As these words are being, written gold is consolidating at the $1,640 an ounce level after peaking at $1,900 in August of 2011. In addition, gold has fallen below both its 50-day and 200 day moving averages. For the army of technical analysis who now seem to rule Wall Street it is game over for gold. There is no shortage of financial commentators across the Wall Street spectrum that is prepared to write gold's obituary but is the bull market in gold really finished?
The most curious thing about all of this is the Wall Street consensus opinion. An opinion, which has not deviated for decades. The consensus opinion has always been that gold is a barbarous relic and therefore a bad investment. After all that is what Keynes said and how could Keynes, be wrong. Then Wall Street was mugged by gold. For 12 straight years, gold out performed the S&P 500.
However, the real story is far worse than that. In August of 1971 president Nixon took the United States off the gold standard. At that, time gold was selling for $35.00 an ounce. In the 41 years since 1971, the price of gold has risen 54.28 times to its all time high of 1900 and 46.85 times to its current high. At that time the Dow Jones industrials was then selling at about 890. The Dow peaked in October of 2007 at 14,164 for a rise of 15.91 times. Its current price is 13,038 a rise of 14.64 times.
Wall Street needed a new story. The new story was that gold was in a bubble and therefore should not be bought. Overnight it went from being a barbarous relic that was a bad investment to being a bubble with out ever being a buy.
The first thing you have to know about gold is its incredible rarity. The authoritative consensus is that from the beginning of recorded history to the present between 150,000 metric tons and 165,000 metric tons has been produced. At its most optimistic, that translates to about .76 troy ounces per human being. In other words if you gave every human being on earth a rather substantial gold ring you would wipe out the world's gold supply.
For an asset to be in a bubble more is required than a historically high price. The key requirement is that the asset must be owned by people, speculators really who will be panicked into dumping the asset by falling prices creating a death spiral.
When you look at the gold market what hits you in the head is how little gold the speculators own. The following is the recent World Gold Council estimates.
What do the speculators own?
Jewelry - 52%
Central banks -18%
Industrial - 12%
Jewelry at 52% dominates the gold market. What do you think the chances are that if the price of gold falls another 25% or 50% hysterical husbands are going to rip off their wives wedding rings and rush off to the pawnshop to sell it?
Central banks the second largest holders of gold at 18% are no longer dumping gold. They are now buyers of gold. They no longer trust the currencies of other nations. It is about time that they snapped out of their stupidity.
The industrial users of gold are not going to freak-out and stop using gold if the price falls. They will buy more. No body uses gold for industrial purposes if there is an alternative.
The only part of the market that is up for grabs is the 16% that is used for investment purposes, which is in the form of gold coins and bars. This is the only area where speculation matters.
Now let us look at who buys gold. One of the favorite proofs of the "gold is in a bubble crowd" is the constant ads for gold that we see in the newspapers. Of course, it never dawns on them that there is something very strange about these ads. At least 95% of all the ads are offers to buy gold and almost never offers to sell gold. Just check out these ads for yourself. If gold were in a bubble then the thrust of these ads would be to dump gold on stupid, unsuspecting investors. Yet, the reverse is happening. That brings up the crucial point of just where is this gold going. It is going to Asia.
The three titans of annual global consumption in 2011 were India with a whopping 745 metric tons. Followed by China, which consumed 428 metric tons, and a lame United States consuming 128 metric tons. On a global basis Asia has become a giant vortex sucking in gold from every corner of the globe. Gold is flowing from where it is disdained to where it is treasured. The more prosperous Asia becomes the more gold it buys. According to the World Gold Council in 2011 consumer gold demand rose 25% in China and a staggering 38% in India.
What do you think the chances are that the Wall Street consensus that gold is in a bubble will panic the Asians into dumping their gold?
In June of 2012, the Pan Asia Gold exchange will open in China and unlike the ugly shenanigans in the United States, each contract will have actual title to gold. They will be the first future gold contracts ever to be fully backed by gold. There is a very real possibility that the days when the price of gold was set in New York and London are ending. After all, if the gold is in Asia should not the price of gold be set in Asia?
It is long past time for the American people to wake up. The days when the dollar was as good as gold are over with. The barbarous relic is not gold. It is the paper currencies of the world that are being debased at a frightening rate. There is not a single sound currency left on the face of the earth.
Every once in a while the New York Times reprints its front page of 100 years ago. It is always an interesting read. The most interesting part of the reprint is the price of the New York Times 100 years ago. It was one cent. Today it is $2.50. What does that tell you?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long various gold and silver stocks.