Gold Market Report
Today’s Fusionomics report on Gold:
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Gold jumped to above $1039 on dollar weakness, a Bank of America supportive report and strong Indian jeweller demand. That’s above the previous record intra-day high of $1034, hit on 17th March 2008. Indeed, factors that could still drive the gold price higher:
1. An increase in inflation fears, which have played only a small part in the rally so far.
2. A creeping loss of confidence in paper currencies and the US dollar.
3. The psychology of the market. The headlines that gold is setting new record highs in nominal terms will inevitably draw attention to the fact that gold is still trading well below the all-time high of around $2,300 in real (inflation-adjusted) terms, which was seen briefly in 1980. This will encourage talk of the potential for further explosive price gains.
The upshot is that don’t be surprised to see gold break still higher in the coming weeks. However, a mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices. Recall that after peaking at around $850 on 18th January 1980, gold quickly slumped to $650 by the end of January and below $500 again by April. While consolidation will likely occur, key support levels at these breakout points may hold leading to gradual higher gold prices over the intermediate/long term. The focal point of such a scenario would be pinned on the US Dollar.
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Contact Peter Greene for more information about institutional research & trading:
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October 6th, 2009 at 4:50 pm
My My My the confusion over the price of Gold..face the fact folks, Gold is a currency! The recent run up in the price of gold has more to do with Gold as a currecny than it does Gold as an inflation hedge.
The explosion in Monetary Base (Money Supply) courtesy of the Federal Reseve Bank has more than offset the decline in MZM (Demand for Money) in the real economy. The new supply of money the fed has created is being used to purchase lilliquid assets on the balance sheets of Banks and purchase new government debt (treasuries), but the quantity has not contracted. There is a reason no fiat currency has withstood the test of time, yet gold has been used as a currency for 4000-5000 years. We are just now learning that the hard way.
October 6th, 2009 at 4:59 pm
There is a great article at Minyanville that covers just what put_seller says. All fiat currencies have ultimately failed.
As for the movement in the last couple days…it is also perhaps due to the denied rumor that some organizations want their oil paid for with gold.
Also repositories for gold are being established in China and in the Middle East. Requests have been sent to London for their gold stores. The U.K. is in no better shape than the U.S. so why would you trust having your gold stored there?
As I look at what I have just written, I realize I sound like I am turning into the goldbug that I laughed at for the last twenty-plus years! Bomb shelter and rations, here I come! Ha!
October 6th, 2009 at 5:46 pm
“Gold jumped to above $1039 on dollar weakness…”
Where did Mr. Greene get that from? It’s the same old price movement interpretation all over again. “The markets fell after a weaker than expected jobless report / The markets were up despite a weaker than expected jobless report.”
The truth of the matter is that the price of gold went up in EVERY fiat currency. This has much more to do with fundamentals of fiat currency, social and economic instability and distrust in governments all around the world. Not everything revolves around the dollar.
Read up on the facts and:
http://www.youtube.com/watch?v=4tty9-owMWo
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
http://www.kristjanvelbri.com/2009/10/china-issued-covert-insurance-on-gold-and-silver
October 6th, 2009 at 7:29 pm
“However, a mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices.”
1.) “inflation fears” based on worldwide monetary debasement.
2.) worldwide governmental “conspiracy theories” re: manipulating gold prices have been proven.
3.) isn’t “speculative demand” the basis for ANY asset class rising, i.e. real estate, equities, bonds, etc.?
4.) as you point out, we don’t even near a “speculative bubble” until the price reaches $2300 an ounce.
Call it whatever combination you’d like. I nailed this call years ago. Got GOLD?? I do.. Silver too..
October 6th, 2009 at 8:19 pm
The threat that it will become a partial proxy for fiat currencies is what this is all about.
October 6th, 2009 at 9:20 pm
Even if inflation fears eventually come true – what am I supposed to do? Buy gold here?
All gold ever extracted from earth: 140,000-158,000 tons (would fit in a cube 60 x 60 x 60 ft)
(It is assumed that all gold is recycled, hence there is no “consumption”).
Thereof in coins and jewelry: 75% (not likely to be actively traded).
Remainder: max 40,000 tons.
Thereof held by central banks: 30,000.
