Gold Prices Are a Sign of Nothing

Jim Cramer said yesterday on "Stop Trading" that Gold Prices are a Sign of "Robust" Economic Growth.

I have several objections to this.

First: there are no signs of economic growth. Things are getting worse at a slower pace, that's all the recovery I see so far. Potential headwinds are strong, including the most dangerous, deflation, which is almost forgotten among the noise about the coming hyperinflation. I don't know when higher inflation is coming (I hope soon!), but so far we have deflation, plain and simple.

Second: gold is a security investment. Higher prices of gold mean that people are afraid of something so they buy the most reliable (from their point of view) form of money storage. Or maybe traders anticipate such behavior of people and try to front-run the trend.

Third: industrial demand for gold is a very small part of gold demand. Most of the gold is consumed as investment (hoarding) or as jewelry. And a significant part of gold which is counted as jewelry is actually bought as investment. Especially in Asia. But currently jewelry demand for gold is down, in some months it's negative (people sell more gold as scrap than buy). And the biggest importer of gold, India, reduced imports this year at least by 50%. Which means that the quoted price of gold is actually the price of futures and has little relation to the supply/demand of physical gold.

The growing price of gold means only one thing: there is a change in the supply/demand balance of gold futures. For investors not related to the gold trade, it means nothing.

Comments

[jrainspe:]

And the change in supply/demand ratio is based on chicken little's who believe Roubini starting to buy. With Roubini spouting his vitriol to half of the population who have an IQ of 100 or less, is there any surprise that demand is high?

Historically, the stock market has always, and I emphasize always leads the economy. While I'm not a tremendous fan of Cramer, his 4 part state of the economy is a vary rational and fact based analysis that appears to have validity and historical perspective on its side.

Sep 09 08:08 AM

[chap08:]

Wrong. Even for investors outside gold, it means something important. It means that those "dollar" things that you own are becoming less and less valuable.

This is not about the supply/demand of gold futures - it is about the dollar. If it's about gold, then tell me why gold is not breaking out against other currencies?

Sep 09 09:05 AM

[billyboy54:]

testing

Sep 09 10:30 AM

[NUCLEAR1929:]

there is no supply/demand in the futures, at least i never heared such meaning
gc is up because short sellers who know that gc is worth less than 1000, place their ask orders higher to uninformed investors who dont care about the price for what they bid, they want to buy, buy, buy at any price, short sellers meet this orders very happily rising their sell limits higher and higher
this is bull market for bears only, because they know how to shake all those buyers in seconds

Sep 09 10:37 AM

[Mad Hedge F...:]

tui. The precious metals markets were stunned with Barrick Gold’s (ABX) announcement that it will float a $3 billion public offering to retire its gold hedges in the futures markets. The means that the world’s largest producer is cashing in its downside production and gearing itself for a ballistic move up in the price of the barbaric relic. The timing of the announcement, the day that the yellow metal broke $1,000 for the first time since February couldn’t have been more auspicious. I have been a huge fan of Peter Munk’s ABX all year, cajoling readers into the stock at $27 in January before its 56% run (click here for report at www.madhedgefundtrader...) . South Africa’s largest gold miner, AngloGold Ashanti’s CEO Mark Cutifani says his company put its money where its mouth is, taking off its hedges some time ago. “People are doing what they have been doing for 5,000 years, and that is buying gold as the only hard currency,” opines Cutifani. In the meantime, the Street Tracks gold ETF (GLD) announced that it has $34 billion of gold holdings, making it the largest ETF of all, and the fifth largest owner of gold in the world after four central banks. If you want to buy gold bullion or coins for the tightest spread over spot, check out www.millenniummetals.net by clicking here.

Sep 09 10:59 AM

[Donald Ingram:]

Alex - Agreed. We have deflation at present that is growing in momentum. Stay tuned - inflation later. As for gold futures deciding the price of gold? No. The present price hike has to do with safe haven. The other (supposedly) safe haven, the USD is down against most all other currencies. So, gold is the answer to park your money when ill economic winds blow.
One thing for certain - the USD will no longer be viewed by the rest of the globe as a safe haven. The actions brought forward by the country to this point in time have sealed the USDs fate. By gold. Hold the physical.

Sep 09 11:15 AM

[Mayer Amsch...:]

Gold price is useful to measure long-term confidence, or lack thereof, in other investments.

Sep 09 02:27 PM

[The Geoffster:]

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense... that gold and economic freedom are inseparable.
-Alan Greenspan

Sep 09 03:49 PM

[Alex Filonov:]

Thanks everybody for comments. Some responses:

to Mayer A. : I'd agree that it's about confidence, but why price of gold changed little since last November? Stock market is up about 50%, that's looking like confidence, no?

to everybody who thinks that era of dollar is over: I'm old enough to remember similar talk in 1970s. Then it was Japan who is going to be new leader, now it's China. Nope. Economy is based on consumption, and USA is still consumer #1 in the world. Strangely enough, US residents are using dollars to buy stuff.

Sep 09 06:39 PM

[Mayer Amsch...:]

I said LONG-TERM confidence. The idea that the market is up yet gold remains high as well points to the idea that there are a lot of people that want to protect themselves. Gold has been creeping up slowly, meaning that there are a lot of holders and not a lot of buyers, which makes sense because we're not trying to get rich off gold, just preserve wealth. Gold is only gonna do well when and if really significant bad shit happens, so most of us only own a small amount as a hedge.

Sep 10 03:21 PM