Goldfinger

(1) Attacking Fort Knox. (2) Gold was a great buy. (3) Central banks hoarding gold. (4) Bulls on the run. (5) Not enough fear for gold. (6) Easing off easing. (7) Draghi’s immaculate intervention has been a drag for gold. (8) Abe talks down the yen. (9) QE has lost its punch. (10) The debate has started at the Fed. (11) Gold and TIPS. Gold. One of my favorite movies is “Goldfinger.” Released in 1964, it is the third in the James Bond series and also the third to star Sean Connery. Who can forget the famous scene where Bond asks Goldfinger: “Do you expect me to talk?” Goldfinger responds: “No, Mr. Bond, I expect you to die.” Needless to say, Bond lives to die another day and foils Goldfinger’s plot to increase the value of his gold by dropping an atomic bomb on Fort Knox. Over the past few years, I’ve been asked on several occasions about my opinion on gold. I responded that my problem with gold is that I only know how to value assets with coupons, dividends, or earnings. I also observed that the price of gold had already increased sevenfold since January 20, 2001. That was when George W. Bush gave his first inaugural address. It was $265 per ounce back then, and soared to a record high of $1,895 on September 5, 2011 (Fig. 1). It was even a better buy in 1964, when "Goldfinger" was released and gold's price was pegged at $35 an ounce, as it had been since 1934 and remained until Nixon took the US off the gold standard in 1971. Yesterday, the price tumbled $41 to $1,563, down $229 from last year’s high and $332 from the record high (Fig. 2). (Add our Gold to MyPage by clicking .) The recent plunge in the price of gold happened despite a bullish Valentine’s Day press release just last week from the World Gold Council, the London-based industry group. It reported that central banks boosted gold purchases by 29% to 145 metric tons in Q4-2012, an eighth successive quarter of net buying. In the full year, the central bank bought 534.6 tons of the precious metal--the most since 1964, when Goldfinger plotted to nuke Fort Knox! On the other hand, demand for gold in India was down 12% last year and flat in China. ETF demand rose 51% last year, but was down 16% q/q during Q4-2012, as many hedge funds bailed out. Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? It has been a crowded trade, as evidenced by the high levels of net long positions held by both large speculators and small traders, according to the Commodity Futures Trading Commission (Fig. 3). With so many bulls around, the lack of upside price momentum since late 2011 must have convinced some of them, especially the big hedge funds, to lighten up.