Gold the only credible currency
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By Kishori Krishnan Exclusive To Gold Investing News
The writing is clear on the wall, according to some experts. Author of Gloom, Boom & Doom report Marc Faber has said the rally in the US markets is likely to continue till April-end, but was quick to add that a total collapse is seen by the year-end. As if that was not bad enough, Faber has insisted that gold could test the $700 per ounce mark.
“My stance towards gold is this,” he told a news channel. “You should buy every month a little bit and become your own central bank, because you can’t trust central banks anymore to act responsibly and maintain the function of paper money as a store for value. So, you want your own reserve.”
As for whether gold could go down and revisit $700 per ounce, Faber dealt another googly – “Possible. We went down following March 2008 peak from over $ 1,000 per ounce to less than $700 per ounce, and now we bounce back and will have a lot of volatility. Gold is relatively expensive compared to industrial commodities.”
Now that the horses are out of the barn, down the road and around the bend, its time to take a close look at who is going to rein them in. Some analysts swear that even though gold prices slumped a bit in the past weeks after its peak of $ 1,000 per ounce level, the yellow metal is unlikely to end its bull run now. Experts maintain that the shortfall in production and rising demand as a hedge against inflations are the driving forces of gold.
An Australian dollar gold price of $1400, compared with $900 in US dollars, has thrown a lifeline to many smaller local producers and the stampede into gold stocks means that companies that were struggling six months ago are now able to raise equity and attract investor interest. “There are a lot of ragtag stocks that call themselves producers,” warns BGF Equities analyst Warwick Grigor who in his latest gold sector review says the price could reach US$1,300-$1,400 this year.
Grigor contends the bull run will continue for the foreseeable future because gold has become the defacto currency of choice. He argues the US dollar is overpriced but there is no confidence in other currencies. “The only alternative currency is gold; that is why we are seeing the gold price rising. Gold is the only credible currency right now.”
In another development last week, Bank of England freed £75 billion into the market. This is part of £150 billion sanctioned by the chancellor, which is equal to some 10 per cent of UK GDP. The US has doubled its money supply in the last seven years, and in Europe it is at a 30-year high. The other big driver is that new sources of gold are genuinely scarce. The leading gold mining nation, South Africa, has halved its annual output since 1998. The days of finding marble-sized nuggets in California are long gone, with most of the world’s remaining gold existing only as traces in difficult regions.
Gold bulls, therefore, have a lot to support their argument that the metal’s price will continue to rise – as well as circumstantial evidence such as record withdrawals from banks, runs on supplies of gold coins, record volumes of trade in exchange traded funds and the sheer tangibility of the metal at a time when banking products can seem opaque.
Fault lines
However, there are some fault lines in the bull run in gold. The first is the contention that growth in demand will continue to come from jewellery sales in emerging markets. Jewellery still accounts for two thirds of all gold demand, with India the world’s largest consumer, devouring about one fifth of the world’s supply, twice as much as China and the US.
It is central to the 10 million weddings that take place in India every year, mostly in April and May, as part of the transactions that take place between families, and this accounts for the regular, annual pattern of price rises early in the year before falling back later in the summer.
This year, however, Indian imports have come to a standstill. Gold imports to India dropped to 1.8 tonnes in January 2009 against the 18 tonnes in the same period last year, and fell back to almost nil in February. Overall, demand for jewellery plummeted by 17 per cent between the third and fourth quarters of 2008, and this trend will likely intensify in the coming months.
COMEX capers
Renowned global commodities investor and analyst Jim Rogers says gold trading at COMEX, a division of NYMEX, is a paper game and not a physical game. “If you can take 50 per cent of the gold away from the COMEX then the price will be closer to what you are paying for physical today. If you take 50 per cent of anything away, you know take 50 per cent of IBM away the prices are going to go up,” said Rogers.
It is not just Rogers alone who is upset at the way COMEX gold is going. Bevan points out that there is something going on in gold. “The COMEX stocks have hardly changed since December and demand and deliveries have been substantial. Also the ETF’s have added over $3 billion just this January. I don’t know where they get their gold, but certainly not the COMEX .”
One of the oddities of the lust for gold is the mistaken belief that it is relatively stable. In fact, it has a similar level of volatility as equities – a 30-day volatility of 20.6 per cent compared with 30 per cent for equities. By and large, investors have been waiting for US president Obama’s financial reforms to deal with the crippled economy, parking money in gold simply until they direct it back into equity markets, some analysts aver.
They argue that the super-wealthy Sheikhs and hedge funds will be first to identify better ways of using their cash. The price could then drop dramatically, just as last year oil collapsed from $147 a barrel in July to $40 in November.
Stocks
Ecuador lifted a mining ban on Kinross (TSE:K) and Corriente (TSE:CTQ) that allows the Canadian miners to restart operations immediately, a government official told Reuters on Tuesday. Kinross fell 2.9 per cent, while Corriente rose 3.6 per cent. Miner Goldcorp (TSE:G) was lower by 2.7 per cent at C$36.11 on Tuesday.
Barrick Gold Corp., (TSE:ABX), the world’s biggest gold producer, will pay $24 million to settle a lawsuit in which investors claimed the company misled them by saying a hedging program didn’t hurt profits as gold prices rose. Insurers of the Toronto-based company will probably pay most of the settlement, Vince Borg, a Barrick spokesman, told Bloomberg, in which he disclosed the settlement amount. Barrick must conclude negotiations over coverage with the insurers before signing the settlement agreement, he said. “There is no admission of liability” in the settlement, Borg said.
The accord was made public on March 16. Barrick hedged its production by entering into contracts to sell some gold at fixed prices before it was mined to protect against a drop in bullion prices. Shareholders claimed in the lawsuit filed in 2003 that the program was speculative and risky, resulting in a drop in the share price as gold prices rose.
“It is clear that investors engaged in a sell-off of Barrick stock due, in part, to defendants’ repeated misrepresentations that Barrick’s program would not prevent the company from profiting in a rising gold market,” the plaintiffs said in their complaint.
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March 3rd, 2010 at 4:22 pm
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