ScotiaMocatta: Gold Trends to Snowball

From Mineweb comes news of a report by ScotiaMocatta, the global bullion banking division of the Bank of Nova Scotia, about the gold market.

In its December Metals Matters report, ScotiaMocatta suggests that global financial problems "seem so deep rooted that demand for gold as a safe haven is expected to escalate."
...

ScotiaMocatta's analysis revealed that gold lease rates have been soaring and "likely to put an end to the gold carry trade, at least for a while. With interest rates falling, the profit margin on gold carry trades has diminished significantly. This means that as former carry traders come to the end of their term, gold will be withdrawn from the system and returned to central banks."

"As carry trades are closed the pressure on the spot market will switch from selling pressure to buying pressure," they advised.

If people lose faith in the financial system and their currencies, ScotiaMocatta forecasts "the growing trend in wanting some gold as a store of wealth may start to snowball."

It's probably fair to say that a lot of people have already lost faith in both the financial system and paper money. Add to this the fact that winter begins next week (snow is forecast in these parts over the weekend) and you have a surefire recipe for snowballs.

Comments

[NOWHEREMAN:]

If Gold is the Inflation hedge that it is purported to be, why aren't Gold futures leading the way?

The Current economic distress has ads 24/7 about sending in your old gold jewelry to get cash. How long will it take before demand is inundated by new sources of supply?

This is how the Hunts were reamed in their bid to corner the Silver market.

The above was my Caveat. I personally hope for a major production cut from Opec which will drive Oil up. Which in turn will drive the Dollar down and raise inflationary expectations. This will not be good for the economy short term but it will erase the delationary expectations being built into our economy.

Inflation vs deflation, I'll take inflation. IMO

2008 Dec 11 08:14 AM

[SW Richmond:]

Paul,

Deflation could be seen as a useful tool in getting people to liquidate their gold holdings. It sure worked with the hedge funds, didn't it?

2008 Dec 11 08:39 AM

[Smarty_Pants:]

I've seen articles recently noting the near delivery squeeze in December gold futures:

"According to the December 3rd Comex delivery report, there are 11,759 notices to take delivery. This represents 1.1759 million ounces of gold, while the Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total amount will have to be delivered by December 31st."

In addition there were over 2500 December contracts still open that might take delivery if they are not rolled over into the February contract.

This follows October deliveries of 11,554 contracts.

Assuming every remaining December contract is rolled over and no more physical gold is removed from the Comex warehouses, if February deliveries are about the same as October and December then after February deliveries there would be only enough gold to meet delivery on roughly 6000 contracts after that.

Of course more gold might be moved to the Comex warehouses in the next few months, but it appears that the demand for physical gold is beginning to drain them of supplies.

Whether this precipitates a short squeeze remains to be seen, but the odds for such an event are increasing. Price action the past few days has seen gold run up strongly as we approach the end of December.

Even trying to roll over those remaining December contracts by current shorts could serve to boost prices through the end of the year. How much and for how long remains to be seen.

2008 Dec 11 09:30 AM

[NOWHEREMAN:]

Thank you, I didn't know that. It explains a lot regarding Spot's activity. A good old fashioned short squeeze in the Middle of a very interesting Economic week.

1. Opec;2. Fed meeting;3. Goldman Earnings;4. Quad witch and 5. Over the Weekend Auto Talks.

Apparently, if the Senate creates and sends their own proposed Bill to the House, they don't have to filibuster. They can force the House to consider the new Bill. At least thats what I think I heard. IMHO

Being from a burb of Chgo, I have other than Business News to occupy my attention currently.

2008 Dec 11 10:37 AM

[Jeff Nichols:]

Monetary Reflation Today, Price Inflation Tomorrow

(Excerpted from speech to China Gold Summit, December 4, 2008, Shanghai -- by Jeffrey Nichols, managing director of American Precious Metals Advisors and NicholsOnGold.com)

I remain bullish on gold because — even as the global economic recession deepens — governments will find the only way out of this mess is to print more money. In other words, to inflate.

The United States Treasury and the Federal Reserve have already thrown a few trillion dollars, more or less, into the banking system and are now also lending directly to businesses and households. And, there’s surely much more to come when the next Administration moves into Washington.

It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy – including the United Kingdom and the Euro zone, China, Russia, Japan and on and on – are doing likewise.

