It's 'Hammer Time' for Gold

"Investors will drive the next leg of this bull market in gold," said Philip Klapwijk, chairman of GFMS, at the London-based research consultancy's Gold Survey launch in Canary Wharf on Tuesday, "setting a new high above $1,000 in 2009 and with a real possibility of $1,100 per ounce."

Anyone pitching for $1,100 in short order, however, might have their work cut out for them. And all thanks to MC Hammer.

We have seen people in Europe buying gold in quantities more typical of the Middle East and Asia...particularly in Germany and Switzerland," Klapwijk went on. Because "Inflation is the inevitable consequence of today's rapid money-supply growth and quantitative easing." All told, reckons GFMS, the monetary response to the financial crisis will prove "extremely powerful medicine for gold investment.

So far, so bullish. But why no new high, therefore, in the gold price already this year? Philip Klapwijk attributes gold's failure at $1,000 back in February to the "astounding" flow of scrap metal coming from cash-strapped consumers worldwide. And GFMS's raw numbers would suggest he's right.

Scrap supplies previously lagged both gold-mining output and central-bank sales by a wide margin each year. But recycled tonnage actually overtook new jewelry demand worldwide at the start of 2009 according to GFMS's analysis. That was after rising 27% in full-year 2008 to more than 1,200 tonnes.

Gold mining output, for comparison, came in at barely 2,500 tonnes, down yet again year-on-year despite the on-going rise in prices.

Come Q1 2009 and scrap supply surged further still, reaching above a massive 500 tonnes according to GFMS's research. New jewelry demand, in contrast, halved to just 420 tonnes, as traditional importers – such as former world No.2 Turkey – became gold exporters in a shocking about-turn.

One attendee at the GFMS presentation even thought they under-played it, putting the flow of scrap metal far higher – and dwarfing world mining output – at perhaps 1,000 tonnes during the first quarter alone. Absurd as that sounds, world No.1 importer India took in next-to-no new gold at all between Jan. and March as the Bombay Bullion Association has reported.

That's an event not seen since the Great Depression of the 1930s according to gold-market historian Timothy Green, also chipping into the Q&A at Tuesday's GFMS presentation.

Most crucially for the new dynamic of gold demand-and-supply, the industrialized West has seen high-margin operations led by Cash4Gold – whose advert during this year's Superbowl hardly needs spoofing, featuring as it did MC Hammer and former Tonight Show sidekick Ed MacMahon spoofing themselves – make selling gold much easier for cash-strapped consumers.

"I can get cash for this gold medallion of me wearing a gold medallion!" gasped the Hammer in Cash4Gold's typically gag-laden Superbowl slot. The airtime alone reputedly cost $3 million, so based on the scrap market's average mark-up of 40% – if not the 60% to 80% mark-ups reported in this "consumer crusade" against America's No.1 – you'd have to guess they brought in a chunk of change...as did everyone else touting for scrap metal as the Christmas heating bills came due between Jan. and March.

Hence the "roadblock", or so Klapwijk reckons, on gold breaking above $1,000 an ounce in late February. But we're not so sure here at BullionVault.

First, Cash4Gold's parent company, Albar Precious Metals, reports 775% growth for the last three years. So why the sudden impact on gold prices – an impact regularly dismissed in 2008 in favor of de-leveraged by crisis-hit hedge funds fleeing the futures and options market? More crucially, back in Feb. this year, gold still broke new all-time highs vs. the Euro, Sterling, Swiss Franc, Indian Rupee, Turkish Lira and pretty much everything else bar the Dollar and Yen. Which would suggest the failure at $1,000 was more currency-capped than supply-driven.

More critically still for gold-market analysts, how can we draw a line between "investment" and "jewelry" for those two billion Asians still without Main Street banks in which to keep their savings?

Either way, gold investors might still want to beware the Hammer. Because the only cap on Middle Eastern gold sales after the Jan. 1980 top, as Timothy Green recalled from his experience in Kuwait and Dubai, was the inability of jewelers to raise enough cash each day to buy all the scrap gold offered daily. Whereas Cash4Gold, the leading US scrap buyer, also runs its own refineries as well as collecting scrap metal by post and touting for metal online and on TV.

