Finally my windy response to Ryuto comments on gold posted yesterday morning.
You said “It seems everyone has caught the gold bug. Even denominated in other currencies, gold is climbing”.
Gold is not even close from reaching main street. It has barely started catching attention on Wall Street. The observation that gold is rising in other currencies supports the idea that gold IS in a secular bull market especially in a world where countries are competitively devaluing their currencies. If you follow commodity bull markets you would notice they do not (or very rarely) last only 9 years. These tend to take place over 15-20 years. Typically the first phase of the bull market smart money moves in, the second phase attracts institutional buyers, the final stage is when mainstream participates and we are still very far from that event. If this analogy is true then we are only nearing half-time.
“You stated “In my own observations, gold prices seem to be affected more by sentiment than supply and demand of the physical product”.
What is the current state of supply and demand of gold? Are you only referring to gold jewelry and the small role gold plays in manufacturing? Correct me if I’m wrong, but I take it you don’t think gold as money. Current gold fundamentals are unbelievable . There is record demand for both paper and physical metals. An often conservative precious metals analyst Jeff Christian of CPM group (
http://www.cpmgroup.com/main.php) recently stated that Private investors were rebuilding gold allocation in their financial assets from previously 0.2% of worlds wealth to the current allocation of 0.6% and he predicts it will continue to rise until it reaches 1-2%, A net increase of several hundred million oz of new demand.
http://www.netcastdaily.com/broadcast/fsn2009-1107-3b.mp3Jeff Christian also elaborated that central banks are shifting from net sellers of gold from over the past 40 year to net buyers and he thinks it will continue to buy for foreseeable future (not sure if foreseeable future is as long as your “extreme long run”) for the tune of 10’s of million oz per year. This demand for gold is represented when you look at India’s purchase of 200 tons of IMF gold and institutional buying by hedge funds such as Paulson & Co., David Einhorn’s Greenlight Capital, or Paul Tudor Jones of Tudor Investment Corporation, all of which are not known as gold bugs. I don’t predict these hedge funds are buying gold for the easy trade rather they are in for a longer haul. Einhorn has even taken a more serious investment and sold his gold etf’s and bought physical metal indicating he predicts a shortage of physical metal in the future. On a similar note, China and Germany are among other countries that have asked for physical delivery of their sovereign gold holdings from foreign bank vaults. In my opinion these actions are a “no confidence” vote for paper assets and will continue to be a rush for physical down the road. Perhaps this is a prelude to a bust on the Comex or the London gold exchange as abnormal demand for physical deliveries has been requested over the past year. Additionally, I have been aware of two instances last year where the US mint suspended gold eagle and buffalo coin sales indefinitely due to unprecedented demand and lack of 1oz bullion blanks.
Gold is not just a play against inflation or a play against a falling dollar it is also a play against deflation and especially credit/currency uncertainty. It is likely that gold is trading based on structural imbalances of the US and world economy that won’t be improving any time soon (3-5years). Even though gold was at a fixed price during the 1930’s depression, Roosevelt devalued the dollar from $20/oz of gold to $35/oz of gold. Gold also fell steeply and traded flat during the 80’s and 90’s even though inflation was rising yoy. There is no standard definition for when gold outperforms. You could see periods where gold trades up with a rising dollar or up with a falling dollar, as both have been the case in 2009.
As for you comment of “when will people abandon gold for stocks? Or when will they abandon gold for bonds or currencies?” Well US government bonds have been in a bull market for 30 years, do you think they will go another 10-20 years? Ultimately, when governments find religion and finally become fiscally sustainable then you will see currencies become strong enough to attract wealth again. Until then I suspect you will see investors remain diversified in hard assets especially gold.
Finally you wrote “don't be fooled by 20-30 year studies which on a bull-gold bias select a convenient period where gold has rallied sharply”. If you look at gold prices from 1800’s -1933 we were under a gold standard with relatively stable prices. From 1946 – 1971 we operated under a gold backed Bretton Woods system. When the gold backed dollar was severed we entered into a world of fiat money backed by nothing. Massive money printing and financial irresponsibility has since dominated and awoken the secular gold bull during the 70’s and early 80’s. Unfortunately, many investors had a sour taste in their mouth as the public buys at the top and sells at the bottom of bull markets. Most mainstream investors bought near the top and gold bears use the peak price of $850 in 1980 to compare gold’s dismal performance over the 80’s and 90’s. Since 2001 which investment outperformed? Gold, equities, cash, or bonds?
As for the future, if inflation is a monetary event then what will we see with this chart of the feds balance sheet.
http://research.stlouisfed.org/fred2/series/BASE and the US debt and deficits as illustrated like this
http://www.usdebtclock.org/The key concept to understand is that you will not get rich investing in gold but it does serve as a preservation of wealth. Gold buy’s approximately what it did 100 years ago. What is the purchasing power of $1 during that time?
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