Dan Norcini continues:

“This buying has been helping gold recently. We also had an Israeli strike take place on a Hamas leader yesterday in the Middle-East, which also put a safe haven bid in gold.  It is also worth mentioning that we saw some strength in the crude oil market yesterday and this also helped put a bid in the gold market.

I think the Israeli action in the Middle-East, while it was very small in terms of the operation, it served to remind investors and traders alike that the world is balancing on a razors edge geopolitically.... 

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“This type of activity is one of the key reasons why gold had very recently divorced itself from the action in the stock market.  I would also add that a great many traders are concerned about the upcoming fiscal cliff in the US.  This has a lot of traders on edge, simply because nobody knows which way this is going to resolve itself.  So gold is stuck in a schizophrenic stage where it doesn't know wether it wants to go up or down. 

But as I mentioned earlier, what has me concerned is the mining shares continue to drop and I mean drop significantly.  Fundamentally, what is happening is you are further stretching that rubber band of undervaluation in terms of the mining shares vs gold.  Take a look at the HUI to the gold bullion ratio.  That thing has plummeted again.  We are back to the extreme levels we witnessed in summer of this year.

Below is a chart which shows that since March of 2008, gold has risen a very strong 76%, while the HUI mining share index, astonishingly, has actually gone down roughly 8%.  Again, this took place while gold rose 76%.

Back to last summer, at that time we saw the mining shares begin to attract value based buyers.  It remains to be seen if these value based buyers are going to come into this market when you have weak earnings from Newmont and Barrick.  The bottom line here is the hedge funds are once again buying the bullion and selling short the shares in the mining sector.  This is where the pressure is coming from.

We will also see tax loss selling in this sector for the remainder of the year.  So it will take something to reverse this trade.  It will most likely take a sharp rally in the stock market which would carry the shares with it as well.  The other possibility is some upside earnings surprises from key mining companies.  This would help push some of these hedge funds out of these short positions they have in these shares.

I would also like to add that the S&P 500 is threatening to breakdown on the technical price charts.  The global stock markets are really struggling here, Eric.  I can tell you one thing, if the downdraft in the S&P accelerates, you will see another leg higher in the bond market.  There are people that are now saying it's conceivable we could see a 160 handle in front of the long-bond.

It will be very interesting to see how gold and silver would hold up in that environment.  We could see continued weakness in stocks, accompanied by further geopolitical instability.  This would cause traders to bid up the oil market.  With the forces of a lower stock market clashing with geopolitical instability, it will be fascinating to watch gold and silver trade under those circumstances should they develop.  Regardless, as I said earlier, the world is on a razors edge here.”  

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Nigel Farage, Bill Fleckenstein, Rob Arnott ($100 billion), Gerald Celente, John Hathaway, John Embry, Stephen Leeb and Don Coxe (BMO $538 billion) are available now.  Also, be sure to listen to other recent KWN interviews which included Rick Rule, James Turk, and Egon von Greyerz by CLICKING HERE.

Eric King

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