Is Gold the New Currency?

Gold gets more than its share of attention when prices are rising. This is particularly true when key technical levels are in sight or being breached, as well as psychological barriers like US$1000 per ounce that was broken recently. But with spot gold now heading toward US$900, the latest decline warrants some analysis too.

Each of the past two declines in November and January were limited to 10% before the uptrend resumed, according to Ashraf Laidi, chief market strategist at CMC Markets in London. He noted that since November, gold did not fall below its 50-day moving average.

Meanwhile, Mr. Laidi told clients that the latest retreat remains within the upward trend, suggesting support is holding at US$890. He added that only a breach below US$887-888 will cast serious doubt on the current bull run.

“If there’s one singular reason gold is unlikely to repeat the October selloff is that today central banks are either at or on their way to quantitative easing (Fed, BoE, BoJ & BoC), followed closely by the SNB,” the strategist said.

A number of factors have contributed to gold’s decline in the past week or so, according to Jeffrey Nichols, managing director American Precious Metals Advisors and NicholsOnGold.com. The market has had to absorb a large amount of old scrap as record high prices in local currencies around the world – along with falling income and rising unemployment – has prompted many people to cash in their old gold jewelry.

“The combination of rising prices, growing secondary supplies, and surging investment buying created a simply unstable and unsustainable situation as higher prices attracted ever-greater volumes of scrap to be absorbed by investors,” Mr. Nichols said in a report on Tuesday. “Only an ever-increasing volume of investor purchases could keep prices near US$1000 an ounce. As investor buying relaxed, prices just had to come down.”

When gold stalled above the quadruple-digit mark on Feb. 20, the short-term technical picture appeared to turn bearish – selling begot more selling. Mr. Nichols sees good support between US$900 and US$910 per ounce, but said a breach below this level could take prices down to US$850 “in a wink.”

“It’s important for gold-market participants to remember that long-term trends are always rational but short-term volatility is often emotional and sometimes just meaningless noise,” he added. “Although we remain bullish for the long-term and foresee more than a doubling of the gold price in the next few years, the immediate picture is less rosy... and the yellow metal remains vulnerable to further short-term selling.”

Mr. Nichols also noted that a pop in the greenback could knock gold down further if anticipated rate cuts from the European Central Bank this week are not already fully reflected in financial and currency markets.

Since China’s trillion dollar cash hoard is largely made up of U.S. Treasuries, John Ing, CEO of Maison Placements Canada, suggested it could protect its reserve position by buying gold with some of its U.S. dollars.

“Gold is denominated in dollars and such purchases would protect China against a declining dollar,” he said.

Mr. Ing also thinks President Obama will be good for gold but bad for the greenback as he “inflates the costs of debt away.”
“We continue to believe gold is the antidote to our problems,” he said in a recent report. “Gold will continue to rise in value as long as the United States keeps printing more money than the economy can use.”

Calling gold the new currency and predicting prices will hit US$2000 in 2009, Mr. Ing suggested that with the U.S. holding 261 million ounces of gold, the Federal Reserve could issue gold-backed debentures as a means to create liquidity and trust in its troubled financial system.

Comments

[slias marner]

mr ing suggetst that the us has 261 million ounces of gold at fort knox i presume. would you care to bet that the 261 million ounces are not there? why has there been no accounting of the amount and where is the missing gold? silas marner would know the answer.

2009 Mar 04 06:05 PM

[GMiki1]

Silas Marner was severely nearsighted---close to blind. But that's neither here nor there. Gold is--gold. It's good. It doesn't go to zero. It does let you sleep at night. Ft. Knox? Let's have an audit.

2009 Mar 04 06:48 PM

[Sakata]

Back in late January/early February I told a friend that it would not surprise me to see $820 gold and $11.50 silver in the next few months. At the time both were somewhat higher. They both went up and I bought more at prices above today's prices. I still believe that $820 and $11.50 are possible.

So why am I still buying? Firstly, I think it possible, but not definite. Secondly, does it really matter if I pay a little more now? I don't think so, because in the long run I am going to make money whatever price I get in at now. Especially in silver.

Thinking of waiting for the price to drop 5% is a traders mentality and I am into precious metals for the long haul and have no intention of buying and selling for small potential profits (and larger potential losses if I am wrong).

2009 Mar 04 07:18 PM

[lapper]

Yes the last audit of fort knox confirmed the 261 mln oz of gold there. oops I forgot no independent audit of gold holdings was ever allowed. They still guard the place, so it all must be there right? Not like US gov't ever lied about anything...

2009 Mar 04 09:48 PM

[Conan the Barbarian]

Sakata: you are talking about the Metal itself, yes?

You are correct, $800 gold, so what. You keep it because Gold will not self-destruct.

It is a big deal for traders though and for buying Gold Miners which move disproportionate to the price of gold.

I would love to see Gold down another 5-6%, because stocks like AUY, EGO and KGC will probably be down 15-20% or more. And then there is UGL.

The physical metal will go up again but the shares of the above will appreciate more on a % age basis and UGL will appreciate twice as much. IMO

2009 Mar 05 01:13 AM

[JudeJin]

the correction of the gold miners are probably over. they're valued at $750 gold at current prices anyway.

load up the gold miners as the gold corrects.

2009 Mar 05 03:40 AM

[Beach Bubba]

Loving junior gold stocks is like trying to go steady with a Russian prostitute....Lots of luck, but there are those moments when "she luffs you very much".

Major PM producers will move in and keep house for you......for awhile.

.999 fine bars and coins will stay with you forever, and continuely amaze you with their brilliance and integrity.

disclosure...I am experienced in all of the above.

2009 Mar 05 07:23 AM

[Conan the Barbarian]

Judejin: Any in particular or just in general?

