enormous short position in gold. Huge rallies occur for a reason, and short covering is always a factor. In order to limit their losses, shorts will bid up the market in a desperate attempt to cover their position. The rule of thumb is straightforward - the bigger the short position, then the bigger the rally.

Second, and more importantly, these huge rallies are signaling that gold under $800 is too cheap. A higher price is needed to bring supply and demand back into balance.

There is other, more than ample evidence to support this same conclusion. The demand for physical metal remains strong.

For example, Eric Lemaire of 24hGold.com has prepared two new pages which offer details on the premiums being charged on eBay for coins and small bars. Both the page for gold and the one for silver show that premiums remain well above historical norms, indicating that coins and small bars remain in short supply.

http://www.24hgold.com/english/buy_sell_gold_coins.aspx?co_id=0
http://www.24hgold.com/english/buy_sell_silver_coins.aspx?co_id=0

Friday's trading action adds to the growing body of evidence that the correction in gold that began after making a new record high in March above $1020 is ending. The low in gold in all likelihood is probably in place. The $700 level has been tested and re-tested, and the huge rallies launched from prices below $800 mean that other attempts to take gold into the $700s will be met with good demand.

I remain in the inflation camp, but even those who are expecting deflation like gold here. See for example what Mish has to say:

http://globaleconomicanalysis.blogspot.com/2008/11/i-like-gold-here.html

Gold remains in a bull market, and so does silver. National currencies are in a bear market. Get ready for the next leg in the precious metal's ongoing bull market.

Published by GoldMoney
Copyright © 2008. All rights reserved.
Edited by James Turk

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