Remainder: ca 10,000 tons. Market value ca $320bn.
Market value of global bond market: $67trn.
“Investable” gold in per cent of global bond market value: 0.5%.
Annual gold “production”: 272 (?) tonnes in 2007 (according to http://en.wikipedia.org/wiki/Gold#Production). May be that was a quarterly number. The speak about ca 1,200 tonnes in the chart.
Annual consumer and investment demand (jewelry, ETF etc): 3-4,000 tonnes (http://www.research.gold.org/supply_demand/). Q1’09 ETF demand was almost 500 tonnes – then down to 56 in Q2.
What am I trying to say? The “investable” gold market is way too small to be a viable alternative for stocks and bonds. If many people lose faith in the $ it will lead to a huge bubble in gold. I agree that the only way the US can reduce it’s debt/GDP ratio is to let inflation eat the debt away. But that experiment is bound to get out of hand at some point (see John Mauldin’s excellent “fingers of instability” -http://www.2000wave.com/gateway.asp). Then sharp interest rate hikes will kill the gold rally. Because high risk-free short-term rates are competition for all other assets.
I don’t like gold, but if you have to, GLD is probably a good ETF. I am still trying to find a better inflation hedge. May be TIP (TIPS ETF).
October 6th, 2009 at 10:34 pm
No matter whatever else is said about Physical Gold, it is not someone else’s (fraudulent) liability.
October 6th, 2009 at 11:30 pm
@gloeschi – your stats are the reason for gold’s attraction. It is a store of value simply by it’s finite supply. Companies wash away sides of mountains to find a few tonnes more each year…and yet the amount added to total supply is very small. So supply is fairly stable–unlike a fiat currency. It cannot be diluted significantly yr/yr. No one is making any more of it… people may find gold (mining) and people may lose gold (numerous ways) but as a basic element, it can’t be broken down into any simpler form than gold. And in a world where every currencies value is determined by how long the corresponding government is running the printing pressing or firing up the furnance, that is pretty darn re-assuring. However, I have been told by a client that ammo has actually increase in value more rapidly than gold or silver… That’s probably a pretty good hedge against instability too.
You are right in that gold is a hedge for inflation, but it is also an excellent hedge against deflation. It works horribly in a disinflationary scenario (see the ’82-00). Gold is more of a stradle position. If you own it, you either believe we have inflation or deflation worries, but not “nothing”…
October 6th, 2009 at 11:48 pm
Gold is probably a bit over priced at the moment – but who really knows. It may have a big correction at then move back up to the $1600 barrier. The point is once the economy stops weakening and inflation gets out of hand, gold will be a good back up to protect some wealth.
October 7th, 2009 at 10:29 am
If I told you to buy an extremely rare stamp (lets say only three of its kind exist), and it, because of its rarity, demands an extremely high price, would you buy it? It’s price should only go up (limited supply), so it would be a perfect inflation play.
Your return would be dependent on the issue of having to find a “greater fool” when you want to sell. Or what happens the owner of the remaining two stamps needs, for whatever reason, to sell, and achieves only half the price you paid?
=> Limited supply works both ways. You pay a price for it.
Re: Gold as a currency: I don’t buy that argument unless you store it at home (with the inherent risks). Who will be interested in your broker statement saying you own some GLD when the banking system is down and the masses are looting? Can’t pay at the gas station with an ETF.
Silver would be better suited since you can break it down in smaller denominations, and may be able to pay for groceries. But then again you’d need a larger fire-proof safe at home (may be the walk-in model?).
Gold extraction costs, at least according to what I was able to gather online, seem to be $200-300/oz. So supply won’t cease even if spot price drops 50%.
But that’s not the point – my point is that you are setting yourself up for trouble if you invest in a market that is small in size relative to the investment flows moving in and out of it. Especially since supply and industrial demand seem pretty inelastic to price.
October 7th, 2009 at 11:12 am
[...] In a surprise move, Australia became the first G-20 central bank to raise interest rates (by .25% to 3.25%), noting that the critical phase of the economic crisis was essentially over. The action spurred global stock gains; a pullback in the US dollar/a spike in the Australian dollar to a 14-month high; and a surge in gold. [...]