forecast for gold in 2010 from $1,200 to $1,400.
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I am thus raising my forecast for gold in 2010 from $1,200 to $1,400.
onn.tv
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Beyond Inflation, Gold as a Monetary Phenomenon
by Kevin Cook
Posted on Wed, 25 Nov 2009 15:36 EST
After my article Monday about the possibility of $4,000 gold, and a subsequent appearance on CNBC’s Closing Bell with Maria Bartiromo, I got a lot of questions about the math and data I was using.
I was simply following Jim Rickards of Omnis and dividing $1.6 trillion U.S. dollars (a reasonable M1 money supply, give or take a hundred billion) by U.S. gold holdings of 270 million ounces to get nearly $6,000 per ounce.
My figures about total above-ground gold supplies of 150,000+ tons and specific levels of central bank holdings were based on multiple sources, but primarily data from the World Gold Council.
From the introduction on their website at www.Gold.org: “Founded in 1987, the World Gold Council (WGC) is an organisation formed and funded by the world’s leading gold mining companies with the aim of stimulating and maximising the demand for, and holding of Gold. WGC is the commercially-driven international marketing organisation for the gold industry. Our members are gold mining companies of all sizes, with operations spanning six continents.”
Clearly, this informational site has a bias. And the members list reads like a who’s who of big gold stocks, with these names among the 25:
Barrick Gold (ABX)
Goldcorp (GG)
Newmont Mining (NEM)
Agnico-Eagle Mines (AEM)
Kinross Gold (KGC)
Yamana Gold (AUY)
Royal Gold (RGLD)
Coeur d’Alene Mines (CDE)
That said, the site is packed with statistical papers and starting points for investment research. Here’s a slice from one of dozens of PDFs that you can download just for registering:
World Official Gold Holdings, September 2009 (Source: WGC)
The complete WGC list includes 100 nations, going all the way down to Central African Republic with 0.3 tonnes. I chose to go up to number 16 so I could get the UK in there. I remember earlier in this decade when gold was trading under $300 and the Bank of England sold the majority of their reserves. Gordon Brown, the current Prime Minister of the UK, was then Chancellor of the Exchequer and he helped drive a major reform of Britain’s monetary policy by transferring control of interest rates to the BOE.
At the time, I figured Mr. Brown was onto something and so I concurred with him and Keynes that gold must indeed be an obsolete and barbarous relic. How wrong we were. And this will be proven when we see the updated figures for central bank holdings at the end of this quarter. We will see that both the tonnage and percentage figures for many governments have grown substantially in the past three months
Cost of Production and Trimming the Hedges
I was disappointed with my interview on CNBC because I left out one of the more subtle driving-forces of gold’s rally—beyond demand from central banks, inflation hawks, and mere speculators riding the wave. The big gold producers have been doing less hedging, whereby a mining company can sell gold as forward contracts, locking in a sale price today to eliminate uncertainty about tomorrow’s price. Some, like Agnico-Eagle (AEM), have never hedged.
AEM recently reported a quarterly loss, but the firm is confident that this will be quickly reversed as their rapid investments to ramp up production enable them to take advantage of their very low “cost of production” near $450 an ounce.
Gold production hit a high around the year 2000 that has not been seen since. And getting new or existing mines “in production” takes time. So this is also driving near-term demand, as global mines won’t get near that production peak for a few years. But what’s often more fascinating to me in markets than the fundamental supply/demand picture is the psychological drivers. What less hedging by producers does is create two important feedbacks on price:
1) Less hedging reduces supply flow to commercial users and central banks. This sort of creates a supply worry that buyers of gold are not accustomed to, especially at these record prices.
2) Producers doing less hedging is similar to public company insiders buying their own stock. It’s optimism about future prices (i.e., revenues for gold producers) and profits that cannot be ignored.
I have written about the potential for a “momentum melt-up” in gold and as much as the last two weeks look like a near-term frenzied top to some, I don’t think we are there yet. We haven’t even begun to see the kind of panic that can come from a dollar rout that makes gold trade like hard money.
I am thus raising my forecast for gold in 2010 from $1,200 to $1,400.
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