Gold on the Rollercoaster — Volatility to Continue (September 30, 2008)
To be honest, no one really knows if the rescue package just approved by Congress will restore order to world financial markets – but whatever the impact, I feel confident about the future of gold.
For now – and the near future – gold is caught up in a mass liquidation of virtually all assets.
Expect “high-stakes” volatility in gold to continue as world financial markets size up the U.S. rescue package . . . and realize that America’s politicians have thrown them a lifeline tied to a leaky boat.
Retail gold investors – real people like you and me – have a different view of the world and economic risks ahead than do the large institutional players and their armies of analysts. Unlike the large institutions, the small guy has been buying more gold lately as can be seen in a pick up in physical demand for bullion coins, small bars, and investment-grade jewelry.
Private investors – from high net worth individuals to the average Joe and Jane – are swapping cash for gold coins, small bars, and bullion ETFs. This is now a global phenomenon as retail outlets, coin fabricators, and refiners report a gold rush of demand around the world.
Gold coins – like the Krugerrand, the American Eagle and Buffalo coins, the Canadian Maple Leaf, and the Austrian Philharmonic – are all in short supply. The Rand Refinery, which mints the South African Krugerrand, has gone to a seven-day work week. The United States Mint has suspended deliveries of its coins while it rebuilds inventory. Major refiners report delivery times for small bars have now stretched to more than two weeks and premiums in Persian Gulf and Indian markets are now around $2 an ounce.
The yellow metal’s own positive fundamentals – and even its role as a safe haven in turbulent financial seas – have simply been overwhelmed by the massive storm-surge flight to cash.
In contrast, platinum and palladium prices are telling us that the crash in car sales will be deeper and longer than rosy optimists had hoped only weeks ago.
Plunging asset prices are weakening the balance sheets of banks, insurers, and other financial firms everywhere, threatening more surprises, bankruptcies and busts. And, at the same time, banks and other lending institutions are hoarding cash due to fears of further financial-sector turmoil. Their reluctance to continue funding even many healthy businesses threatens to send the world economy into a tailspin.
Amid signs of a teetering economy (the latest being the just-reported 1.1 percent drop in U.S. industrial production in August) speculation is growing that the Fed, sooner rather than later, will cut its key Fed funds rate – and this might just be enough to knock the dollar but good and put gold back onto a more sustainable upward trajectory.
Europe is also succumbing to the credit crunch and worsening recession. Governments — from the Benelux nations to Ireland, Britain, Germany and Spain have –undertaken multi-billion euro “American style” bailouts of some top banks and financial institutions.
So far, the European Central Bank has stubbornly refused to cut interest rates, making matters worse in the real economy. When rates are finally lowered, probably later this year, the euro will tumble further.
The yellow metal’s extremely bullish longer-term prospects, prospects that are just as bright today as they were early this year when gold was racking up record prices.
Gold is underpinned by rising physical demand in key global markets, deteriorating macroeconomic and financial environments, accelerating inflation, and tight supply/demand fundamentals.
I believe any renewed decline, however deep, will be short-lived as price-responsive physical demand increases in tandem.
In any event, shaken confidence in financial institutions around the world should soon begin to benefit gold once again as selling of financial assets and commodities runs its course.
If anything, gold promises to remain volatile. The credit crunch has reduced liquidity available to precious metals traders and speculators, the result being increased volatility both up and down – and this will continue day to day and week to week.
As sure as day follows night, reflationary monetary policies — however prudent and necessary — have long-term implications for global inflation.
In response to prolonged stimulative monetary policies in so many countries around the world, inflation is now accelerating across Europe, Asia, and the Middle East . . . and this is prompting a rise in gold demand, particularly in the traditional gold-hoarding counties (India, China, Southeast Asia, Turkey, and the Arabian Gulf countries).
Importantly, much of the traditional gold-hoarding world continues to enjoy rising prosperity and growing middle classes that will, along with more inflation, translate in to rising gold consumption in the form of small bars and investment-grade jewelry.
The key for gold, in the longer term, is that inflation everywhere — in the United States, Europe, Japan, India, China and Southeast Asia, Latin America — is accelerating. China and India, the biggest gold consuming nations, each recently reported double-digit year-over-year consumer price inflation rates. Measures of monetary policy — growth in broadly defined money supply and real (inflation-adjusted) short-term interest rates — are already at inflation-fueling levels.
Gold price prospects remain as bright as ever — and nothing in the recent market performance has changed our forecast of record high prices in the next few years. For the near term, We still expect to see gold back over $1000, if not late this year, then almost certainly in the first quarter of 2009.
With the right confluence of economic and geopolitical developments we could see gold as high as $1500 or even $2000 an ounce in the next few years — and a buying frenzy, such as is often seen late in the price cycles of financial and commodity markets, could briefly take the metal much higher.
