The Dow's Gain Is Gold's Loss

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After a correction of more than 5% in light of fears about the government shutdown's longer-term impact on the economy and the potential for a U.S. debt default, the stock market today cheered even the possibility of a favorable resolution to the long-running Washington stalemate. The Dow Jones Industrials (DJINDICES: ^DJI  ) posted their best session of 2013, as lawmakers presented the framework for what could become a way forward in negotiating on the federal budget. At the close, the Dow finished up 323 points, its biggest gain since Dec. 2011, with broader markets posting similar gains of around 2%. All of the Dow's 30 component stocks closed higher, and throughout the market, the vast majority of stocks finished higher.

One gloomy spot in the market, though, came from the gold sector, with spot gold bullion prices falling almost $20 per ounce, to drop below the $1,300 level, trading at about $1,288 as of 4 p.m. EDT. That sent most major gold-mining companies down, as well, with Newmont Gold (NYSE: NEM  ) falling 0.8%, and Goldcorp (NYSE: GG  ) down 1.7%.

Gold investors almost find themselves in a no-win situation right now. On one hand, a resolution to the budget impasse would remove a lot of the uncertainty that the financial markets have suffered from recently, leading those who turned to gold as a safe-haven play to exit their positions and send prices lower. Yet, on the other hand, a continuing government shutdown could have dire economic impacts that would curb commodity demand, which, in turn, could also lead to reduced demand for gold, and lower prices.

For Newmont and Goldcorp, the temptation ever since the big plunge in gold prices earlier this year has been to protect against further declines with hedges, selling future production rights at locked-in prices. Back in July, Newmont CEO Gary Goldberg said that the company had discussed gold hedging, but that it hadn't chosen to follow through on it at the time. Goldcorp has been on record for years with its policy not to hedge future gold sales, although it does hedge exposure to base metals like lead, zinc, and copper to ensure stability in byproduct revenue that offsets production costs.

Unfortunately, gold investors could continue to see pressure well into the future. Even if the economy rebounds, rising interest rates will increase the opportunity cost for investors to hold gold. That, in turn, could leave Goldcorp and Newmont struggling in sympathy until the next challenge to the financial system rises up to send fear into the Dow and the broader financial markets, once more.

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  • Report this Comment On October 10, 2013, at 5:02 PM, EllenBrandtPhD wrote:

    It is always darkest right before the dawn.

    Hint: It is 6 AM or so, Eastern time, and Godzilla's wrath - 99.9999999999999999999999999999999 of everyone in the world being very angry with them - is about to descend on the Evil Japanese Government.

    There are many, many ways for the Yen Short of the Ages Boyz to save face and make excuses.

    Call me, Mr. Abe, I'll give you a whole list.

  • Report this Comment On October 10, 2013, at 5:04 PM, EllenBrandtPhD wrote:

    And Dan, as any actor knows, when you are handed a Script that's embarrassingly bad, just reject the part.

  • Report this Comment On October 10, 2013, at 11:50 PM, spirts wrote:

    Gold sold off and its being orchestrated. Every time I get into this debate in a chat room there seems to be always a lack of something called PROOF. Imagine that. Imagine you Imagining things that somebody somewhere is magically controlling the markets at their very will, GARBAGE. You conspiracy clowns all belong in the same trailer in Alabama, should be set on fire and thrown over a cliff.

    That is complete nonsense. The indexes are in an uptrend, end of story. What did you think was going to happen when the potential for a debt ceiling resolution makes the news?

    By the way, I have some advice for you. As an independent trader DO NOT THINK. What is the prevailing trend? What is the data stating is all you need to know.

    What about PM’s? Gee do you think they are still in a downtrend? I don’t know Bob, stand back 20 feet from a weekly chart and the line goes from the upper left hand corner to the lower right. DONE. That’s all you need to know. DOWNTREND in GOLD.

    Forget fundamentals, consumer confidence, debt levels blah blah blah blah blah. I have heard it ALL. All of it, “This cannot be because of …” or “That cannot be because of…” or “This is happening because of…”

    I have news for you. Its all CRAP. All of it, And anyone telling you why a market is doing X is a Charlatan. All you need to know is that what is the prevailing trend is. END OF STORY.

  • Report this Comment On October 11, 2013, at 12:16 PM, EllenBrandtPhD wrote:

    Where do you get "conspiracy theory" in my comments? In fact, anyone who knows me knows I have nothing in common with the so-called Austrians, and I am very far from a Market PermaBear.

    As for the NEW Script of Gold and Gold Stocks moving against the General Market, for five years after the Great Crash - and much of the time the past 15 years - Gold has moved WITH the General Market, not against it.

    What has happened the past 10 months is due to one primary cause: Abenomics.

    A group of Deep-Pocketed Cronies around the world declared the Yen Short of the Ages and tied their overdone, overleveraged - typically at 80 to 1 - Yen Short bets via complicated algorithms to various other overdone, overleveraged bets - Kill Gold! Kill AUD! Kill NOK! Kill CAD! - and MOST damaging, in my opinion, Short bets on virtually every US version of dual-listed Commodity Currency stocks or ADRs, some of which are very small stocks, in the sense of being very lightly traded.

    So the Crony Group now holds almost ALL the Short position on many US versions of Australian-US stocks, Norwegian-US stocks, and Canadian-US stocks.

    This is very filthy behavior, especially since we are talking only 2 or 3 or 4 primary MMs in some cases, one of which may also be serving as the Axe.

    The Crony Group has been panicking for months now, as the Yen Short of the Ages seems to have run its course, because the entire rest of the world is complaining loudly now.

    Ironically, Yen Shorts themselves, in an active, major forex market, will be fairly easy to unwind.

    But all the derivative algorithmic bets tied to the Yen Short of the Ages are much more difficult to handle.

    Look at the craziness in the NOK, for example, which is a thin market.

    In any case, I agree with you that this IS a trading issue now. But in currencies and commodities, various external factors, like Geopolitical Events and the concerted actions of the BRICs and EMs against the Japanese Bullies, can spin markets around in a nanosecond.

    I consider anything to do with Internal US Events much, much less important.

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