Gold’s been acting fishy…
Gold is somewhat unique amongst investments in that it trades both in physical form—bullion, or the actual metal—and as an equity—the Gold ETF (GLD). The differences between the two forms of gold are striking:
| Gold ETF | Bullion |
| Extremely liquid | Far less liquid |
| Requires an online brokerage account | Requires an actual dealer |
| You own a % of a trust that owns actual gold | You own actual gold |
| Can be manipulated by traders | Cannot be manipulated by traders |
| Is an equity-based inflation hedge | Catastrophe insurance |
As you can see, gold trades in two very different forms. And the differences between the two investments go a long way towards explaining the massive discrepancy occurring between the “paper” and “physical” gold markets today.
Gold, as you may or may not know, recently violated its 65-week moving average: a metric that is widely used to measure whether or not an investment is in a bull market. The pundits, seeing this, announced that gold was in serious trouble. Of course, no one bothered to mention that much of the selling in gold was the result of overleveraged hedge funds and others unloading their “paper” gold positions when the dollar rally began.
And while “paper” demand for gold has plunged, “physical” demand, particularly for coins, has exploded upwards. In fact, demand has been so high that the US Mint announced it was temporarily suspending sales of American Gold Eagles, a popular bullion coin, due to shortages.
David Beahm, VP of Blanchard and Co, one of the largest US bullion dealers, told Reuters that both the American Eagle and American Buffalo one-ounce gold coins are completely sold out. "Nobody has the Eagles or the Buffalos right now. We bought 2,000 ounces late last week, and those were the last 2,000 ounces that we can find in the marketplace," said Beahm.
Beahm’s not the only one.
I called up my friend Parket Vogt at Camino Coins. Camino’s been dealing bullion for 50 years and Parker says he’s never seen anything like the action of the last week. “Graham, people are going nuts. I actually had to stop selling Krugerrands because premiums are too high. One guy actually called up and bought 500 ounces of gold in one order. That is the single largest sale I’ve had in my entire career.”
In light of this, it’s tempting to assume gold will explode back up to $1,000 in no time at all. However, from a historical perspective gold could also continue a gradual slide for another year. I’ll explain…
During the last major gold bull market—1971-80—gold first exploded upwards from $35 to $200 in 3.5 years. It then followed this performance with a 19-month correction during which time gold retraced 50% of its initial gains. It didn’t retest its $200 highs until 1978, eventually topping out at $850 in 1980.
If gold were to follow this same pattern today, this current correction—starting March 2008 with gold’s peak at $1,030—would last until the fall of 2009. So we could well see gold tread water for another year.
On the other hand, today’s market and the market of the ‘70s are very different. Today there are several potential financial crises that could light gold’s fuse: a major bank could go under, Fannie and Freddie could be nationalized, the market could crash, etc. Any one of these could push gold back up to $1,000 in a matter of weeks.
Because of this, I view this current pullback in gold as a buying opportunity. I realize I may not make money for a year. But I’m not looking to trade gold. I’m looking to own it. And the current financial climate is such that I wouldn’t be surprised to see gold back at $1,000 before the year’s end.
Hedge funds can mess around with moving averages all they like. Gold is still a great storehouse of value. And while paper gold has dropped, physical gold isn’t showing any signs of a let-up.
