The Gold Ounce's Bold Bounce

What a difference a week can make. While sentiments may turn on a dime, fundamentals pave a much steadier road.

Seven days ago, a chorus of voices touting the end of the road for the bull market in gold echoed across the airwaves and filled the blogosphere. The U.S. dollar was exhibiting surprising strength, while gold traded at the worst levels of the year. Shares of gold miners were being treated, frankly, like toxic financial stocks.

Then along came the biggest financial story of the past 50 years, and the gold bull resumed just as abruptly as this past March's correction had interrupted it. Yesterday's $90 move in gold futures was the precious metal's biggest single-day jump in modern history, crushing the prior record $63 move from January 1980. With October futures touching as high as $922 today, compared to Wednesday's open of $774.80, the metal has forged an extraordinary $147.20 trading range over the past two days.

The most obvious explanation for this flight to the safe-haven metal seems to be nervousness within the global financial system. Credit markets remain effectively dysfunctional, and the multi-trillion-dollar derivatives market appears set to continue de-leveraging. While I think this is part of the equation, some other recent developments also warrant Foolish consideration.

For one thing, the U.S. dollar index reversed convincingly, as the Federal Reserve tossed more than $500 billion dollars at this crisis in the last week alone. That sum equals more than one-fifth of last year's entire national budget of $2.73 trillion. Yields on Treasury bonds dipped dramatically amid high demand Wednesday, which also may have enhanced gold's appeal. Finally, I took notice last week when one of China's biggest investment banks indicated a desire to diversify its reserve currency holdings away from the U.S. dollar.

Alongside double-digit percentage moves in bullion proxies like the SPDR Gold Shares ETF (NYSE: GLD  ) and gold and silver holder Central Fund of Canada (AMEX: CEF  ) , the gold miners broke out in convincing fashion as well. Agnico-Eagle Mines (NYSE: AEM  ) has surged 30% in the last five days, with smaller gains from competitors Goldcorp (NYSE: GG  ) and Newmont Mining (NYSE: NEM  ) . Stay tuned, Fools. I firmly believe there's a lot more shine yet to come from gold.

Further Foolishness:

The "Gold" tag at Motley Fool CAPS lists 85 companies. Join the CAPS community to separate Fools' picks from fool's gold. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Central Fund of Canada and Agnico-Eagle Mines. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (3) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 18, 2008, at 5:07 PM, JiveDadson wrote:

    The stock market surged, and gold tumbled late in the day on rumors that Paulson has been meeting with lawmakers talking about a government funded burial ground for toxic debt (a resolution trust fund). So the BM (big move) was traders moving back into the now "safe" stock market. Who needs gold, when you have a printing press? Well, actually, I do. I bought more on the dip.

  • Report this Comment On September 19, 2008, at 2:01 PM, otterknow wrote:

    As someone who paid more attention than most to my grandparents stories of the great depression and someone who has worked as a slave for the families offshore tax practice for almost a decade, I have long been an advocate of moving funds into commodities. When as currency has been passed around like a drunk chick at a frat party for the last 8 years, it may be significantly safer to put move your assets into the old school realm. Gold and silver are the strongholds of an uncertain economy...I'm just waiting for the 10 treasyry note to his 13+%...Then I can finally pick myself up that 380SL and rent me a Max look alike....Oh, and of course I'll be saying "it was murda"!

  • Report this Comment On September 19, 2008, at 2:21 PM, XMFSinchiruna wrote:

    With all due respect, there is nothing dangerous nor misleading about my analysis, and I will be happy to debate the finer points at the time of your choosing, provided we maintain a Foolish level of decorum.

    Permit me to set the record straight a bit. I am certainly not focusing on any one single day, which is why I made a point to differentiate between long-term fundamentals and sudden shifts in market sentiment. I made no presumptions whatsoever based upon the price moves of this week, and I have already presented through the entirety of my work here at the Fool substantial evidence that we are in the midst of a multi-year bull market for gold that is based upon a set of fundamental drivers that have not altered form, but merely increased in intensity as the events of this week unfolded.

    http://www.fool.com/investing/small-cap/2008/09/12/in-defens...

    http://www.fool.com/investing/general/2008/03/19/dodge-the-d...

    http://www.fool.com/investing/general/2008/06/05/dorothy-tra...

    http://www.fool.com/investing/general/2008/05/05/gold-delive...

    http://www.fool.com/investing/general/2008/05/30/when-jv-is-...

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