STAFF NEWS & ANALYSIS
Gold Bottom Is U.S.$1,000?
By Staff News & Analysis - January 28, 2010

Continued strength in the US dollar is likely to be painful for investors with long gold positions, as evidenced by December's fall, and strategists contend that the potential for further US dollar strengthening is possible. However, in spite of gold's vulnerability to a stronger US dollar, we continue to believe that gold is well supported in the current environment for the following reasons: In our view, a below par recovery in the face of constrained consumer spending is more likely to continue to encourage gold investment, due to expectations that fiscal and monetary stimulus is likely to continue to fuel large government deficits and pose risks to the longer-term value of the US currency. Central banks have been supportive of the gold market as net buyers from the IMF. … We believe the continued weakness in real interest rates continues to provide strong support to gold prices over the medium term. – UK Telegraph

Dominant Social Theme: Gold is not done?

Free-Market Analysis: Yesterday we carried a CNN article (originally appearing in Fortune a feed-backer informs us) that predicted gold would plunge to US$500. While the author of this article apparently has an affinity for finding and then metaphorically lancing bubbles, we were not surprised at the CNN affiliation. The mainstream media carries the water of the state and the state hates gold because it interferes with its money manipulations and makes central banking more difficult.

To read Why Does CNN See Gold at US$500, click here now.

Anyway, we found it a bit hard to believe that gold was going to go to US$500 anytime soon, mostly because the world's major economies are fairly troubled and gold (and silver) tend to do well in such environments. We are certainly aware that both Britain and America have recently declared their "recessions" over – and we have about as much faith in those proclamations as in Bernanke's certainty that he will be able to balance monetary policy on the head of a pin (avoiding both inflation and deflation and getting it "just right.") Here's some more from the article, excerpted above:

Safe haven buying as an alternative currency is set to continue, in our view. However gold is the only currency whose production is going down rather than up in double digits. No supply response to high gold prices is anticipated, and mine production is on a declining trend of approximately -1% per year.

Gold shares still have significant upside because:

  • The high and rising gold price.
  • Costs have stabilised (energy and materials costs are falling).
  • Weaker producing currencies, which further widens margins.
  • Relative to the gold price and to their usual valuations, gold shares appear oversold.

In conclusion, we believe that gold has finally broken clear of the $700 to $1,000 per ounce range that dominated the last two years and that we are probably in the process of finding out where the new higher range will be established. We believe that the degree of investment demand is likely to force a peak that is nearer $1,300 per ounce over the next six months with $1,000 an ounce becoming the long-term floor.

We think we can make some other points as well. While high prices tend to attract hoarders who then dis-hoard, and while eventually new mines will open and old ones might reopen, significant demand is likely to outstrip demand for a relatively long time to come. There are some very big players who have indicated an appetite for continued purchases – of gold too. China especially seems somewhat disenchanted with its trillions in paper asset reserves and is said to be seeking virtually any alternative. Heck, officials recently announced that China would diversify into the Canadian loonie of all things – and we can only assume that this is actually a backdoor play on that country's abundance of commodities and precious metals.

Chinese officials have certainly indicated that they are buying the real thing whenever they can. All that is stopping the buying program is the price. Thus, the Chinese, ever savvy shoppers, are supposedly trying to buy on the dips.

Then there is India. The Indian central bank recently made a huge gold purchase of some 200 tons of gold directly from the IMF and there is no reason to believe that the country's thirst is yet quenched. It could be said – and yes it has been – that the obvious interest that China and India have in further gold purchases have put a kind of effective floor on precious metals. How low will gold, especially, go before it triggers significant Chinese or Indian buying?

You know, we are still not sure that the price of gold, even at US$1,100 has exceeded the price of gold some 30 years ago when it topped out at US$850 or so – not when adjusted for inflation. Bull markets it might be said (and this is obviously a bull market for gold and silver) are like the incoming tide. Each cycle brings the level higher, and we would imagine this would be the case once again when it comes to precious metals price performance.

After Thoughts

In fairness to readers, let us make sure we add that the article we have excerpted was written by Bradley George and Daniel Sacks – co-Portfolio Managers of the Investec Global Gold Fund. Obviously, they would have a pro-gold bias, but we don't think that necessarily detracts from their arguments. They're not hiding their bylines. Hope between yesterday's analysis and today's we've presented both sides of a promising puzzle.

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