Gold Is Set to Regain Its Shine

Gold is all set to regain its shine in the upcoming quarter. At the same time, it will put an end to the skeptical notions of investors regarding gold as a safe haven commodity for investments. At present, the world has been tempted by the current rally of the US dollar, but the reason behind it is not genuine; rather it seems a race for the worst, and rival currencies are not performing well. The US dollar's recent gains are exorbitant and manipulated. Investors can see at least 38% retracement of the current dollar rally, which will help gold get its upward momentum.

The US dollar index is showing bearish signals and a short term correction is inevitable. The dollar has received a fair amount of gains in a relatively short period of time, and therefore, as a repercussion, retracement is bound to occur sooner or later. The US has recorded 3.30% annual growth rate in the second quarter of 2008, but this was led by an increase in net exports, which were cheaper due to the weakened dollar during same period. Several currencies hit high levels, with the Euro above $1.60 and the GBP above $2.00, and this made imports of US goods cheap for emerging markets as well as for the Euro zone.

The University of Michigan's Consumer Sentiment Index was 73.10 versus the expected 64, but it was corroborated by a tax rebate announced by the federal government. By this time, all rebates were expected to be spent on oil-led, inflation-clobbered Americans. The US July trade deficit increased significantly to $62.20 against the $58 billion expected and jobless claims increased to 445,000 on the week ended September 12.

The status quo does not bode well for the US economy in the near term as it does for the US Dollar. Once the King dollar knocks on the doors of the bears, the funds will start moving towards emerging markets, which will lead a positive revolution in financial and commodity markets across the world. The most awaited investment will be in gold, the safe haven commodity, which is ready to bounce after embracing a 38% retracement of the secular eight year bull run - i.e. it is corrected to 38% of its $1033 magic figure, the highest level ever achieved.

At present, gold is facing fundamental turbulence due to demand and supply mismatch in the precious metal markets. The cost of mining has increased noticeably in recent years, thanks to the northward journey of wage inflation and costly mining technologies.

The golden trio (Barrick Gold Corp (ABX), South Africa's AngloGold Ashanti (AU) and Newmont Mining Corp (NEM)), the world's top three gold miners, are confident about good fate of the safe haven commodity. Davidson, a top official at Denver Gold Forum, said “he expected gold supply to fall off year over year, and demand is very strong from India, China, the Middle East and Turkey. We continue to see weakness in the U.S. dollar over the long term, and negative real interest rates, and all those are good for gold."

The Euro zone has also not been immune to a global slowdown, but it has a very strong banking foundation which has an additional advantage over the United States. The latter is suffering from financial instability. The US has poured billions of dollars into tax rebates in order to enhance consumer confidence and it also spilled out huge sums of greenbacks to bail out housing mortgage giants Fannie (FNM) and Freddie (FRE).

But problems for the world`s largest economy are not yet over, now that Lehman Brothers (LEH) is standing in front of the federal door. Lehman Brothers lost 53% of its worth late last week. Ultimately it is going to put pressure on the dollar which is the lone forerunner at this time on behalf of the United States. If the dollar starts weakening, the already boiling inflation will start burning, which will further invite innumerable undesirable happenings.

Henceforth, the dollar may lose steering control over the financial markets which can set the natural boom in the commodity markets and a big drop down in stock and bond markets. The weak dollar will make commodities like Gold, Silver, Copper and Crude Oil & Natural Gas comparatively more expensive. The given scenario insinuates that gold may regain its prestige as a safe haven commodity for investors, which was to some extent tarnished by the slowing demand and rising dollar in recent period when gold traded below $740 on NYMEX last Thursday, September 11.

Gold may once again become a fair hedging instrument against the falling greenback for investors in the future. It may start an upward journey very soon, which might last for the next one and half quarters of year 2008. Silver and crude oil may also join the party along with gold. Gold may embrace $950 an ounce level in coming months, crude will adjust its levels to nearly $120 a barrel, and silver is also likely to kiss $17 levels in near term.

Comments

[dlaw:]

Apparently the author doesn't get out much.

The Dollar Index is UP.

After it's spike to $785, Gold immediately fell $20 to the Friday close.

Know why?

Because gold is NOT money and what people need now is money.

2008 Sep 15 10:31 AM

[Lionheart:]

Please sell me all your gold and I will give you "paper money printed or keyboarded in out of thin air" in exchange.

I can't wait for the litigation to start. A HUGE class action is days away in Canada against the evil investment banks NAKED shorting mining shares and I think it will steamroll from there.

