Gold's Price Discovery Is Clearly Out Of Sync With True Fundamentals

September 19, 2011  

Five straight days of gains and the best week we've had in over six weeks. The markets are finally showing some life. But is this all a grand illusion? Despite the negative news engulfing the world markets, stocks are not only holding up but have seen a tremendous rally this past week. Perception is reality and it looks as if investors are thoroughly expecting a big round of stimulus coming from Bernanke as he takes the stage at the two-day FOMC meeting on September 20-21. While this may appear to have helped our markets, it could also lead to disaster.


If investors are buying based on the sentiment that a new and significant amount of stimulus is coming, but the stimulus doesn't come, you can expect the markets to sell off. We need news of a strong stimulus package if our markets are going to survive to see next year. I am going to reiterate the fact that we should all be watching the next week as if it were our last. Even with stimulus, we still have to look at what the other side of the world is doing.

How to guarantee a double on your money?

The European issues have only gotten worse. The Greek bond markets have gone off the scale. Yields have risen by 150 percentage points on some bonds in the space of three months and volumes have slumped to practically nothing.

As a matter of fact, one three-year bond, which was trading at 20 per cent in June, is trading at a yield of 172 per cent, with a bid-offer spread - the difference between what a bank is offering to buy and sell the bonds at - of 47 percentage points. That's worst than most of the illiquid junior stocks on the TSX Venture. Earlier in the week, yields on one-year Greek bonds climbed to more than 130 percent. No, I am not kidding. 130% yield on one year bonds.

If you believe Greece will survive by helping them out now, they'll give you more than double your money back. Where in the world can you find a government-backed investment like that? But guess what? Even with those yields, investors are hardly jumping at the chance to buy them. That's because at the end of the day the other European nations (especially Germany who's carrying the Euro on its back), will eventually say enough is enough. When something is too good to be true, it probably is...

Whether our markets like it or not, Greece should default, and default big.

But if they do, we will see a snowball effect all over the world. The question is can it be contained? Bernanke better have a trick up his sleeve next week for the sake of our short term markets.

Bullion for Paper

There's no doubt that the most common question I get from readers is: "Why is there such a disconnect between gold prices and the price of gold stocks?"... continued