We have never in the history of money seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value – in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable devaluation of money and the corresponding rise in price inflation that will propel gold skyward in the next few years.

As sure as day follows night, reflationary monetary policies — however necessary — have long-term implications for global inflation. Typically, monetary creation affects price inflation with a lag of six months to a couple of years – and in the current environment, the lag could be still longer . . . so it may be some time before inflation is recognized as a serious problem. But gold prices have shorter lags and could begin moving up before rising inflation becomes apparent or worrisome.

Longer term, gold-price prospects remain as bright as ever — and I firmly believe we will see record high prices in the next few years with gold back over $1000 an ounce in the coming year.

With the right confluence of economic and geopolitical developments we should see gold break through $1500, then $2000, and possibly still higher round numbers in the next few years – particularly if we get the type of buying frenzy or mania that often occurs late in the price cycles of financial and commodity markets.

This is hardly an audacious forecast when looked at relative to the upward march in consumer prices over the past 28 years. After all, the previous high of $875 an ounce in January 1980, when adjusted for inflation since then, is today equivalent to more than $2200.

Let me end with a warning about the days and weeks ahead. In the short term, gold remains volatile and vulnerable, if only because market psychology is nervous, anxious, and fearful. In this environment, we could still get a quick sell-off that would bring us back to the recent lows. But, day by day, I think that becomes less likely and, day by day, I think the base is building for a lasting longer-term recovery.

2008 Dec 11 11:04 AM

[NOWHEREMAN:]

Hank has spent whatever he could, Its is very interesting how he has managed to spend $335 Billion of the $350 first installment, $15 Bil. left in the kitty with the Auto makers getting $14 Bil. seems a bit too coincidental.

A new crisis starts next week, Congress wants to vacate the premises but Paulson needs the Rest of the Tarp funds. Can't leave, gotta Vote. Maybe he will use what he has left for the Auto makers. A TV show type lets "make a deal".

The Repub's have a very valid point in blocking the bill. The UAW refuses to make any additional concessions, period. They will not until their current contract expires, 2011, I believe which means We will continue pay their exorbitant salaries and the auto makers will continue business as usual as we foot the bills.

GM and Ford filed their 10Ks for the last quarter recently. In GM's case their burn rate was $2.3 Billion a month. When Waggoner testified, he Needed $4 Billion to survive the Year. Meanwhile Ford only wanted a Bridge loan. For Ford market conditions had not deteriorated but for GM. they had.

GM had almost $16 Billion in Cash and equivalents listed on their 10K. But They need $4 Billion? Either the Burn Rate tripled for GM but not for Ford or Waggoner is lying through his Smiley face.

GM's GMAC unit needed cash to qualify for Bank Status, I posit that GM shoved as much as it could into it. It wasn't enough, GMAC is expected to file for bankruptcy.
Had it succeeded, GMAC could have drawn on TARP to refund and fund GM.

IMHO

2008 Dec 12 04:38 AM

[Trace Mayer:]

"gold will be withdrawn from the system and returned to central banks."

I am not sure the central banks will be able to get the gold back. There is a difference between gold and paper gold. Generally the people with the gold own it unencumbered and are hanging onto.

www.runtogold.com/2005.../

2008 Dec 12 04:52 AM

[Alex Stanczyk:]

Now up to a staggering 43.2% ( charts: www.rapidtrends.com/bl.../ )

I have followed precious metals for a long time...and this is definitely interesting.

With Tbills going negative yield the only logical next step to park capital will be gold. If that happens on the scale that capital flowed into Tbills...all I can say is wow.

2008 Dec 12 08:41 AM

[nmelendez:]

The reason gold has not flourished is two fold. First, Central banks lending gold while maintaining it on their ledgers(COMEX). That way it appears there is twice as much gold as their actually is. And two, since the dollar is the world currency and it is illegal to pay in gold, all the unleveraging that is occurring is in US Dollars. Once this concludes, everyone will buy gold in US Dollars. That's when the fun starts because the dollar is going Zimbabwe's way. Masive inflation, yes, You will make 100,000 per year digging ditches but a #1 at McD';s is gonna cost ya 20 bucks. Houses will cost over 400,000 for a studio in the middle of the Mojave desert and an auto loan will be for 20 years, for those that can afford it.

2008 Dec 12 03:46 PM