Why Gold at $1,200/Ounce Is Likely 26 comments
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Gold’s correction continues and it has fallen for four days in a row now, but the long term fundamentals remain very sound.
Bargain hunters are likely to reemerge at these levels which should be supportive.
Gold remains up more than 7% so far this year (in dollar terms as per table and much more in euro and sterling) and continues to significantly outperform battered stock markets. With the global economy sinking into a deep recession and possibly even a depression this outperformance looks set to continue in the medium term.
Momentum and technical driven players with speculative short term horizons such as hedge funds are again pressurizing gold however the fundamentals of strong investment demand and anemic supply shall likely see gold well supported between $900/oz and $930/oz. A period of correction and consolidation was clearly needed and this will likely lead to gold targeting the $1,200/oz level in the coming weeks.
While jewellery demand has fallen and scrap supply has increased significantly in recent weeks, this is being negated by the hugely increased investment demand for gold coins, bars, certificates and ETFs. The increase in scrap supply is due to owners of jewellery selling in order to raise much needed cash. Ironically, it shows that there is no ‘mania’ for gold amongst the “man in the street” at the retail level. Quite the opposite, consumers internationally are selling their gold rather than buying.
Retail investors are clearly increasingly investing in gold as seen in gold coin shortages, rationing and rising premiums and in the surge in demand for certificates and ETFs. However, this increase has come from tiny levels and retail investment in gold remains tiny vis-à-vis investments in equity and bond markets. Also, the physical gold market is such a tiny market vis-à-vis equity, bond, currency and derivative markets that even small flows from these massively larger markets can result in outsize moves up in the gold price.
Importantly, one of the most important sources of gold supply In recent years (both in terms of volume and psychologically) has been central bank supply. This potential huge overhang in the market contributed to gold falling to massively undervalued levels in the late 1990s (Gordon Brown’s disastrous sales much of the UK’s gold reserves ironically marked the bottom of the market) and has contributed to gold’s very slow and orderly advance in recent years.
Gold has risen some 16% per annum or some 260% in the last 10 years. Without the large potential central bank supply, gold would have more likely replicated the performance of the 1970s when it rose from $35/oz to $850/oz in just 9 years for a return of some 2,400%.
With central banks becoming increasingly reluctant to part with their gold reserves and indeed some second and third tier central banks becoming buyers (notably the Russian Central Bank and the People’s Bank of China), gold prices look very fairly valued and have the potential to appreciate very significantly in the coming years.
Central banks are rightly concerned about financial, economic and systemic contagion. The German Bundesbank recently clearly stated how they view gold as a an essential monetary asset. “National gold reserves have a confidence and stability-building function for the single currency in a monetary union,” the Bundesbank said.
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Apparently it's held its value in Argentina and Zimbabwe.
Gold may be a dinosaur---but dinosaurs ruled the earth for a long time. In the end we may draw the conclusion that J.M Keynes was the "barbaric relic," not gold.
This implies gold's appeal is a mass-psychology fad, at bottom, with no solid backing. But gold does have backing: the willingness of a few traders (such as coin shops and pawn brokers and flea-market traders) in all bad-scene situations to hand over trade goods and currency in exchange for gold. If mass psychology trusts in a weakening currency more than in gold, that only encourages them, because they need pay out less when gold is traded in.
The willingness of these traders to back gold in turn makes amateurs willing to trade in gold as well, because they know they can exchange it for something of value if they have to.
"But watch out for a rise in interest rates, which makes all metalic monies less attractive. Just think what a non-traditional "tiny raise" in the rate, such as 5 or 10 basis points would do, ..."
What was the interest rate in Weimar Germany?
IOW, a rise in interest rates may indicate that long-term Treasuries are in a downtrend, because the currency is risky, which would make buying risky and/or unwise (because rates will get better yet, so why "lock them in" now?). A rise in rates might actually unsettle investors and encourage a shift to gold, by bond-holders who fear a decline in bond-prices or a rise in inflation.
Tremendous posts. Lots of good minds in high gear. A PLEASURE reading here. I note the absence of gold haters, thus far. Makes for choice reading. Keep it up folks...and buy physical silver and gold for your family's future.
Go America!
Btw, gold and gold stocks had done very well during the Depression era. Look it up.
On Feb 28 02:16 PM MarvinMBA wrote:
> The biblical commentary has always been "Do not put your faith in
> Gold" but I am assuming that putting your money in gold is something
> else. This could be the top of the market as hard assets/commodities
> get marked down as we unwind into Depression Statistics. We are looking
> into another bubble as gold (investing???) is bought into by the
> public. When stuff like this gets published with rationale to jump
> in, its time to jump out of this bubble in my opinion....MarvinMBA
What I am able to glean is that the worlds financial institutions cannot be restored, period. The credit freeze continues as a result of a mountain of contaminated assets where the size of the thing swamps federal monitization efforts. More bad is coming. The size, ultimately for the auto industry bailouts is in the hundreds of billions for instance and then now comes the Alt-A and other mortgages resetting this month, some 800 billion worth where estimates of default run as high as 70 percent.
So, treating the gold "investment" in classical analysis just doesn't hold up. Joe sixpac hasn't got the message yet as he worships the great Obama, the miracle worker, however, the chromium plated messiah is losing his shine rapidly. Things are going to get very much worse and soon.
On Feb 28 10:00 PM The Mad Hedge Fund Trader wrote:
> Bn Gf Panic buying of gold coins continues to overwhelm coins dealers
> around the world. According to the Financial Times, the US Mint sold
> 193,500 American eagles in the first seven weeks of this year, more
> than it sold in all of 2007 at prices 40% lower. Retail investors
> fleeing paper assets, like plummeting stocks and bonds, are paying
> 5% premiums over face values. The same phenomena is appearing in
> other countries were gold coins are available to the public. Does
> this have a toppy feel to it?
Superbowl ads, cash4gold parties, and Asian poor turning in gold for fiat continues the disgusting trend of focusing the world's wealth into fewer and fewer hands.
This will not end well.
Even at 1200$ (from where you crunch this numbers) most mining stocks will be down 35% from 2008 at best not so good a perfornance comparing to Nasdaq, but then who knows, maybe selling GC at a loss and buying Nasdaq maybe a contrarian bet against yourself.
On Mar 01 03:08 AM istartedi wrote:
> Let's say we divide the world into two classes--those who have gold
> and those who don't. What, praytell, would be the reason for those
> who have no gold to pay any particular heed to those who do? Nothing
> more than a social convention that says their gold is worth having.
> Absolutely nothing more. Nevertheless, this convention has been
> fairly durable, and is worth heeding for the same reason that any
> other mass market psychology is worth heeding.
>
> But watch out for a rise in interest rates, which makes all metalic
> monies less attractive. Just think what a non-traditional "tiny
> raise" in the rate, such as 5 or 10 basis points would do, with an
> announcement by the Fed that the bias would be towards raising.
> It wouldn't hurt the credit markets, because 5 or 10 bp won't make
> your payments that much more, but it would flush out a lot of money
> sitting on the sidelines, hurrying to lock in those rates, and it
> would devestate gold as people anticipated higher rates.
We have at least another year or three of this recession/depression to work through during which time gold will at least retain its value as compared to stocks which will fall another 50% from current levels. I'm not seeing any inflation on the horizon though which is what really drives gold upward. We are still in an extremely deflationary environment.