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Minyan Mailbag: Why the Drop in Gold, Miners?

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Inflation a key factor.

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Prof. Lewis,

What's up with the market buying on bad news and selling on good? I was very encouraged by your post this morning. The euro and crude oil headed south, just like you predicted. Any thoughts as to why gold and gold mining stocks unfortunately followed with such gusto? Also, are you concerned about gold being below $900?

Sincerely,
Minyan Kathy


MK,

What I am looking for is for gold to be "sold out" and eventually "buy the news" of the dollar's bounce after having "sold the rumor" and fallen, well in front of this bounce in the buck beginning, just as we saw back in November-December. When gold was up this morning early on, even after the euro and crude had started down, I was encouraged that today might be that day.

But an hour later, crude broke further and that generated more selling in the gold, which then took the gold stocks down too despite Newmont Mining's (NEM) positive earnings.

Nevertheless, I still believe we'll likely see gold bottom well above its April 1st low, which would be consistent with the November-December analog also, where gold actually revisited its mid-November low when the euro (which is the primary driver of the dollar index) topped out and corrected. Then as the euro continued to correct, gold rallied. See the chart below.


Click to enlarge


I expect something very similar to occur here during this correction, because gold generally leads the dollar. The surprising part has been the severity of the selling in the gold shares given how cheap they already are. NEM is starting to look cheap even if it just produced "widgets," let alone gold.

Goldilocks believers want to think that "government" or the Fed can make inflation go away by talking tough about it or by the Fed "pausing." Only slowing money and credit growth will bring down inflation, but I feel the cost of doing that will be the implosion of the financial system. Stagflation is still here. It hasn't gone away overnight because crude oil is $116 as opposed to the $119 it was yesterday.

As was the case back in August when the Fed decided to ramp up the printing presses in response to the credit crunch, you can't have it both ways. To keep the system functioning and the asset-price dependent U.S. economy from imploding, money and credit growth must continue to expand, but the cost is going to be more inflation. Inflation isn't going abate just because the Fed pauses.

The dollar isn't going to magically recover either, unless the rest of the world wants to bear more of the inflationary burden via printing of their own currency to prop up America's, which will then increase their inflation rates.

Today is the sixth day in a row that gold and gold stocks have fallen (the all-time record is 7 days in a row I believe), so odds are that an important low will be seen very soon. I wish I could predict it in advance to the day and to the price level, but realistically, all we can really do is wait and watch for the signs that the low is in.

Seeing gold firm up despite a continued correction in the euro will be one of those signs in my view. One thing is certain in my mind: Both inflation, gold, and gold stocks will be higher later this year than they are now.

Thanks,
Prof. Lewis
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Position in gold, gold shares and NEM.

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