Global Liquidity Glut Bodes Well for Gold

Gold

Gold is currently trading at $1,048.10/oz. In euro and GBP terms, gold is trading at €703/oz and £640/oz. Support for gold is currently seen at $1,034/oz and resistance is at $1,054/oz. Gold took a much needed breather yesterday and fell some 1%.

The correction was much expected as gold had become overbought in the short term and profit taking, correction and consolidation is the natural order of things. Given the extent of the move up in the last three weeks ($70 or some 7% in 3 weeks), gold was due a correction and from a technical basis could be expected to fall back to previous resistance around the $1,030/oz level.

Physical demand in India was very robust yesterday with dealers and jewelers reporting very strong demand. Yesterday was Dhanteras, the most auspicious day in the year for buying gold, according to Indian tradition. This and the healthy premiums that gold has commanded in India recent days bodes well for the Diwali festival this Sunday and the rest of the Indian festival season (gold premiums in Vietnam are also very high). India has not been buying for some months now and dealers may be forced to stock up. This Indian demand is likely to put a strong floor under the market at $1,000/oz.

With the international monetary system itself being questioned and the dollar’s reserve status increasingly uncertain, any pullback looks likely to be short and shallow. It must be remembered that gold’s nominal record in 1980 of $850/oz was reached while interest rates were nearly double digits and global foreign exchange reserves were minuscule compared to today (some 14 times less - see charts from FT below). Today there is a huge global liquidity glut, zero percent interest rates and governments pursuing extremely expansionary fiscal policies. Yields on government bonds are being kept artificially low through government debt monetisation (printing money to buy their own bonds). This bodes very well for gold’s (and particularly for the much smaller silver market’s) continuing rise in the coming years.

Silver

Silver is trading at $17.30/oz. In euro and GBP terms silver is trading at €11.62/oz and £10.56/oz.

Platinum Group Metals

Platinum is trading at $1,339/oz while rhodium and palladium are trading at $1,700/oz and $318/oz respectively.

Disclosure: no positions.

Comments

[doubleguns:]

How much of that global foreign exchange reserves is our worth less but approaching worthless dollar.

Timmy and Ben are planning on adding to that pile with more bond/treasury sales which will continue to push gold skyward and dollars into oblivion.

Oct 16 09:18 AM

[Spartacuss:]

The liquidity glut only applies to the big players here. Joe six-pac is not able to borrow and thus his obligations are exceeding income and hopefully he is still employed.

You fail to mention that we are witnessing the biggest monetary extortion ever with the obvious result of runaway equities and I doubt not that the Fed is buying those too to create the image of prosperity.

And now we look at the coming defaults of commercial loans on top of a new and viscous wave of home mortgage defaults. Small businesses can't borrow, Joe can't borrow and job losses are continuing so if there is a glut it is a glut of hard times while the big banks are ponying up to the public trough...do you connect any dots here?

Oct 17 04:56 PM

[jumpingjoe:]

Global liquidity glut?

I just viewed a chart overlaying gold and global liquity. from 1978 gold followed global liquidity. I tried to duplicate the chart here unsuccessfully for your viewing pleasure. From early 2008 thru mid 2009 the global liquidity is depicted as PLUNGING from 30% highs to negative 7-8% lows. The dive encompasses the full range of the channel of highs and lows occurring during the charts date range.

My first question, is global liquidity a glut or is this chart correct in depicting a dramatic decrease in global liquidity?

My second question is there any reason to believe that gold will not continue it course of following the liquidity, in which case as the charted liquidity has plunged I would expect gold to also plunge.

Is gold breaking away from its correlation with global liquidity? and if so what would cause that? Perhaps an over blown or premature fear of inflationary reaction to massive bond sales from the U.S.? Bond sales is deflationary. Massive bond sales is massively deflationary in that borrowing money from the world removes available funds from the global liquidity supply.

However I think that monetizing those borrowings should cause increasing money supply and hence increasing global liquidity glut.

Is it possible that the gold global liquidity correlation is disconnecting simply because of the recognition that the massive bond sales must be monetized and more than likely sooner than later?

Oct 17 07:21 PM

[HA65MPH:]

SPARTACUSS , Good points .....the very worst is yet to come 2010 -2012 .....hold gold AND SILVER BULLION , in my humble opinion ...no etf`s ..or paper gold ...

Oct 17 11:52 PM