Gold Shines Brighter Thanks to Fed 21 comments
Money Morning
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By Don Miller
The currency markets' reaction to the Federal Reserve’s recent interest rate cuts has ignited a rally in gold, as investors weigh the benefits of owning the yellow metal versus U.S. Treasuries and the dollar.
As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.
Gold has been on a roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.
Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government. That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.
But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index ((NYBOT: DX)) down 10% in the last month. The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.
The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.
Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.
Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.
It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.
Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:
- Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.
- The incoming Obama administration has promised that another $1 trillion or so stimulus package is on the way.
- It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.
These economic stimuli are designed to do one thing – get the consumer spending again.
The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.
“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.
Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.
For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.
“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.
With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything. It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.
When inflation kicks in, the dollar’s buying power will suffer long-term. In fact, we expect a decline in all the world’s paper money, over time. Historically, investors in gold have prospered during periods of weakening fiat currencies.
That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend.
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This article has 21 comments:
(H/T Bill Murphy)
They will try to thwart the gold bugs if they can.
Just got back from Thailand, where gold is sold on every corner, even
gold chain 18ct sold for price of gold that day plus a few dollars for making the chain, can bring back and pawn if needed for about 10% price. try that in US after you paid 40.00 a gram.
I bought 10 ozs bullion 965 fine 0r 23 ct . no cost at customs, seen 100.s of oz s for sale lots of 5 oz bars . enjoy. They charged me 3% on my visa charges to them Easy and Honest, cheap to live there also
dont need to come home. haha might be best in long run.
Sad but true. That is why you must always protect some of your portfolio the old fashioned way.
#1 Dollar will fall like a rock. I don't need to detail the reasons why -- you all know it. Dollar and Gold have an inverse relationship. When the world's reserve currency fails and there is no other currency to take its place Gold will assume its historic role as the de facto standard by which all of world's currencies are measured. This and the fact that all of the world's economies are running their printing presses overnight will cause all currencies to plummet and Gold to rise. One simple measure you could have used historically to measure the value of Gold was simply to come up with a ratio of paper money in circulation vs. available supply of Gold. When paper money supply goes up Gold prices go up and paper money supply goes down Gold prices go down. Right now this ratio is out of whack but Gold has not risen as much as it should because of the belief that this paper money even though it is printed has not flooded the economy. Think of a giant dam that is holding a huge rush of paper money behind it and pilining up immense pressure behind the dam's release doors. It is not if but when this paper money will flood the economy. Once flooded it will take years before the excess money can be removed from the system.
#2 There are several hot geopolitical tension spots around the world and some of these will ignite. In a good economy countries hesitate to start war but in bad economies war could be the only way that their political powers will survive. Tensions spots are India/Pakistan, Israel/Iran, Israel/Palestine and Russia/Former-Republic... Somewhere in here is brewing the next big world catastrophe which when ignited will cause a run to the precious metal as a safe haven. When you think about Gold try not to think like a U.S. consumer but someone from the Asian and Arab countries where Gold is ingrained culturally as a precious metal that holds its value through times good and bad. This is where the real buying power for Gold is and when ignited will cause Gold to soar to new heights.
#3 It is wishful thinking that the economies of the world which were mauled by corrupt market professionals and politicians for so long could be fixed in 1 short year. There will be tremendous pain in 2009 as markets continue to struggle to get rid of the malaise that started in 2008. The stock indexes will seesaw throughout the year and geopolitical tensions will explode in several parts of the world. Gold, the precious metal, is your only recourse as a safe high-yielding investment in 2009.
I invested a majority of my portfolio in Gold and Gold miner stocks in late October. As a result my portfolio which should have been down along with the market is showing a 55% plus gain for the year. Please note that while Gold the physical metal may move 10% in price Gold miner stocks move up 3-4 times as much in price. That is because each unit rise in price of Gold impacts the bottomline of mining companies by 3-4 times as much.
If you want a minimum of 50% investment return in 2009 and wish to do it as safely as possible invest the money in Gold and Gold mining stocks.
Mining stocks have responded to a rise in gold but will never pay meaningful dividends due to the need to constantly replenish their wasting resource. And the increased profits that might otherwise be expected must be shared with corrupt politicians, labor unions and local tribesmen. I advise any fast gains in the stocks be grabbed and invested in the real deal.
1) I am going to buy a 50 inch Panasonic Plasma TV, with the highest dynamic range I can afford. And my wife is going to replace her Apple laptop. Are the prices going to be higher or lower than 2008? Well, I hear that Apple laptops are going lower in 2009. And you can bet that Panasonic is going for less than it did last year, or I won't buy it. Will Asia keep the lid on inflation just like they have in the past, regardless of the USD? Of course they will. They are not going out of business.
2) I will be investing a lot of cash in American industrial companies (and the occasional foreign company) like IBM, NUE, CAT, TSM, CVX JNJ and so on.
Its not that I have a problem with gold. If I were a currency investor I would be buying gold. But I am not a currency investor, and I do not think the sky is going to fall on American industry, so, except for some deflated home electronics, that's where my cash is going.
Disclosure: I own all of the companies mentioned above.
