Citigroup Says Gold Could Rise Above $2,000
By - November 28, 2008

The Citigroup report is extremely bullish for gold. Gold is likely to rise above $2,000 an ounce regardless of the long term macroeconomic scenario that unfolds, Citigroup said in a research note. "For those who refer to gold as 'that useless piece of yellow metal that has no real value and earns nothing' (and have done for years) they might want to look at financial market charts more closely," writes Tom Fitzpatrick of Citigroup in New York. Citigroup warns that the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold. "They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed through into an inflation shock." If they are unsuccessful, Fitzpatrick warns of a deflationary meltdown, civil unrest and massive political instability internationally, and possible wars. – IBT Commodities

Dominant Social Theme: Another honest admission?

Free-Market Analysis: The dominant mainstream media theme is that the dollar is a safe haven against whatever is happening in the world. But the Citigroup report which is all over the Internet if not the mainstream news, has taken the unusual step of agreeing with the gold "perma-bulls" that current trends favor gold.

Those who favor precious metals believe that gold, and silver, too, are in a long-term bull market. The market is similar to the markets of the 1970s and even the 1930s, when the only sectors that went up in a big way included gold – physical gold and paper related gold, including gold mining stocks. In the 2000s, it doesn't seem to be much different this time around. Gold has climbed upwards of US$1,000 an ounce in the 2000s, far outperforming most if not all other sectors, and there is no reason to believe the fundamentals for precious metals have changed.

The common wisdom is that gold's rise is predicated on inflationary fears and the outlook for inflation has strengthened of late with central banks around the world indicating that they will plough trillions into the market to attempt to alleviate the current financial crisis. But there are other reasons to believe that gold will rise. These have to do with the way that bull and bear markets work.

In a gold bull market, the paper-money world of central banking is not providing necessary perceived value. Because paper money, or fiat money, is based on confidence – since there are no assets backing it – the collapse of fiat money is always partially a collapse of confidence. It is this lack of confidence that helps precious metals prices.

In fiat-money bear markets such as the 1930s and 1970s, the economy itself was failing, and that is occurring as well today. The combination of inflation, lack of confidence and economic collapse generally creates a more chaotic environment. Additionally, violence tends to sharpen considerably during an economic downturn. For all these reasons, it is fairly evident to an unbiased observer that gold climbs upward on a variety of factors during a gold bull market – and that these factors often increase in number and severity during such a cycle. In fact, this can be seen in the escalating war on terror and the recent violence in India.

Analysts are divided over whether the hand of al-Qaeda can be detected. The only claim of responsibility comes from a group that may not even exist: an e-mail message claiming responsibility and sent to Indian media on Wednesday night said the attackers were from a group called Deccan Mujahideen. Deccan is a neighborhood of the Indian city of Hyderabad. The word also describes the central and southern region of India, which is dominated by the Deccan Plateau. Mujahideen is the commonly used Arabic word for holy warriors. But Sajjan Gohel, a security expert in London, called it a "front name" and said the group was "nonexistent." Alex Neill, head of the Royal United Services Institute's Asia security programme, believes the attacks were probably carried out by local jihadists linked to the radical Students Islamic Movement of India (Simi), a banned Islamic fundamentalist organisation which advocates the "liberation of India" by converting it to an Islamic state. (Scotsman)

While the Mumbai violence is a terrible human tragedy, the question of whether or not Al Quaeda is involved in the latest violent episode is probably beside the point insofar as a gold bull market cycle is concerned. What is clearly evident is that untoward events drive money metals higher during these cycles; economic insecurity breeds socio-political instability. This can be observed in the 1930s and the 1970s. The fear of instability and violence drives gold and silver prices up a wall of worry during such fiat-money bear cycles.

After Thoughts

Gold did not move up much during the Mumbai episode within the last 48 hours. But the cumulative effect of such incidents, along with fears of inflation and other economic destabilizing factors will doubtless have an effect on money metals over the next weeks and months. It is difficult to see money metals going down hard in an environment of incipient socioeconomic violence and inflation. These trends are hard to reverse in the near term. Gold, not the dollar, has been the safe haven of choice for thousands of years. There is no reason to think it will be any different today.

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