Peak Gold: The New Paradigm

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 1^st 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.

Comments

[SW Richmond:]

www.bloomberg.com/apps...
"Central bank sales slumped 55 percent to 35 tons from 77 tons."

So much for "barbarous relic". Where the hell are the radical dollar bugs?

May 21 07:07 AM

[Barryyes:]

The investment demand created by ETFs is a game-changer for Gold and Silver. The spot prices for both are still too low, versus the physical, especially for Silver, which appears to be in shortage.

This is the last, best chance to buy Gold and Silver at reasonable prices before the fun really begins.

May 21 07:46 AM

[yellowhoard:]

There's no telling how high gold will go once we go parabolic. The intraday high could be twice what anyone is projecting.

May 21 08:12 AM

[sdavid0419:]

$5,000 an ounce for gold sounds awfully high but when compared to a $100 hot dog or $150 hamburger its just a reflection of hyperinflation as the dollar turns into the yen. The good news is that our governments plan all along was to inflate its way out of our current dillema. We will be better positioned to pay off our national debt with cheap inflated money.

May 21 08:14 AM

[alg:]

A major difference between oil and gold is this: A gallon of gas created a hundred years ago no longer exists. It is gone, vanished. An oz of gold created a hundred years ago most likely still exists. It may be diluted in 12 K jewelry but it is still recoverable. Oil is important because it is necessary to the functioning of civilization. Gold has no function. It may be desirable but it is not needed. Folks cannot decide that they don't need oil. They can decide that they don't need gold because, in fact, they do not need it.

May 21 08:45 AM

[fireball:]

gold has functioned as money for most of human history. silver has too.
both have uses in tech.
i'll keep my insurance since it is useless anyway. actually i'm building a bigger policy.
the function of the debt instruments called federal reserve notes (note as in debt) are what is becoming non-functional along with the rest of the fiat currencies. these pieces of paper allow banksters and politicians to control and steal from us. gold in the hand is private and you do not have to rely on a "promise" to pay.

May 21 09:08 AM

[Whippet:]

Alg- if you wake up tomorrow and learn that the dollar has ceased to exist, how much "money" do you have? What is "money" now?
You have been conditioned to believe that $$ = money. This was true up until 100 years ago, but it is not anymore. Dollars are currency, not money. Gold is money, not currency (currently). The time will return when currency is money again. I would argue it is already here. Opinions like this, held by the majority of Americans and Europeans, are why gold and silver are still cheap. True, you do not "need" it today. But your paper wealth can and will disappear in an instant. Paper has value because the gubmint created it, and said so. Gold has value because God gave us enough, but not too much.


On May 21 08:45 AM alg wrote:

> A major difference between oil and gold is this: A gallon of gas
> created a hundred years ago no longer exists. It is gone, vanished.
> An oz of gold created a hundred years ago most likely still exists.
> It may be diluted in 12 K jewelry but it is still recoverable. Oil
> is important because it is necessary to the functioning of civilization.
> Gold has no function. It may be desirable but it is not needed.
> Folks cannot decide that they don't need oil. They can decide that
> they don't need gold because, in fact, they do not need it.

May 21 09:21 AM

[SW Richmond:]

What you are failing to mention is that the people who export the oil are themselves showing signs of moving to a gold-based currency. This means if you wish to buy their oil you might need gold to do it.

Oil is a commodity. Gold is a currency. See?

On May 21 08:45 AM alg wrote:

> A major difference between oil and gold is this: A gallon of gas
> created a hundred years ago no longer exists. It is gone, vanished.
> An oz of gold created a hundred years ago most likely still exists.
> It may be diluted in 12 K jewelry but it is still recoverable. Oil
> is important because it is necessary to the functioning of civilization.
> Gold has no function. It may be desirable but it is not needed.
> Folks cannot decide that they don't need oil. They can decide that
> they don't need gold because, in fact, they do not need it.

May 21 09:26 AM

[Douglas T:]

Precious metals have been among the best performance sectors of the global market place for the last couple of months. According to your article this could very well continue for the near term. www.mutualfundwealth.com/

May 21 09:29 AM

[doubleguns:]

Whippet, ya nailed it.

May 21 09:36 AM

[Roger Knights:]

"If you are a player in the market, sitting with an illegal “short” position ... you must now be constantly fearful of your own annihilation."

The recent purchase of huge far-out-of-the-money (1200-1300) calls on gold may represent hedging by major shorts.

May 21 09:39 AM

[alg:]

Whippet

I am only concerned with what will happen in my lifetime, at most 30 more years. Gold has value because PEOPLE decided it did. There are many things more rare than gold. They can change their minds. You can say that the dollar might lose its value but you cannot say that it will lose its value. This is unknowable. As you say opinions like mine are why gold and silver are cheap. Exactly my point! The value of gold is what people decide it is. If the stock market bull returns GLD will be forced to sell large quantities as investors go back to stocks. Most of my stocks pay good dividends. My gold holdings depend strictly on the greater fool theory that there will always be someone wanting to pay more.

May 21 09:43 AM

[5142152-337:]

Thanks for the article, Jeff!
Boy oh boy, Brad Zigler isn't going to like this at all (smile)! I guess that's just too bad, right?

alg: Your rationale about gold is EXACTLY why SILVER will be flourishing mightily (with gold) very soon!