In the times when countries and banks go bunkrupt and people lose jobs by millions, GC can not be supported much longer as investors will have to sell physical GC to buy food and pay for basis life needs.
When all this tons of Gold will flood the jewelry shops that are already empty and bankrupt, the only ones who will make money in GC will be pawn shops who buy GC 10% cheaper each time.
Wait for more people flooding the pawn shops with their jewelry to buy bread, you will see what is real price of Gold which is nothing else but luxury asset that can only go up during booming global economy.
On Jan 01 08:24 PM 1977°C wrote:
> Gold will crash to 200-300$ an ounce and I am sure it will never
> brake it's previous high of 1030$ which was driven by manic buying
> by investors under the influence of mass media, if GC would have
> any value long term, GC stocks would not crash between 50-95% in
> a matter of few months.
> In the times when countries and banks go bunkrupt and people lose
> jobs by millions, GC can not be supported much longer as investors
> will have to sell physical GC to buy food and pay for basis life
> needs.
> When all this tons of Gold will flood the jewelry shops that are
> already empty and bankrupt, the only ones who will make money in
> GC will be pawn shops who buy GC 10% cheaper each time.
> Wait for more people flooding the pawn shops with their jewelry to
> buy bread, you will see what is real price of Gold which is nothing
> else but luxury asset that can only go up during booming global economy.
Buffet said it - don't invest in anything you don't understand.
The U.S. is on sale - look for the next market leaders and you will make much more than in gold.
If the rest of the free world was in better shape than us
As someone with a personal friend who runs his own mom & pop jewelry store I can state from firsthand knowledge that the real 'flood' of gold in jewelry stores is from people bringing in their old jewelry to sell. My friend is having one of his best years ever just from the spread he makes buying such gold. He has even sent a good portion of his old inventory off to melt for scrap at prices above those he paid for them at wholesale some time ago.
The amount of actual gold on display in jewelry stores is minimal these days. A few sample pieces mostly. If you want to buy a brand new piece of gold jewelry you will likely be ordering it for delivery through the jeweler. It ties up far too much capital to buy a lot of 'ready to go' pieces for a display case.
Good article and several good comments. Gold's recent price action would tend to indicate that it is gathering itself for another leg upward in price. It is having a difficult time trying to drop below the the 200 day moving average level and is holding comfortably above the 50 MA.
Looking at a post 1980 chart, almost impossible to gauge...
I have some..at the same time reluctant to own more..it has had
a 6+ year run...if stocks move higher than money is flowing in
that direction...hard to see inflation in real estate, gold, equities
for a couple of years at least...unless we go back to 30 times reserves
and derivatives and 0% financing...inflation will hit cost of living..
barring terrorism or total economic collapse of course..
On Jan 01 08:24 PM 1977°C wrote:
> Gold will crash to 200-300$ an ounce and I am sure it will never
> brake it's previous high of 1030$ which was driven by manic buying
> by investors under the influence of mass media, if GC would have
> any value long term, GC stocks would not crash between 50-95% in
> a matter of few months.
> In the times when countries and banks go bunkrupt and people lose
> jobs by millions, GC can not be supported much longer as investors
> will have to sell physical GC to buy food and pay for basis life
> needs.
> When all this tons of Gold will flood the jewelry shops that are
> already empty and bankrupt, the only ones who will make money in
> GC will be pawn shops who buy GC 10% cheaper each time.
> Wait for more people flooding the pawn shops with their jewelry to
> buy bread, you will see what is real price of Gold which is nothing
> else but luxury asset that can only go up during booming global economy.
brake it's previous high of 1030$ which was driven by manic buying.
Carpenter-True that will be the manipulated COMEX price. As for physical gold
that’s another story, a larger disconnection gap.
1977C-it's previous high of 1030$ which was driven by manic buying
by investors under the influence of mass media
Carpenter- The mass media? Gold is purposely kept out of the lime light especially
when on the rise.
1977C-In the times when countries and banks go bunkrupt and people lose
jobs by millions, GC can not be supported much longer as investors
will have to sell physical GC to buy food and pay for basis life
needs.
Carpenter- when banks go bankrupt not bankrupt people will have a lifeline to necessary staples using the only true currency gold. When banks collapse try putting gas into your
shinny new car using credit cards.
1977C-Gold which is nothing else but luxury asset that can only go up during booming global economy.
Carpenter- What planet do you live on! You don’t have to look far to contradict that quote.
brake it's previous high of 1030$ which was driven by manic buying.
Carpenter-True that will be the manipulated COMEX price. As for physical gold
that’s another story, a larger disconnection gap.
1977C-it's previous high of 1030$ which was driven by manic buying
by investors under the influence of mass media
Carpenter- The mass media? Gold is purposely kept out of the lime light especially
when on the rise.
1977C-In the times when countries and banks go bunkrupt and people lose
jobs by millions, GC can not be supported much longer as investors
will have to sell physical GC to buy food and pay for basis life
needs.
Carpenter- when banks go bankrupt not bankrupt people will have a lifeline to necessary staples using the only true currency gold. When banks collapse try putting gas into your
shinny new car using credit cards.
1977C-Gold which is nothing else but luxury asset that can only go up during booming global economy.
Carpenter- What planet do you live on! You don’t have to look far to contradict that quote.