2008 Sep 15 12:19 PM

[mcadoo3312:]

dlaw, analyze what you said. People need money and the easiest way to do that is to PRINT it. When money is printed, its supply increases and the paper money is worth less. Expand your time horizon and consider the mess the United States is in financially and you should certainly come up with a different response.

2008 Sep 15 12:55 PM

[Smarty_Pants:]

"After it's spike to $785, Gold immediately fell $20 to the Friday close."

And several hours later it was right back up to $780 again where it stayed for much longer than it 'stayed' at Friday's close.

And this ignored little tidbit of foreign news doesn't imply much in the way of support for the dollar either:

"China held $447.5 billion of US agency bonds as of June 2008....(and are) likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves."
China Daily, Sept. 15, 2008

Gee, maybe the Chinese are going to buy a little gold with the billions of trade surplus dollars we send them every year.

Even if they just trade their dollars for Euros or Swiss Francs it will push the dollar down.

2008 Sep 15 03:21 PM

[dlaw:]

Actually, McAdoo, people need GOVERNMENT money and what they do is issue bonds to borrow it, thus taking cash OFF the foreign exchange markets.

And since they are injecting that cash into a deflating domestic economy, I really don't see a problem with the value of the dollar.

Rather, I see an enormous problem with the value of other countries' currencies. Thus despite the crash today, the euro is at about the price it was at the beginning of last week and the dollar index is up on the day.

Gold is up to. I think gold will move - as it has for years - with other commodities which are equal stores of value - equally bad in a dollar-deflationary environment.

2008 Sep 15 05:48 PM

[dlaw:]

Those who think that fiat money isn't real would be at pains to explain about 20 trillion dollars worth of global GDP growth.

2008 Sep 15 05:50 PM

[dlaw:]

I mean, look at the author's call on oil.

2008 Sep 15 05:50 PM

[Cesato:]

I wonder when the BUY call will stop for Gold, I've read articles recommending to buy Gold since it was at USD 900. All these analysts have to be grounded, are they really making money for the companies they work for, I doubt it, I'm not saying that Gold is not going to go up medium-term, in fact I'll be a buyer but please stop those buy calls every time that Gold makes a new low, consolidation will take some time and don't be surprise to see a sub USD 700 spike in the upcoming 2 weeks then you can asses the opportunity to buy, in the meantime don't be mislead into a dumb short-term investment which only benefit brokers by charging a fee to your losing investment. Patience has always been the name of the game.

2008 Sep 15 10:16 PM

[Riffraff:]

There is no question about the fact that gold is headed up. It is, and always will be, an investment in confidence when everything else looks bleak. And folks, if you are conscious, things look bleak. Whether they are bleak or they are not, is always a matter of perspective. But now, gold will benefit from an investor's (big and small) NEED to make an investment in hope. Whether the fundamentals are there or not does not matter to jump start the next leg of this bull market, I assure you of that. If the run sustains, it really won't matter if they were there or not. Why did gold run up and through $1000? It began that rally when the "mess" we find ourselves in started to stink. And, when the credit crisis finally became front page, undeniable news, gold soared. If you thought it found its legs in July, just wait and see it sprint in Q4. I've been enjoying the fruits of gold for 35 years now and it is always the same story. At the end of the run, the analysts are left bewildered, saying something like: "There was absolutely no reason for it to make those types of gains; and, so quickly". I beg you all to use my hindsight and buy some confidence to offset the vomit-inducing losses the markets are handing you. When negative, unprecedented economic events are playing out right in front of you, buy gold. Ask yourself these questions tonight: "Are there unprecedented economic events playing out right now?" How is the value of your home faring? How are your investments faring? Do you remember Freddie and Fannie? How are your friends doing who work at Lehman, AIG, Bear, Merrill? Are there wars being fought anywhere on the globe tonight? How do you feel about the United States Dollar? Things will get better, they always do.

2008 Sep 16 12:41 AM

[bowman711:]

The Government has to borrow the money for all these bailouts. First, they swap the financial institutions worthless and near worthless contracts for dollars. Then the Government 'packages it all up' and sells them as Treasuries to China and other countries, or to you. So, when you are putting your cash into Treasuries, you are essentially buying the junk that the financials just gave up on collecting! The only difference is that the Treasuries have 'the full faith & credit' of the government behind them. But, the Government doesn't create anything (except trouble!), so it is impossible for the Treasuries to become stronger due to the increased production of something (anything) creating wealth.