Jeff, as a holder of physical gold bullion, I have a concern I would like your views on: Gold confiscation. Obama is a "student" of FDR. As such, do you think that confiscation could become a reality? If so, would you consider swaping gold into silver a viable option to avoid confiscation?

May 21 09:53 AM

[Jeff Nielson:]

Thanks for the comments, everyone.

My understanding when FDR stole the gold of Americans is that this was done to 'repair' the gold standard at that time. With no gold standard today, there doesn't seem to be any obvious motive for the U.S. government to steal their gold again.

Alg's point that oil is consumed while gold isn't is a good one. However, this is balanced by the fact that unlike oil, there is no substitute for gold.

Yes, 5142152, silver is ALSO being "consumed" literally - depleting stockpiles. That's why I favor silver over gold slightly in my own investments.


On May 21 09:53 AM 5142152-337 wrote:

> Thanks for the article, Jeff!
> Boy oh boy, Brad Zigler isn't going to like this at all (smile)!
> I guess that's just too bad, right?
>
> alg: Your rationale about gold is EXACTLY why SILVER will be flourishing
> mightily (with gold) very soon!
>
> Jeff, as a holder of physical gold bullion, I have a concern I would
> like your views on: Gold confiscation. Obama is a "student" of
> FDR. As such, do you think that confiscation could become a reality?
> If so, would you consider swaping gold into silver a viable option
> to avoid confiscation?
>

May 21 10:11 AM

[Whippet:]

You are right, Alg. All asset values are determined by aggregate perceived notions of value. The question lies in what future monetary systems will be comprised of- gold may have no part in them at all, and you could be absolutely correct. The problem is that no monetary system is currently backed by any real assets, and this in my opinion cannot be sustained. People will no longer place the required faith in fiat currencies when the dollar ultimately collapses. Could a hard currency be backed by a basket of tellurium, rhodium, and nickel? Sure. But there are reasons why gold and silver have been favored as monetary metals for thousands of years- their inertness, scarceness, and ubiquity. While I agree that the Greater Fool theory may drive gold prices to a degree, at times, I am hard pressed to find many "gold bubbles" in recent times. (One could argue we are currently in one, of course.) This cannot be said for stocks, real estate, or even T-bills. Over the last decade, have there been more Greater Fools investing in gold or USD? We will see.

And if you are only concerned about the next 30 years, I would still argue that anything can change it that period of time. 2039 will look a lot different from today than 1979 does.

May 21 10:53 AM

[johnmorrison9:]

I am a bull on gold, and I never thought it would come to this.
Thanks Democrats!

May 21 11:29 AM

[fireball:]

jeff
perhaps a motive would be, "i'm from the government and i'm here to help you. you are not allowed to be independent of needing us. the help comes under these conditions. turn over your arms, your land, your surplus foods, all contraband."
command and control. the end goal is power. who wants a warehouse full of worthless fiat currencies?

May 21 12:15 PM

[dtblount:]

The difference between Peak Oil affecting oil prices and Peak Gold affecting gold prices is that oil is consumed (essentially destroyed by usage) and not able to be replaced. On the other hand, g is merely transformed, not consumed. With 70% of refined gold in the form of jewelry, rather than bullion, that percentage could shift drastically if gold prices were to rise rapidly...i.e., everyone I know would be selling off their jewelry, the jewelry would be refined into bullion, and sold to investors for a profit.

With oil, it is pulled out of the earth, refined, and consumed/destroyed. Demand for oil, on a long-term basis, is rising, while supply is shrinking.

I prefer being long of oil over gold any day for speculative long-term price appreciation based on a simple supply/demand relationship.

That being said, I also do not believe that all market participants act rationally. It makes no sense for humans to dig gold out of the earth, refine it, shape it, and stash it away in vaults...but people still do...and the price of gold rises and falls. Despite my obvious preference for being long of oil right now, I still hold some gold as a sort of "armageddon hedge."

May 21 01:58 PM

[kennypowers09:]

hmm whats more valuable...powering the world economy (oil) or making some jewlery (gold).

peak gold....hardly.

May 21 03:36 PM

[Jeff Nielson:]

An "utterly non-essential good", lol! That's a good one.

In the less than 40 years since greedy, reckless, and oh-so stupid bankers completely decoupled the global monetary system from gold, they have brought us to the brink of TOTAL MONETARY COLLAPSE.

This is due to totally unsustainable mountains of debt which could NEVER have been created with the self-imposed monetary discipline of a gold-standard.

The question is not "if" they can prevent their house of cards from collapsing, but only how long they can DELAY it.

Gold is not only "valuable", but unless we are going to revalue it somewhere up or above $10,000/oz, then the only way it would be sufficient when the idiot-bankers re-introduce the NEXT "gold standard" is if SILVER was also incorporated into that system.


On May 21 05:19 PM istartedi wrote:

> "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."
>
> The ability of Indians to stop buying gold just highlights the fact
> that it's an utterly non-essential good. Despite deeply ingrained
> cultural traditions, the Indian demand is quite elastic. Investment
> demand has more than taken up the slack; but since investing is all
> about making money as opposed to tradition, it should be even more
> elastic.
>
> When gold stops going up, it becomes even less attractive as an investment.
> It doesn't return anything. You have to sell it for a capital gain
> at some point in order to make a return.
>
> Comparing it to oil makes little sense. Gold is recyclable, oil
> isn't. Oil is used to power engines that provide economic return.
> Gold is just a luxury item.

May 21 06:19 PM