Looking ahead, an estimated 82,000 tonnes of gold exists as privately-owned jewelry worldwide, some 52% of the total above-ground supply. The vast bulk of recent tonnage has been added by emerging-market consumers, most often in the form of lumpy "investment jewelry" that carries little added-value from fabrication, but which can still lose 10-15% in dealing fees when it's sold to raise cash. So how much of the 2008 and early-09 supply represented forced sales by truly cash-strapped gold hoarders – and how much represented "easy scrap" sales? You know, the really ugly old-fashioned stuff inherited from maiden aunts that the owners never much cared for, similar to that "rabbit gold" buried by generations of Frenchmen fearing (yet another) German invasion but now dishoarded by their grandchildren each year.

In the same way the earth yields up "easy gold" to open-cast mines, before forcing miners to start digging...and digging...down as far as four and even five kilometers below the surface in South Africa, the world's former No.1 gold-mining nation...perhaps the emerging markets are now racing through their "easy scrap" gold. Or perhaps the decision to sell has already been tough, "spurred by losing your job, losing money in the stock market, bad luck, or just needing some extra cash for holiday spending," as Cash4Gold laments on its website.

On the other side of the trade, meantime, GFMS now expects "concentrated buying" on any price dip to $800-850 per ounce. Down there, the consultancy says, pent-up demand will surge while scrap sales fall sharply, just as we've seen right throughout this bull market to date, with Indian jewelry demand triggered at ever-higher dips in the price.

And as Philip Klapwijk noted in London on Tuesday, if it weren't for a surprise jump in gold-jewelry demand during the plunge to $700 an ounce and below in Oct. 2008, "it's undoubtable that gold would have fallen further...down to $650 or lower."

Everyone's got their "deal price" in short – that level at which they're either a buyer or seller, depending on where they last bought or sold. And also depending, of course, on their outlook for inflation from here.

Disclosure: Long physical gold, not GLD

Comments

[Chris B:]

The bottom line is, there are no reliable supply/demand predictors for gold. Who 6 months ago foresaw the flood of scrap sales? Who foresaw the rapid increase in mining production in response to high prices? Forget trying to predict supply & demand.

Gold prices are based on EXPECTATIONS for future inflation plus an element of media hype. It has virtually NO historical correlation with actual inflation rates, which is why prices went nowhere in the 90's, despite persistent 2-4% inflation. That's also why prices peaked in the early 80's when expectations for 10% inflation to continue indefinitely justified near-$1000 gold. That investment didn't work out so well when inflation somehow returned to 3%.

Based on past patterns, I'd say the gold market is again predicting 8-10% inflation 2-3 years from now. That's certainly not impossible, but keep in mind that no other part of the markets are making this prediction - not treasuries, not bonds, not TIPs, not equities, not currencies, not oil or any other commodity, and not real estate. The gold market is kind of a home for outlying opinions in that regard.

Apr 09 03:19 PM

[GMiki1:]

Yes, the gold advocates do have alternate opinions. In fact, they were predicting an economic collapse for a couple of years before the collapse occurred, and when no one else was. The reason gold advocates have such alternate economic views is that most follow Austrian economics and not the theories of Keynes. By the way, most follow the inflation statistics at Shadow Government Stats and not the federally published statistics. The view of inflation by gold analysts is much more radical than 8 to 10 percent in two to three years. And that's why we invest in gold.

Apr 09 03:59 PM

[huskerbob:]

More than an indicator of inflation, gold is a measure of confidence in paper money and the economy. Most were lulled into comfort by the performance of the economy after gold's peak, which became the greatest economic expansion in world history.
Now the blinders are off and people are forced to see that the economy has been built on a foundation of sand. Governments have not inspired confidence with their reactions. Gold is a an assurance of something with tangible value. Paper promises have lost the seeming solidity they had in the 90's.
Gold buyers fear inflation, but more so lack confidence in the management of our currency and the promises of the equities market.

