The thing about gold is it has no counterparty risk and can't default, when you connect money to it in whatever way you at least put a break of the process of credit creation. You still see a business cycle, but you don't have these 25 years booms followed by collapse. ~ Kevin
On November 19, Market Watch.com reported that "Retail investors sharply increased their demand for gold bars and coins in the past few months as they struggled to find a safe place for their money amid the financial crisis...."
On the same date, a World Gold Council press release stated:
"Dollar demand for gold reached an all-time quarterly record of US $32 billion in the third quarter of 2008 as investors around the world sought refuge from the global financial meltdown, and jewelry buyers returned to the market in droves on a lower gold price. This figure was 45% higher than the previous record in Q 2 2008. Tonnage demand was also 18% higher than a year earlier."
Record demand is showing up at retail and in exchange traded fund (ETF) inflows. They were also offset by "inferred investment" outflows by hedge fund liquidations to raise cash for redemptions.
James Burton, World Gold Council's chief executive officer stated:
"Gold's universal role as a store of value has shone through during this quarter helping (to) attract investors and consumers to all forms of gold ownership. Looking forward, given the uncertainty that surrounds the global economy, gold's safe haven appeal should continue," but so will the speculative side of the gold market.
Earlier in the year, spot gold reached $1000 an ounce. The price then briefly fell below $700, remained in the low to mid-$700 range (until on November 21 it spiked to $800), and reasons cited are that institutional investors are selling desired assets to meet margin calls on weaker ones. Perhaps so, but much more is going on as well.
Markets are heavily manipulated, and gold among others are targeted. For the precious metal, it's to hold down its price to make dollars more attractive at a time it should be soaring and likely will looking ahead with some forecasts of it reaching extremely high valuations.
Noted analyst Richard Russell of Dow Theory Letters has his view on gold and its price action. He believes "one way or another, gold is being manipulated by certain sources. What group would least want to see (it) heading higher? My answer is the Fed. (It's) exploding the money supply. This would ordinarily foment inflation. Surging gold is a red flag that the public understands. The Fed is doing everything it can to hide the fact that it is devaluing the dollar via its" explosion of the money supply.
Russell believes that gold is in a primary bull market. The longer its price is artificially depressed, the "greater the bull forces within gold will struggle to express themselves."
Even now, the New York Post reported (on November 18) that "Governments Can't Handle (the) Global Run on Gold Coins....as people around the world are demanding so many of the valuable coins that government mints are having difficulty filling orders."
The US mint is allocating them to restrict supply. It increased its dealer price for a 10-ounce coin by 10% and one-ounce coins by 3%, and one dealer says that customers wanting 200 gold coins have to wait up to two weeks to get them. Six months ago they were available immediately. In addition, some dealers turn customers away, and those selling them demand a 10 - 15% premium over the Comex quoted price.
It hasn't curtailed demand and why not. Gold is a global thermometer that reflects monetary, political and economic stability as well as marketplace demand - for investment, jewelry, or as the ultimate hedge against uncertainty. When prices rise, it usually warns of trouble - geopolitical, inflation, deflation, the loss of confidence in fiat currency, or a possible looming depression so far not reflected in the metal's price, but watch out.
Gold's price may be resting for a time and is being artificially held down, but for how long. If conditions keep deteriorating and money creation remains too expansive, sooner or later gold may explode on the upside.
Petrodollar states may think so and are making large gold purchases. In November, Saudi investors bought $3.5 billion worth, reportedly as a safe haven at a time of crisis and falling oil prices. Reuters said that Iran is converting some of its $120 billion in foreign currency reserves to gold. Dubai dealers are running low on the metal as demand is high.
In China it hit 38.4 metric tons through September compared to 24 tons for all of 2007. Gold jewelry demand in China reached 241.6 tons through September compared to 302 tons in 2007 when jewelry demand grew by 26%. China is the world's second largest gold consumer.
On November 14, The Standard (based in Hong Kong) reported that "The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold (because of) fears about the long-term viability of parking most of (them) in US government bonds" at a time America's budget deficit and national debt are soaring.
Demand in India (the largest gold consuming market) is also growing (up 31% from Q 3 2007) at a time global gold mining production was 1133 tons in the first half of 2008 or 6% below the same 2007 period. Gold supply was down 9.7% over year-earlier levels due largely to significantly lower central bank sales. Those made under the Central Bank Gold Agreement (CBGA) totaled 357 tons in the year ending September 26 - the lowest annual figure since the first 1999 Agreement. Prices are falling, but Saudis and other Middle East investors are buying and for good reason.
World economic viability is sinking, and it's affecting oil prices. They've fallen around two-thirds from their all-time high, and producer states are worried. The Energy Information Agency projects that OPEC may earn $595 billion in 2009 - way down from its earlier $979 billion net 2008 revenues and lower that $671 in 2007.
So today's gold weakness and dollar strength may turn out to be a shorter-term phenomenon than many observers believe. The 10-year credit default swap (CDS) spread on US Treasuries provides a clue. The cost of insuring against a US government default is soaring, and it's happening to Britain and Germany as well. It's now many fold higher than in late summer, a cause for worry, and likely because markets are pricing in massive bailouts that may far exceed the current levels. In the US, it already hit $4.2 trillion, it's rising, and hinting at a possible future default or huge devaluation that's the same thing.
In this environment, gold may be the safest of all asset classes at a time none are safe, and no one can predict how bad things may get before they improve. What's likely, however, is that the road ahead will be painful, protracted, and unlike anything experienced before so all the old rules don't apply, and no one knows what, if anything, may work. This saga has a long way to run, and the path ahead is down.
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