Gold Price: How High, How Fast? 15 comments
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The breaking of the old record high price for gold Tuesday was no surprise to long-time critics of American, and thus global, financial policy. Regardless of how much spin you can generate from a compromised media, the laws of supply and demand re-assert themselves inevitably.
Will this bring the mainstream investor crowd any closer to the understanding that the gold standard is precisely that, and has not been diminished but merely obscured by the powerful marketing forces of the United States Treasury and her feckless sister, The United States Federal Reserve? Not likely. When anything -- be it stock, bond, currency or commodity -- reaches a new high, the impetus for selling into strength and taking profit off the table are enhanced dramatically. With gold’s new record high, there are plenty of holders of bullion who started acquiring it in the first years of the millennium who are now sitting on profit equivalent to three times the money. The question is: sell gold in exchange for what? Certainly trading gold for U.S. dollars is akin to forward selling gold at an incrementally lower price. Anyone smart enough to own gold since 2001 is unlikely to be so silly. Renmibi might seem like a good trade. The only problem with that is you can’t easily spend renmibi at Home Depot or Safeway or Nordstrom. No, there’s really no substitute for gold at this point in the global currency landscape. And so, the normally present impetus to sell and take profit has been castrated by the lack of anything else capable of retaining its value. Some consideration need now be devoted to the future price potential of gold. Gold began its bullish incline immediately following the dot com bust and, spurred again by the events of 9/11, has gained an average of $87 a year since then. Barring any real change in global fiscal policy, such as an end to the practice of over-leveraging asset bases and bastardizing currencies through sustained deficit spending, it is unlikely this pattern will ease. Since the United States has forced itself, and by extension, many of its allies, into what would appear to be decades of deficit spending, we can expect this average rate to continue, at a minimum, for the next ten years. That puts the gold price closer to $2,000 an ounce in ten years than to $1,000 an ounce. Those numbers also make the more outlandish predictions, such as $5,000 an ounce and, most improbable of them all, $10,000 an ounce, seem a little less ludicrous and maybe even likely. In the absence of anything of equal or greater ability to retain value, all of the holders of bullion have no incentive to sell. If anything, the reasons for acquiring gold in the first place are the very same reasons for hanging onto it. So the normal price suppression effect of profit taking is neutralized. The reasons for gold’s ascent is universally acknowledged to be the saturation of the global economy with exponentially titanic amounts of U.S. Dollars, which the American government now prints without purchasers of its debt. Indeed, the Federal Reserve, nominally the beneficiary of U.S. debt sales, is now a buyer. So not only has the dampening effect of profit taking been removed, but the fundamental drivers for the northward trajectory of gold’s ascent has been intensified during the last several years. We know beyond doubt that the mainstream investing public are like so many sheep, following the soiled derriere in front of their noses in the subconscious conviction that there is always greener grass just ahead. We are at the point now where even the alpha sheep leading this wayward flock through increasingly barren badlands is about to experience an epiphany. There is no green grass left. The only grass worth having is the golden straw they left behind in the manger. Upon their return, however, the now starving, homeless and hungry sheep will discover that all the gold has been spoken for, and if they want to survive they are going to have to pay dearly for a bale of golden straw. And, since the population of sheep far outnumber the population of crafty foxes who have been carefully and judiciously squirreling gold away for the last decade, the effect of this flood of demand is going to see gold blast through $2,000 with ease in much less than ten years. So where is the price of gold going? Much higher. How fast? At a minimum rate, it will increase by $87 a year in price, for at least the next ten years. At a maximum, the sky is literally the limit.
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This article has 15 comments:
As the Dollar continues in a free fall, $1500. gold & $35. silver should be a reality before the "ball" drops to begin 2010 with or without a geopolitical event. Please keep in mind the inflation adjusted price from the 1980 high of $850. gold is $2400., and $50. silver $140., so we still have a lot of "catching up" to do.
Silver and Gold are the only mid term (1-4 years) solution to the falling dollar and the hyperinflation that will DEFINITELY manifest itself during the remaining months of 2009 and continue through 2012.
Owning gold & silver is buying INSURANCE on your wealth. Insure it soon or lose it later.
We have legalized gambling in the USA...NASDAQ, NYSE, COMEX, etc. Holding a stock portfolio in this economic climate is riskier than casino gambling.
Gambling with discretionary money is OK as it is a form of entertainment. Gambling with your retirement fund and your family financial future is not a form of entertainment.
I'd like to add a plug from my blog today....
With COMEX shorts at near record highs, I expect we will soon have a new crop of gold buyers. I have been speculating for weeks that this could happen, as it's just too easy to short gold every time it becomes technically overbought. The shortsellers are now facing combined seasonal and cyclical strength in the gold market which overrides such technical factors as MACD and relative strength.
I expect that the savvy shorts will wait for a pullback from here to buy (that is, they're too smart to all buy at once), but now they will be gaming each other, so I'm not sure how many opportunities the shorts are going to have to buy back gold at much lower prices than we are seeing today. Those who wait for the dust to settle could end up holding the bag for larger losses. So who says that short-selling hurts the gold market? The short sellers - too smart for their own good at times - have become our new best friends!
Hmmm... Here's an interesting tidbit. It turns out the commercial shortsellers in gold are primarily US banks. According to Gene Arensberg, "Just three U.S. banks, the largest of the largest hedgers and short sellers, accounted for six-tenths of all the large commercial net short positioning on the COMEX. It doesn’t take a Harvard economics degree or a Goldman Sachs quant box to understand that the short side – the side which benefits if prices fall – is dominated by a very small, very powerful elite group of financial 'wizards' whose ability to manage risk is now highly questionable."
