The Favorable Outlook for Gold

| About: SPDR Gold (GLD)

Spot gold prices bounced off a $700 low yesterday morning. "Gold's recent slump bewilders investors," headlines MarketWatch.

"An ugly, unmitigated disaster, this," writes Jon Nadler of Golbug Central

Despite of valuation drops that seem to rival those of certain emerging markets, some die-hards still see the glass as half full.

Adrian Ash actually found a ratio that makes gold look good:

You might like to know, if you put store by such things, that the US stock market just sank to a 14-year low against gold. (...) So the Dow/Gold Ratio - which simply divides the one by the other, thus pricing the Dow Jones Industrial Average in ounces of gold - fell to a little above ten, making the 30 stocks of the DJIA cheaper in Gold Bullion terms than at any time since January 1995.

Jim Turk celebrates new gold price records — "against the Australian dollar, Canadian dollar, Indian rupee, South African rand and British pound." Not against the U.S. dollar, mind you, the currency gold is supposed to hedge against. But against the currencies that hard money internationalists considered the Dr. Jekyll to the greenback's Hyde just eight weeks ago!

O quae mutatio rerum... how things have changed, as the German student song bitter-sweetly complains.

The Daily Reckoning's Bill Bonner wrote yesterday morning:

Money is pouring into the gold coin market. Apparently, dealers can't keep up with the demand. Of course, financial analysts tend to view the gold coin market as a place for nuts and kooks. 'If the world really does fall apart, you'd be better off buying ammunition,' said one analyst. But it depends on how apart the world falls. If commerce were still done peaceably, gold coins would be a good thing to have in your pocket. But, he's right; when things really fall apart, you'd be better off packing heat than Krugerrands. But we're not worried about that kind of world — it is too wild and too unpredictable.

Big Gold's Jeff Clack goes futuristic in his outlook, writing an article from the vantage point of "a news release I brought back with me from the future that reveals the price of gold": "It’s with nothing but unabashed excitement that I republish an article that I saw cross the AP wires on January 21, 2012....Gold rockets past $5,000 in heavy trading."

Those of us stuck in the here and now, however, breathed a sigh of relief as gold clawed back to $720.

What is going on?

As far as Doomsday predictions go, it's hard to imagine anything that could beat a 30% drop in the Dow to fuel panicked gold buying.

And let's make no mistake about it: People are buying gold like there's no tomorrow. Shout "Fire!" at a gold bug convention, and people will ooze toward the exits like garlic butter from escargot as their pockets are weighed down with pounds of precious metals. One expert wrote, "At the London Gold Bullion Traders Conference in Kyoto, I was amazed to find the magnitude of the shortage of gold and silver coins. In Germany, they aren’t having the crisis we’re having here, but Germans were lining up to buy gold. They have gold in the kilo bars. Everything is sold as soon as they get it."

With dollars, pounds, euros and yen already pouring into physical gold at humongous premiums... what could possibly be the catalyst for that long-overdue break-out that heaves gold past $1,000?

During the gold bull market, gold investors liked to point at China as the looming demand catalyst. To them, ancient concepts of wealth would turn China into a virtual hotbed of aurophilia. (Apparently, 50 years of Communisms, the Cultural Revolution, and the VW Jetta (the #1 selling car in China in January 2008!) had no effect on Chinese perceptions at all.)

But how much can we really expect from Beijing?

"Due to a lack of gold reserves, it will be very difficult for China to respond to any proposal put forward for reconstructing the Bretton Woods system," wrote Xu Yisheng of just yesterday morning. And the Chinese consumer? says that per-capita disposable income was recorded at 4,140 yuan (605.6 U.S. dollars) in rural areas. According to, per-capita disposable income of urban residents was 13,786 yuan. Less than $2,000. Per year. Per capita.

Even at $700 an ounce, the nouveau riche Chinese may have other ideas to spend that money than converting it on rapidly depreciating gold coins. Maybe on a down payment for a Jetta, a Buick Excelle (#4 best-selling car), or the Ford Focus (#9)... a solar electricity unity for hot shower water... or rice and pork in case he happens to be one of the tens of thousands Chinese who've been laid off by shuttered factories.

How about those gung-ho gold buyers in India? Those who "traditionally" see gold as a store of value? Here's a sound-byte straight out of India. "The global crisis has definitely affected the sale of gold and silver. Though I do not have the exact figure, but the business has been 50 per cent of what it was last year," the president of the Ahmedabad Jewelers' Association, Shanti Patel, said on yesterday morning.

What I find most concerning at this point is that Indians aren't buying right now. Think about it. Gold is selling at a 30% "discount" from its 2008 high. Hard money advisories are urging readers to use this "last opportunity to buy below $1,000". Gold should be a back-up-the-truck bargain right now.

But the deferral of buying in India means only one thing:

Prospective buyers expect prices to fall even further!

One reason for this is the epic trend reversal in the U.S. dollar. The euro is now trading below $1.30 for the first time since February 2007. The British pound fell to the weakest level against the dollar in five years. The U.S. economy make be in no great shakes right now... but neither is anyone else's. Worse, the liquidation of foreign assets and portfolios has sparked a veritable rush into greenbacks.

"The fact that gold did not head higher during the current leg of the crisis seems to reflect a combination of the rise in the dollar, deleveraging of commodity positions, sales to meet margin calls, and the unwinding of the long gold, short dollar trade," wrote Natalie Dempster, an analyst at the WGC, in a research report released yesterday.

In my humble opinion, we cannot look to Asian or American buying to create a strong, sustained bullish catalyst for bullion. To make things even worse, crude oil prices keep falling — increasing the downside pressure on gold. Even the prospect of an output cut in by OPEC cartel, was only good to raise light sweet crude for December delivery to $69.05 dollars per barrel, after oil had traded as low as 65.90 dollars — a level last seen on June 13, 2007.

Brent North Sea crude for December had hit a low of $63.96 Wednesday, a price level last seen in March 2007. Amateur speculators have abandoned oil at this point. With the bubble pressure gone, nothing is standing in the way of another 50% drop in crude oil prices!

Here's my Holiday Season prediction: Oil will go up to $65 thanks to Turkey Day automotive traffic by late November. Gold will be trading below $700 by Halloween. The dollar will be trading at $1.20 per euro by the time they're turning on the Christmas lights on the Washington Monument in Downtown Baltimore.

If you hold any gold in your portfolio — especially if you bought even an ounce of gold since 2004 — it is high time to buy some insurance against this rout! My colleagues and I have put together a simple investment strategy that translates gold's current downside into cold, hard profits for you... without you having to sell as much as a single Krügerrand!

Stock position: None.