Beach: Not only that, but you can line them up on the Mantle anytime you wish and set the room ablaze.

a question on your "disclosure", All of the above?

I am pretty sure I'm mispelling this...Chorte E Ezniate?

2009 Mar 05 08:24 AM

[Vuke]

Gold is central banks "currency of last resort" and is being carefully managed to higher prices to balance (or correct) currency panics or defaults. Holding it is not only good insurance but also a moderately good investment over time.

An excellent book on the subject is Kindleberger's "Manias, Panics and Crashes", which traces central bank thinking from its inception. Basically, they're all gold bugs at heart but have to pretend to be otherwise in order to sustain public faith in paper.

It's a grand game to watch, and fun to play. Fears of collapse are everywhere, blown up by the internet and TV, but fundamental imbalances have to be corrected. The gold price vs. currency will lead the way over the next few years but do keep in mind they'll want their gold back and will pay for it in their paper. What they will pay will be up to the holder.

2009 Mar 05 08:31 AM

[SW Richmond]

"“If there’s one singular reason gold is unlikely to repeat the October selloff is that today central banks are either at or on their way to quantitative easing (Fed, BoE, BoJ & BoC), followed closely by the SNB,” the strategist said."


Those "wacky" goldbugs predicted this years ago. In fact, they're the only ones who did predict it, loudly, to anyone who would listen. Their (our) only flaw is that they've (we've) seen it inevitably coming for so long that some of them (us) continue to predict currency crashes in the short term. Don't fault us for this; when you know in your heart what is coming, once you see it begin then it's only natural to predict what happens next.

Fiat currencies go "poof". Always have, always will. Traders can push gold up and down all they like. Strong hands hang on tight. As gold climbs, higher prices coupled with lost jobs will translate into forced liquidation / secondary market supplies. Ultimately, this will slow down the movement but it cannot stop it. The gold market is so very small, when a few percent of the world's money decides to move into the safety of gold, you'll be hard pressed to find any. Maybe years, maybe sooner. Don't get caught offside, a fast-moving "event" is not impossible.

DYODD

2009 Mar 05 08:36 AM

[JackDoitCrawford]

Can anybody think of a better way for Obama to destroy the country than to sell the gold in Ft. Knox? At first, the price would dip low and then people would catch on and it would go very high. Dividing the quantity of money (M2) by the quantity of gold (261m oz) gives $31500/oz. It would be interesting to do this worldwide, but I haven't the time.

2009 Mar 05 09:36 AM

[5142152-337]

Whew, another article giving the gold haters ammo to moan and groan. SWRichmond has it right (as usual).

Just keep buying PMs (physical), period. UNLESS OF COURSE YOU BELIEVE OBAMA WILL FIX EVERYTHING! HAHAHAHAHAHAHAHAHAHHA

2009 Mar 05 10:02 AM

[Where's Me Gold?]

Reminds me of the old joke about Pres. Eisenhower visiting Ft. Knox and asking to see the gold reserves. The guard tells Eisenhower, "I'm sorry Mr. President, you can't see the gold." Eisenhower: "What do you mean I can't see the gold? I'm the President of the United States." Guard: "Well . . . Mr. President . . . there is no gold." Eisenhower: "In that case, double the guard!"

2009 Mar 05 11:49 AM

[Conan the Barbarian]

Where's: love it, probably true about doubling the guard.

The "devil only knows" is what I was trying to spell in Russian above but Cyrillic writing is not exactly my forte. Not even close.

2009 Mar 05 12:36 PM

[Mad Hedge Fund Trader]

A lot of people are buying into this. Howard Ruff is the irascible Mormon publisher of Ruff Times (www.cyrusfirst.com/gue...), which after 32 years is one of the oldest investment letters in the business, and one of the original worshipers of hard assets. He says that any investment denominated in dollars is a mistake, which is in a long term down trend. Silver is his first choice, which will outperform gold, and eventually top $50 from the current $12.50. Equities may never come back from their current slide. Don’t buy ETF’s because they may not actually buy the gold or silver they claim. The government is laying the foundation for a massive inflation which will begin in 6-12 months. You can’t say this guy isn’t entertaining.

2009 Mar 05 01:18 PM

[Conan the Barbarian]

That he is Mad, I subscribe to his Letter "RuffTimes".

He hasn't changed BTW.

2009 Mar 05 04:29 PM

[5142152-337]

What is in Fort Knox? Aliens and associated hard/software. Disprove it! If we had gold the manipulators would be running the price into the stratosphere!

All you have to do is look at Nancy Pelosi. If she's not an alien, I will give you a shiny buffalo!

2009 Mar 05 06:18 PM

[plumstupid]

The country has already been destroyed. That destruction began in earnest on 20JAN1981.

Does one really believe there is 261m oz in Ft. Knox?

I've got a bridge I'll sell you. No checks, bonds, shares, IOU's or cash. Gold bullion only.


On Mar 05 09:36 AM JackDoitCrawford wrote:

> Can anybody think of a better way for Obama to destroy the country
> than to sell the gold in Ft. Knox? At first, the price would dip
> low and then people would catch on and it would go very high. Dividing
> the quantity of money (M2) by the quantity of gold (261m oz) gives
> $31500/oz. It would be interesting to do this worldwide, but I haven't
> the time.

2009 Mar 06 06:09 AM

[5142152-337]

All right, I apologize (for the alien comment). I lost it for a moment, but I'm back. Now, will somebody..ANYBODY...te... me not only that there IS gold in Ft.Knox, but HOW MUCH gold is there. No audit has been conducted since 1952 or 1953?????

2009 Mar 06 07:36 AM

[5142152-337]

tell, not te. Sorry.

2009 Mar 06 07:37 AM