Apr 09 06:10 PM

[CJJ:]

Okay so you have given reasons why people buy gold. Fine, no problem with that or the reasons.
However because people have these fears does not make them true.
Also gold holders never actually answer important questions like
If the fiat currencies actually failed, what value does gold retain? Minute quantities are worth a good bit of money. It would quite hard to split it up enough to match what it was worth.
It is also very probable that things like food would become much more valuable than gold and that would occur very quickly.
The only reason people pick gold is that it lasts. Well that would be great if A)We lived thousands of years ago or B)We all lived for thousands of years.

I have no problem that people invest in gold, actually it makes 100% sense for some portion of a diversified portfolio to have metals and commodities. But goldbugs should be just as afraid of a complete breakdown as everyone else. Perhaps goldbugs are just hoping for a really, really bad downturn. But that begs the next questions, wouldn't you do just as well or nearly as well if things kept on keeping on.

Fear has its place and time in the world, but a world based on fear is a disaster.



On Apr 09 06:10 PM huskerbob wrote:

> More than an indicator of inflation, gold is a measure of confidence
> in paper money and the economy. Most were lulled into comfort by
> the performance of the economy after gold's peak, which became the
> greatest economic expansion in world history.
> Now the blinders are off and people are forced to see that the economy
> has been built on a foundation of sand. Governments have not inspired
> confidence with their reactions. Gold is a an assurance of something
> with tangible value. Paper promises have lost the seeming solidity
> they had in the 90's.
> Gold buyers fear inflation, but more so lack confidence in the management
> of our currency and the promises of the equities market.

Apr 09 07:35 PM

[CJJ:]

Whoa, so now gold advocates as a whole predicted the economic downturn. How broad are your strokes? How big is your canvas?

Jesus?

On Apr 09 03:59 PM GMiki1 wrote:

> Yes, the gold advocates do have alternate opinions. In fact, they
> were predicting an economic collapse for a couple of years before
> the collapse occurred, and when no one else was. The reason gold
> advocates have such alternate economic views is that most follow
> Austrian economics and not the theories of Keynes. By the way, most
> follow the inflation statistics at Shadow Government Stats and not
> the federally published statistics. The view of inflation by gold
> analysts is much more radical than 8 to 10 percent in two to three
> years. And that's why we invest in gold.

Apr 09 07:37 PM

[CJJ:]

Forgot all about your shadowstats comments. Shadowstats has always had inflated stats compared to the Government. Like right now it says we are still at a moderate inflation.
Its unemployment numbers are off the chart. Which is my biggest beef with shadowstats. For a "contrarian" type site that is supposed to think outside the box it seems convienient that Shadowstats believes everyone is "underemployed" that claims to be. And that it really believes that all unemployed people are actually trying day and night to get jobs. And the BIGGEST thing it just ignores is the under the table economy, which could be 4-10% of the overall economy.
Hey, if you're going to tout such a "special" site at least understand that it is designed to paint a dire picture. Maybe it should be called "ItsAllAConspiracyStat...


On Apr 09 03:59 PM GMiki1 wrote:

> Yes, the gold advocates do have alternate opinions. In fact, they
> were predicting an economic collapse for a couple of years before
> the collapse occurred, and when no one else was. The reason gold
> advocates have such alternate economic views is that most follow
> Austrian economics and not the theories of Keynes. By the way, most
> follow the inflation statistics at Shadow Government Stats and not
> the federally published statistics. The view of inflation by gold
> analysts is much more radical than 8 to 10 percent in two to three
> years. And that's why we invest in gold.

Apr 09 07:42 PM

[daveddawg:]

This recycling of gold has been very interesting, and it raises several questions.

