Peak Gold: The New Paradigm

 |  About: SPDR Gold Trust ETF (GLD)
by: Jeff Nielson

By now, almost everyone is familiar with the concept of “peak oil”. This notion, which has been accepted as fact by many, has two components to it.

First of all, we have new supply fundamentals which demonstrate conclusively that any increases in supply cannot be maintained due to the permanent inability of the petroleum industry to find and develop new sources for crude as fast as current reserves are depleted.

The second component of the “peak oil” model is a demand “curve” which projects large increases in demand which are totally above the upper parameters of supply. In other words, barring some currently unforeseeable miracle, we will be forced (through dramatically rising prices) to curb our demand – or else we will “fuel” (pardon the pun) even more extreme prices.

More recently, some “gold bugs” have been quietly discussing their own paradigm for the future: “peak gold”. The first component of this model already equates to the current realities of the oil market: global gold producers are unable to increase supply – despite a greater than tripling of the price of gold this decade.

The only country which has been able to substantially increase production is China. If not for dramatic increases in Chinese gold mining, global production would be inching lower despite a tripling of the price. However, as we have also recently discovered, the Chinese government has no inclination to share this increased production with the rest of the world (see “China now has 5th largest gold reserves”).

Today, thanks to the World Gold Council, we have now been provided with the second component necessary to make the case for “peak gold”: soaring demand. The WGC just reported that 1st quarter demand for gold has risen by a stunning 38%.

As I stated in a recent commentary (“Gold demand now driven by investment...PERIOD!”), this rising demand has come entirely through investment demand, and more particularly retail investment demand – which exploded upward by nearly 400% in 2008.

A further indication of this new paradigm for the global gold market is that this HUGE increase in demand came without any support from the Indian gold market, which historically had always been the largest and most important market for gold. Indian gold imports were virtually non-existent in the first quarter, thanks to large domestic supplies of “scrap”. Along with other factors, this has led me to speculate that India has ceased to be a driver of the global gold market (see “Is India now IRRELEVANT to the gold market?”).

Clearly, when the world's largest consumer can STOP buying gold, and yet demand has still skyrocketed by 38%, this alone is a powerful argument that the gold market will start behaving much more like the oil market: specifically, it will become much more susceptible to powerful “spikes” in the price any/every time some gold-bullish news reaches the markets.

This in turn, suggests yet more new trends in the gold market. Traditionally, Indian gold-buyers have been patient and savvy: able to do the majority of their buying when troughs in the price of gold occur. Suddenly, there is no guarantee there will EVER be another “trough” in the price of gold – at least nothing below the current, grossly-manipulated price. Now, with their deep cultural attachment to gold, and their own supplies depleted, they may be forced to "chase" the price of gold higher - in order to meet domestic needs.

And speaking of “manipulation" these new demand numbers also strongly suggest a new paradigm of behavior for the anti-gold cabal of bankers. Specifically, we are likely to observe genuine fear in their behavior.

If you are a player in the market, sitting with an illegal “short” position – many times larger than anything every witnessed in any other commodity market – and you now realize that the commodity you are “shorting” is prone to huge, upward gyrations in price, you must now be constantly fearful of your own annihilation.

Keep in mind that when the position of the manipulators was much stronger earlier this decade, the best they could do was to hold back the price of gold to slightly less than a quadrupling of the price. With their reserves of bullion seriously depleted, and record-demand now eating up supply sources in a ravenous manner, a logical projection of the price of gold over the next decade now obviously points to a four-digit price at or approaching $5000/oz.

If the price of gold could quadruple when the manipulators were “strong”, then a quintupling of the price – now that they are “weak” - is not unreasonable in any sense.

Peak gold” is here. Those who have sat on the sidelines until now, paralyzed by the anti-gold propaganda of the Manipulators have one, last opportunity to purchase cheap gold: right now.