Gold's Shine

We have received a lot of feedback since we first published our gold report article “Why gold isn’t shining (yet…) on November 25, 2008. When we first published our report on gold, the yellow metal was trading at USD 744 and recommended buying gold as it was moving closer to USD 700.

We have seen a strong recovery since then and gold is currently trading around USD 900. In our November report we argued that the rather big selloff last year was caused by a weak U.S. dollar, a deflation of the commodity bubble and investors' need to generate cash. At this time, a lot of investors who purchased gold for security were disappointed and confused because they did not understand what was driving the gold price back then.

In our November report we gave readers an insight view of what was happening in the gold market: Quote Nov. 08 :

However, at the moment, the short-term impact of various factors is out-weighting the positive long-term fundamentals. The reason gold has not performed well in the last couple of months is because there has been massive selling from institutional investors who required liquidity. [This] gives some additional insight into the current crisis and shows how bad the situation is for many. Gold has really been left to be one of the very few assets that can be easily liquidated in order to generate cash. Also, the creativity of the financial industry has resulted in the development of a lot of commodity-linked investment funds. Typically, gold is among a basket of other hard- and soft-assets which are bought by these funds. These funds have all been facing a massive amount of redemptions which have forced fund managers to sell all commodity baskets they are invested in including their positions in gold. They could not differentiate between oil, agricultural commodities, metals and precious metals due to the investment baskets in such commodities, adding more selling pressure on gold.

We continue to experience a lot of demand for gold and have kept our portfolio allocations at almost 25%. We are seeing things that were unimaginable a year ago and are buying substantial amounts of physical gold bars for our clients, normally at their request. Some of them are then flying to Switzerland and visiting their bank in order to take physical delivery of the gold bars and coins just to lock them up in a private safe box. They want to make sure they get the “real” deal, not just some type of investment certificate which might be linked to the gold price, but has also significant counterparty risk.

James Bond’s opponent in the 1964 “Goldfinger” movie, played by the famous actor Gert Fröbe, said in the movie that he loves gold for its colour, its brilliance and its divine heaviness. In fact, humans have always been fascinated by gold. Today, investors have even more reasons to hold gold, besides the reasons quoted by Mister Goldfinger. However, we again stress the importance of proper asset protection, a theme that has developed into a truly “multidimensional” concept. Make sure that your gold investments are in fact backed by physical reserves, only then you get real value in terms of crisis.

We expect gold to trade between USD 820 and 930 for a while and eventually break-out through the USD 1’000 mark later this year.

click to enlarge

Comments

[SW Richmond:]

The gold battle isn't over. Another important factor for small gold investors is the ability to hold on to it through a forced liquidation. The smashing of gold's price late last year has been attributed to forced liquidation by hedge funds, selling 'good' assets to raise cash to stay alive. IMO small investors must remain aware of this possibility and maintain a cash position capable of defending their gold position. The scenario I fear most is a sustained deflationary period (forced liquidation) followed by high / hyperinflation. Were such a scenario to unfold, small investors could find themselves forced to sell their gold and raise cash in a last-ditch effort to meet other obligations, only to be hit afterwards with massive inflation / devaluation of fiat currencies once 'their' gold is in someone else's hands.

Strong hands are necessary to hold gold.

Feb 08 07:18 AM

[highlarche:]

I see gold at 1200 in 6 months. Jewelry demand is not the factor here it does'nt even come close to the thousands of people and other countries buying the metal.

Feb 08 08:53 AM

[yellowhoard:]

If the S&P goes to 400, what is everyone's forecast for gold?

Feb 08 09:46 AM

[Mike10613:]

Don't panic. I have gold on order. But I will buy next month. Then when the big boys run out we small investors can get an hedge against the hyper-inflation that is bound to come as currencies around the world are devalued. Remember, any currency that is not of Gold or silver is illegal in the great United States under it's constitution. Not that the constitutional rights of ordinary American's have ever mattered. It's the same here in the UK. Just try to stay one step of the stupid with the flare gun who may burn the place to the ground.

Feb 08 09:47 AM

[auto44:]

For an asset that has been sold massively in the deleveraging of hedgefunds and others, gold has been holding up pretty well. Especially if you compare it to other assets, oil, stocks, and etc. Seems to me gold has really been the only place to hide lately. Ever wonder why these very smart folks had so much gold to sell when deleveraging was required? I suspect it was because they thought a position in gold formed a very sturdy anchor to their portfolio. Even during deleveraging it served them better than the other assets that crashed during the same event.

Feb 08 12:59 PM

[silverwood:]

I would like to commend the author for a good article. He gives some good advice;

"We are seeing things that were unimaginable a year ago and are buying substantial amounts of physical gold bars for our clients, normally at their request. Some of them are then flying to Switzerland and visiting their bank in order to take physical delivery of the gold bars and coins just to lock them up in a private safe box. They want to make sure they get the “real” deal, not just some type of investment certificate which might be linked to the gold price, but has also significant counterparty risk."

I concur entirely and if you don't hold it (physical gold/silver) you don't really own it.

Also the author 's chart shows we are in a consolidation period from the 2008 high. Within the period we have witnessed a down trend maked by successive lower highs and lower lows. This has given way to new uptrend which has broken above the that down trend line. We are bumping up against resistance in the $920- $940 area. Once through that resistance zone and we will be rapidly challenging the old 2008 high. God speed I say!