1. Is the whole thing just an arbitrage between the lower scrap price and the higher refined price? Or

2. Is it a market/guv way of nicely calling in gold? i.e. We get your gold for some funny money. Since it takes some pretty serious money to get Superbowl ads, who puts that money up? I have read that these mail-in companies hose the sellers badly. Recently, local gold buying events have been much fairer to the seller.

Certainly, buying scrap is cheaper and more sure than mining gold.

Like one poster somewhere said, pretty soon, only the rich people will wear gold.

Apr 09 09:24 PM

[huskerbob:]

CJJ: Where do you get the idea that gold investors are all expecting the apocalypse? Do you judge all of your investments by "how easily can I exchange this for food if there is a complete breakdown of society"? Your questions are not answered because they're not important to gold investors. Why would I ever trade gold for groceries? Do you expect to trade shares of GM for groceries?
The appeal is that gold will always be worth something. I simply expect (as do most gold investors) to trade gold for fiat which I can use for other things. When I see that gold is very high relative to the price of something I want, I will sell gold and pay for that item in currency. Currency is a medium of exchange which varies in value according to politics, policy, debt, wars, etc.
Money is a store of value. Gold is money. I'm not worried about the apocalypse, I want sound money and the dollar ain't it.
Maybe I should ask you: "Do you expect to exchange those $2 for a gallon of gas in 10 years?"
You mention gold lasts. When was the last time you heard someone say "the almighty dollar"? I don't mean sarcastically.

Apr 10 02:16 AM

[optionsgirl:]

Wow, your suggestion #2 is uber devious! That possibility never occurred to me- what a smart way it would be for a govt to remove gold from the general populace- first manipulate the economy, strip the middle class of their wealth, and, people will sell their gold to try to meet their financial obligations- at a discount. Trade in gold for fiat. The populace never sees what hits 'em! At the same time, the govt offers to take care of citizens needs, to spread the wealth, whittling away at our right to own property in the name of a "greater good" and a socialist agenda. Wouldn't that make a great novel? Maybe not, maybe this book would be in the non-fiction aisle!


On Apr 09 09:24 PM daveddawg wrote:

> This recycling of gold has been very interesting, and it raises several
> questions.
>
> 1. Is the whole thing just an arbitrage between the lower scrap price
> and the higher refined price? Or
>
> 2. Is it a market/guv way of nicely calling in gold? i.e. We get
> your gold for some funny money. Since it takes some pretty serious
> money to get Superbowl ads, who puts that money up? I have read that
> these mail-in companies hose the sellers badly. Recently, local gold
> buying events have been much fairer to the seller.
>
> Certainly, buying scrap is cheaper and more sure than mining gold.
>
>
> Like one poster somewhere said, pretty soon, only the rich people
> will wear gold.
>
>
>
>

Apr 10 10:39 AM

[traderstraffic:]

It is not, Supply and Demand, it is not, all the scrap coming in to the market, it is not the, wedding season, it is not the devalue of the Dollar or any other Fiat Money, it is not any of these that drive the Gold and Silver markets. The one and only thing that drives the Gold and Silver Market are The Outright Manipulation controlled by the Banks, IMF, or any of the other people with initials as there name. I still keep some around, it is very nice to have, look at it like art work.

Apr 10 11:53 AM

[capt Brian:]

It's late, and I have tried to read all the comments and some are fine, some are too fine, and some not so fine, but all fine.

My comment on gold is simple. Pick up a copy of economics 101, learn about supply and demand. Learn about profit and loss, and a simple balance sheet, and ask yourself, if our government is running proper course for our ship of state, or is a storm coming and are you prepared.

I am putting in guns, ammo, food, precious metals, and for the rest of it, I am running as usual, working, playing, thinking... but for sure, there is a storm coming. Just how bad, not sure, but I am pulling down all unnecessary canvas, slowing ship, putting out a sea anchor and getting ready. If I am wrong, I have some metal that has value, and some good K-rations for a lot of picknicks... hoping for the best, preparing for the worst, and the unexpected. I suggest you do the same, and any extra money, trade it in for platinum....for the future, and silver for the near term good luck

Apr 11 11:23 PM