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Gold could be moving with the commodities’ complex, and if it is, that could be a good thing. The mainstream press continues to associate gold’s rangebound price behavior with the euro’s dismal performance, but, as I have argued in the past, that might be the stuff of market fiction. A better place to look for a culprit over the past several months, in my view, would be the slippage in global commodity demand led by China, Japan, Germany and other manufacturing centers.

Now with the drought driving up corn, wheat and soybean prices food inflation looks like a probability. Add to that renewed tensions in the Mid-East, and a number of analysts thinking China might recover from its recession in the short term, you have the essential ingredients for generally rising commodity prices — a situation likely to feed into retail prices in the months to come.

The CRB index, as a result of all this, is on the move — up 12% from its late June bottom. Goldman Sachs predicts a 30% rise in commodity prices over the next 12 months led by energy and base metals. If today’s action is an indicator, gold looks poised to to participate in the broader commodities’ rally.

Financial Markets, Politics and the New Reality
by George Friedman – Stratfor

Editor’s Note: Every once in awhile an analysis is published that gets to the heart of an important matter. This essay — or better put, deep background — on the economic problem in Europe is such an analysis. When politics trumps economics, uncertainty rises and financial chaos becomes a potential result. Thus Dr. Friedman’s essay starts with the peculiar decision of one Mr. Louis M. Bacon of Moore Capital Management — peculiar not so much for its result, but for what prompted it. When we read of the recent decision of other prominent hedge fund managers, like George Soros and John Paulson, to greatly increase their gold holdings, it behooves us to understand what might be the underlying logic. This essay is a step in that direction, and thus an important addition to our Gilded Opinion Library. MK

Louis M. Bacon is the head of Moore Capital Management, one of the largest and most influential hedge funds in the world. Last week, he announced that he was returning one quarter of his largest fund, about $2 billion, to his investors. The reason he gave to The New York Times was that he had found it difficult to invest given the impossibility of predicting the European situation. He was quoted as saying, “The political involvement is so extreme — we have not seen this since the postwar era. What they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets.”

Continued. . .

ABC News (August 16) — Once again John Paulson is choosing to heavily invest in gold and fellow billionaire George Soros is making a similar bet.

According to Bloomberg News, Paulson & Co. and Soros Fund Management bumped up exposure to SPDR Gold Trust to 21.8 million shares and 884,000 shares, respectively. Paulson & Co. now has 44 percent of its $24 billion fund exposed to bullion.

The decision by Soros is an interesting one. In 2010, Soros called gold “the ultimate bubble” during an appearance on Reuters television. “It may be going higher but it’s certainly not safe and it’s not going to last forever,” he stated.

[Source]

JK Comment #1: Well, nothing like a big headline followed by drivel trying to undermine the message. This article goes on, as you will read, to quote two relative unknowns who think Paulson and Soros ‘see something they don’t’. They go on to discourage any private individuals from participating in the gold market:

Quoting the article again — He (Sorrentino) continued, “the fundamentals behind gold such as available supply coming to market and end demand have not changed in any material way. In fact, gold purchase by central banks in the pacific rim, India and Russia have reached new highs. So from an investor psychology and supply/demand perspective, this looks like every cycle before it during the last decade.”

“The big question is whether or not this time it’s different. Every commodity-driven cycle ultimately comes to an end, and ten years is generally the average duration for these market moves,” said Sorrentino.

But, despite big bets by two of the nation’s billionaires, he continued, “…There is an old saying among Wall Street trader; ’It’s said with a whisper and not with a shout, when the widows and orphans get in, it’s time to get out.’”

JK Comment #2: Which is Soros? Which is Paulson? ‘Widow or orphan’? Ridiculous. And if the ‘widows and orphans’ are ‘in’, how do you explain that less than 1% of invested assets worldwide are currently participating in the gold market. Not to mention the statement of ’10 year cycles’ is completely baseless. So to extrapolate from two HUGE players that have been EXTREMELY successful investing in gold, and have shown a track record of being right on the money with their bets, that this is somehow the final ‘herd’ phase of the gold market borders on lunacy. In fact, being the contrarian’s contrarian, I might say that because financial advisors like these continue to discourage gold suggests we’ve got quite a long way to go.

Much has been made of the Soros ‘bubble’ comment over the years, but we have always contended that it was misinterpreted and taken out of context. The sentiment of Soros’ statement is that gold will become the ultimate asset bubble. If that’s the case, we have quite a long way to go from $1600 for it to eclipse the magnitude of both the tech and the housing bubbles. All told, this is HUGE news for the gold market, despite every attempt in this article to suggest otherwise. It appears Soros and Paulson might be following the same cues as our clients, who have found buying during the stable slow summer period can prove very fruitful. Pete’s article from last week is worth another look as we digest this move from two huge believers in gold.