Let me add to Mr Arensberg's sage comments that a Harvard degree would probably be a disadvantage to a gold market investor at this particular moment in history.
My meditation for today: So, the folks who got trillions in government bailouts are now placing these taxpayer-donated funds on the short side of the gold market? Hey, I'm not complaining --- it's all helping me. But I certainly feel sorry for the US taxpayers who are now going to be absorbing the big US banks' large losses arising from their decision to crowd in like a flock of geese to short the COMEX gold market!
I would tend to agree that the impetus of the masses is now to buy gold and force its price into the stratosphere. However, there is one caveat that bears heeding. The banks and Fed have not played their hand yet. If and when they do, their massive resources will force the POG to drop like a rock. But I don't think they could do it twice and gold will recover to rise sharply again. The drop will afford us lemmings the opportunity to buy more gold.
The one troubling thing about gold, in my opinion, is the extreme difficulty of establishing a "fair market value" since an ingot of gold does no work and produces no current or future cash flow and the industrial needs are rather small. Its value is based mostly on how much paper currency someone will trade for it to put it in their vault and sit on it. That value is based partly on the current state of crisis and fear or lack thereof.
So, is gold at the current dollar price of $1040 overvalued by 50%, undervalued by 300% or fairly valued? Those of us owning gold hope that in 10 years an ounce of gold will buy at least as many loaves of bread as now regardless of the dollar's dilution. But is that true? We don't know because there is no quantitative measure of its current state of under or over valuation.
On Oct 06 11:45 PM The Recusant wrote:
> L.A. Igrok -- Gold is indeed another bubble, but some bubbles take
> years to burst and the alternative to not having gold in your portfolio
> as a capital preservation is to have only devalued paper dollars
> and IOUs. Which sounds better?
>
> I would tend to agree that the impetus of the masses is now to buy
> gold and force its price into the stratosphere. However, there is
> one caveat that bears heeding. The banks and Fed have not played
> their hand yet. If and when they do, their massive resources will
> force the POG to drop like a rock. But I don't think they could do
> it twice and gold will recover to rise sharply again. The drop will
> afford us lemmings the opportunity to buy more gold.
On Oct 07 12:28 AM Kevin_T wrote:
> Indeed gold is being pushed ever higher by dilution of the dollar
> and fear the dilution will continue to increase over time. Gold buyers
> hope it will be a stable refuge against currency Armageddon.
>
> The one troubling thing about gold, in my opinion, is the extreme
> difficulty of establishing a "fair market value" since an ingot of
> gold does no work and produces no current or future cash flow and
> the industrial needs are rather small. Its value is based mostly
> on how much paper currency someone will trade for it to put it in
> their vault and sit on it. That value is based partly on the current
> state of crisis and fear or lack thereof.
>
> So, is gold at the current dollar price of $1040 overvalued by 50%,
> undervalued by 300% or fairly valued? Those of us owning gold hope
> that in 10 years an ounce of gold will buy at least as many loaves
> of bread as now regardless of the dollar's dilution. But is that
> true? We don't know because there is no quantitative measure of its
> current state of under or over valuation.
My hunch is that its too late for that. A deflationary vortex will overwhelm the logic of fractional reserve banking.
"Gold appears to be making a blowoff similar to 1980. I think 1000 is probably the real value. I like productive stocks not pie in the sky."
Gold probably will go into a blowout high at some point years in the future. And I can't blame you for thinking like Warren Buffett and preferring something that is productive. But the law of supply and demand is the ruler of the investment markets.
When central bank-issued currencies cease to be in demand due to excess supply, the market offers no real alternative. You want something productive? Gold miners produce gold, and they have customers lining up for whatever they can dig out of the ground. Find me another industry with the same supply and demand metrics, and I'll have a good look at it.
Today, Gold $1000+. Gas $2.20, Milk $3.79, bread $2.49, fillet $16-22/lb and NY strip dinner about $50-55. without alcohol.
Exchange your gold/silver today for the worthless dollar and get a 2 1/2 times value over the past 9 years....silver about 3 1/2 times!
HOWEVER, I would not rush out to a local coin shop to sell NOW as by March of 2010, I can realistically see $1600. gold and $35. silver...and that is WITHOUT INFLATION!
If INFLATION rears her head, you may NEED GOLD & SILVER as gas could become $15-20/gal...if you could find it... bread & milk would triple even quintuple... because gas prices affect delivery, and so on............and you just might be in the group of 20% unemployed emptying out your foreclosed house or trying to pay the 35% interest rate on your credit card...but you WILL HAVE HEALTH CARE!
On Oct 07 04:53 PM Madcow2 wrote:
> Rising Gold assumes the central banks around the world will maintain
> control and that they will be able to stave off a deflationary "game
> over" with inflation.
>
> My hunch is that its too late for that. A deflationary vortex will
> overwhelm the logic of fractional reserve banking.
On Oct 07 10:25 PM Laurence Hunt wrote:
> To CLH, who said:
>
> "Gold appears to be making a blowoff similar to 1980. I think 1000
> is probably the real value. I like productive stocks not pie in the
> sky."
>
> Gold probably will go into a blowout high at some point years in
> the future. And I can't blame you for thinking like Warren Buffett
> and preferring something that is productive. But the law of supply
> and demand is the ruler of the investment markets.
>
> When central bank-issued currencies cease to be in demand due to
> excess supply, the market offers no real alternative. You want something
> productive? Gold miners produce gold, and they have customers lining
> up for whatever they can dig out of the ground. Find me another industry
> with the same supply and demand metrics, and I'll have a good look
> at it.