If it were an honest choice between Treasuries and gold (or silver, to a lesser extent), gold would win hand down. The Government knows, of course, that rational people would choose gold over their 'fiat Treasuries' backed by their increasingly worthless fiat dollars. So, they have been systematically driving the apparent value of gold down with massive naked shorting of gold. In short, they do what they know best - 'print' paper gold and flood the gold market with it to give the impression that the value of gold is also going down! To a great extent, it does fool many if not most of the people.

But, you can't buy gold anywhere right now, or you are very lucky if you do manage to find a coin or two to buy. I'd guess gold dealers, with the limited supply they can lay their hands on, give preference to their regular customers. But, where is the gold that normally would be moving in the gold market? I can think of a couple of possibilities. First, with the price so artificially low, gold producers are either 'mothballing' mines or not selling what they produce in the hopes of getting much more when gold finally breaks free of the Government manipulators. Second, it could be that the Government's 'Insiders' - which likely would include China and other buyers of Treasuries - are siphoning off what gold become available at the artificially reduced prices.

We don't know how long the Government can keep its 'hands' on gold, but we do know that at some point people will discover that their Treasuries are worth about as much (maybe I should say, as little) as the Government's paper money. When that happens, there likely would be revolution against the Government as gold skyrockets back to where it should have been all along. I think the main reason Lehman wasn't also bailed out like Bear Stearns and Freddie/Fannie is that foreign buyers of Treasuries are balking at buying more Treasuries backed, not really by the 'full faith & credit' of the government, but by junk paper.

We are living in very interesting times. I probably wouldn't be a bad idea to stock up enough staple foods to last months if not a year. Who knows what will happen if/when the people realize the Government has duped them all this time.

2008 Sep 16 08:17 AM

[rcraig:]

The only reason any printed curraency is value is out of confidence the debt certificate will be honored by the issuer. If the US government continues extending itself into the private sector, by bailing out mismanaged corporations, the dollar will lose confidence because and drop in value. The first sign of a drop in the value of the dollar will start a freefall of the dollars value. Be reassured when the FEDS announce they are cutting interest rates (which will not help the consumers) the dollar will begin its freefall.
Would anyone be willing to take on a bet of the dollar being equal to the Chinesee Yen by the end of the year?
At that point you will see a lot of foriegn investmetns coming into the country.
Shal we post our America for sale signs now or wait until the dollar drops?

2008 Sep 16 02:03 PM

[Jake2:]

Gold bugs never die, they just fade away.

2008 Sep 16 05:05 PM

[dlaw:]

But Jake2, don't you know that gold is "headed up and ALWAYS will be?" Don't you know that?

And r_craig, you can take a bet on the value of the dollar versus the yuan...or yet...or whatever the heck you're trying to say...any time you feel like.

2008 Sep 16 06:34 PM

[Riffraff:]

dlaw - Is that arrogance I detect? Who said, "Gold is up to. I think gold will move - as it has for years..." Oh yes, that was you. Just what the world needs, another wise guy.

2008 Sep 16 09:43 PM

[Smarty_Pants:]

What's this? Gold currently passing $810/oz?

Say it isn't so. Up over $30/oz just this morning.

If you're desperate to buy physical gold but can't find any in your local coin shop, try a local pawn shop. They buy scrap jewelry every day. Offer them spot for the gold content and they will probably be happy to sell. If you're careful about the purity of what you buy it's a good way to 'find' gold when it's scarce. Avoid most 10 carat stuff, stick with 14 carat or 18 carat. It's not a Kruggerand, but it's better than nothing.

2008 Sep 17 10:29 AM

[Riffraff:]

Allow me to quote the wise dlaw who said, "Gold is headed up and ALWAYS will be". I could not have said it better myself. This, on the historic day where gold gained more in one day than any other day in history. Very prophetic, I'm impressed with the vision.

2008 Sep 17 09:03 PM

[TheRabble:]

As assets deflate money becomes more valuable. Something that can be created via a few keystrokes is not money, it is counterfeit pure and simple.

Gold is money, always has been, and will be so long as human nature remains intact. Every government which has tried to issue money via fiat has failed miserably. Even the most powerful authoritarian regimes have collapsed because of loss of faith in the currency. You can not pay a population with monopoly money and expect the confidence to last forever. The deception collapses due to the greed and ineptitude of those operating the printing presses.

2008 Sep 17 10:09 PM