Feb 08 03:01 PM

[ROLEX18:]

No question Gold goes to 500-600$ soon.

Feb 08 03:12 PM

[T.Stamps:]

Great article. It's golds time now. Always keep a little cash
available to buy more at price corrections. Gold, a great insurance
policy.

Feb 08 07:39 PM

[Deegan:]

I would like to get more gold, but it is getting more difficult to get. I have been sticking to gold and silver eagles since they are official US currency..

I do have orders in, but with delayed delivery of up to 3 weeks. I thought this might change after the 1st of the year, but it doesn't appear there has been any decrease in demand. I don't understand why the price doesn't increase more when the demand is so strong it is unavailable on the street.

Feb 08 11:07 PM

[mr freddo:]

Interesting Statistics:

Total Gold Ever MIned: 145,000 Tons / $4 trillion.
Total World Govt Gold Reserves: 30,000 Tons /$870 billion.
Total US Reserves: 8133 tons / $236 billion.
Total Gold Exchange Traded Funds 1039 tons / $30 billion.
Total Value World Stock Markets: $36 trillion
Total Value World Bond Markets: $45 trillion.
World Production of Gold 2007: 2400 tons / $70 billion
Q3 07 Identifiable Investment: 244 tons / $7 billion.
Q3 08 Identifiable Investment: 382 tons / $11 billion.
% increase q3 08 vs q3 07 = 56%.

If, as I believe is happening, gold is becoming a prudent hedge for the average investor, the pressure on gold prices could be fierce.

Feb 08 11:57 PM

[Conan the B...:]

Gold Mined in 2007=2400 tons, 2007 stats. Gold use for Jewelry, 60% of gold mined=1440 tons.

Factor in a worlwide Rec./Dep. and only a decline of only 50% of the jewelry demand, supply available increases by 720 tons or 30% without a single new mine.

2008 gold production curtailed by large power outages in South Africa (normal now). Demand increases due to Beijing Olympics and Obama commemoratives and the continued movement of Gold into ETFs. Only the ETF pressure remains since spot gold started trading below Futures last week. And continues in Asia this AM.

Obama Certified Silver commemorative ads are on the Tube.

ABX CEO comes onto Bloomberg and says they will produce 10% more gold in 09 then they did in 08. Harmony Gold CEO comes onto Bloomberg and says they will increase production by 75% by 2012, from 1.3 mil to 2.2 mil. oz annually.

A stable dollar and the removal of supply pressures will do a number on Gold, short term.

On the other side of this particular Gold Coin, MER and company are going to recommend it as an investment to whatever clients they have left when gold drops below $800.

Like Mr. Freddo says, "the pressure on gold prices could be fierce".

A little patience for now. IMO

Feb 09 05:48 AM

[Conan the B...:]

BTW, a possible explanation to last year's Saudi and Iran purchases of gold bullion, The DGXC, or the Dubai Gold Exchange increased their trading volume by 53% last year, they had a big increase in their inventories in the 4th qtr. of 2008.

They want to go global.

Feb 10 02:02 AM

[Conan the B...:]

Sorry, thats DGCX.

Feb 10 06:04 AM

[Daniel Zurb...:]

Thank you for your feedback, I appreciate your detail and qualified opinion. Gold has moved quite a bit since the article came out but I really think this is a much longer-term story. Best, Daniel


On Feb 08 07:18 AM SW Richmond wrote:

> The gold battle isn't over. Another important factor for small gold
> investors is the ability to hold on to it through a forced liquidation.
> The smashing of gold's price late last year has been attributed to
> forced liquidation by hedge funds, selling 'good' assets to raise
> cash to stay alive. IMO small investors must remain aware of this
> possibility and maintain a cash position capable of defending their
> gold position. The scenario I fear most is a sustained deflationary
> period (forced liquidation) followed by high / hyperinflation. Were
> such a scenario to unfold, small investors could find themselves
> forced to sell their gold and raise cash in a last-ditch effort to
> meet other obligations, only to be hit afterwards with massive inflation
> / devaluation of fiat currencies once 'their' gold is in someone
> else's hands.
>
> Strong hands are necessary to hold gold.

Feb 13 09:48 AM

[Daniel Zurb...:]

Thank you for your feedback, I appreciate it. It's really crucial, many investors don't realize the importance of holding "real" gold. Many still do have some type of investment certificate, which carries significant counterparty risk. Best, Daniel


On Feb 08 03:01 PM silverwood wrote:

> I would like to commend the author for a good article. He gives some
> good advice;
>
> "We are seeing things that were unimaginable a year ago and are buying
> substantial amounts of physical gold bars for our clients, normally
> at their request. Some of them are then flying to Switzerland and
> visiting their bank in order to take physical delivery of the gold
> bars and coins just to lock them up in a private safe box. They want
> to make sure they get the “real” deal, not just some type of investment
> certificate which might be linked to the gold price, but has also
> significant counterparty risk."
>
> I concur entirely and if you don't hold it (physical gold/silver)
> you don't really own it.
>
> Also the author 's chart shows we are in a consolidation period from
> the 2008 high. Within the period we have witnessed a down trend maked
> by successive lower highs and lower lows. This has given way to new
> uptrend which has broken above the that down trend line. We are bumping
> up against resistance in the $920- $940 area. Once through that resistance
> zone and we will be rapidly challenging the old 2008 high. God speed
> I say!

Feb 13 09:51 AM