Gold has been the best-performing major commodity since the financial crisis began and we see no big reason why that outperformance should be over. After its breathless run to $1220, it’s entitled to correct back toward $1,000—or even a bit below that chiliastic level—without ending its bull market. Words: 707
In further edited excerpts from the original article* Donald Coxe (www.bmocm.com) goes on to say:
With gold’s 25% rise in 2009 the media has been filled with:
a) Authoritative Explanations:
• the collapse of the dollar;
• the repudiation of Obamanomics;
• a warning of a coming financial collapse, leading to Depression;
• a signal of the runaway inflation to come;
• China has only begun to convert its dollar holdings into bullion: the best is yet to come;
• a short squeeze on gold ETFs which are misrepresenting how much bullion they hold: beware of counterparty risk: buy bullion, not paper;
• a coming Armageddon in the Mideast
b) Sophisticated Explanations:
• gold is the only asset that is nobody’s liability and is therefore a haven in an increasingly uncertain world;
capitulation by hedged gold miners, notably Barrick;
• India’s purchase of 203 tonnes from the IMF, removing the overhang in bullion markets;
• China’s announcement that its gold holdings are higher than were previously revealed;
• “Peak gold” discussions, as investors ponder the failure of gold mines to maintain—let alone increase—their production despite record bullion prices. The classic expression for getting rich quick is to find a gold mine—but it takes time, experience and capital to bring on a mine. Reported gold companies’ reserves haven’t been rising, but soaring gold prices will change that: millions of tons of low-grade “resources” that haven’t been booked as ore reserves will be reclassified if gold prices remain near or above current levels;
• recognition of the longer-term implications of central banks’ astounding levels of creation of fiat money at a time they are collectively becoming net buyers of gold—after decades of sustained selling;
•respect for gold’s future because prices have managed the remarkable feat of setting new records at a time jewelry demand—traditionally the main support for gold—is slumping sharply;
• portfolio diversification by sophisticated investors who seek a haven at a time of zero returns on Cash—with no indications that central banks are about to abandon their Zero policies.
My Gold Target
When asked recently for my price target for gold I readily confessed that no one really has any idea of the longer term price of gold that can be justified by sober analysis. All that can be sensibly said is that gold’s price entered a 20-year Triple Waterfall collapse in 1980, falling from $825 to $250, and has risen every year in the last ten. If it can maintain its strength at a time jewelry demand is shrinking, then investors and speculators are in charge. Gold looks good because it keeps going up, and they’re scared about what the Fed and Obama and other central banks and governments are doing, and have no great confidence that there will be a sustained, noninflationary economic recovery, so gold is a good place to hide.
Gold and the Dollar
Finally, gold may even be decoupling from the dollar. The sheer scale of foreign exchange reserves in China, Hong Kong, India and other countries whose currencies are pegged, directly or otherwise, to the dollar may be opening a whole new demand for gold. Just to maintain even tiny percentage exposure to gold in forex reserves means these nations must remain on the buy side. The euro was once seen as a worthwhile alternative to the dollar in Asian forex accounts, but the unfolding problems of its Eastern European and Mediterranean members are exposing the euro’s internal contradictions as a viable alternative to the dollar.
In a world in which nearly all paper money has problems, and in which the sheer supply of paper money is expanding far faster than global GDP, gold has its best claim as a constituent of foreign exchange reserves since Bretton Woods booted it out sixty-five years ago.
*http://www.scribd.com/doc/24291901/BMO-Capital-Markets-Basic-Points-Dec-2009 (pages 37-40)
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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