I don't whether the following was posted before. But I think goldbugs are gonna to love this:-
1. NO NEW OFFICIAL SALES FOR AT LEAST 5 YEARS. It was widely reported last
month that the European Central Bank (ECB) and 14 European national central banks had agreed to limit gold sales. What was not made clear in all of the press reports was just how strong that pledge was. Here is the exact wording of the pledge to limit gold sales:
1. Gold will remain an important element of global monetary reserves.
2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.
3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.
4. The signatories of this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
5. The agreement will be reviewed after five years.
In addition to Europe, the International Monetary Fund also withdrew its proposal to sell a portion of its gold reserves. Earlier, then-Treasury Secretary Robert Rubin commented that the U.S. Federal Reserve had no plans to sell any of its gold reserves, calling gold "the ultimate form of payment." After the European announcement, the Bank of Japan and the Austrian central bank announced that they had no plans to sell any gold reserves. What all this means is that 90%+ of the world's official gold reserves have been secured. A huge artificial obstacle to rising gold prices has been removed.
2. GOLD IS STILL VERY CHEAP. Right now, gold is trading at $314 per ounce-25%
higher than it was just a month ago-but it is still undervalued. The following figures put the current price of gold in historical perspective.
• From 1979 to 1999, the Average Annual Low for gold was $339 per ounce--$25
higher than today's price.
• From 1979 to 1999, the Average Annual Price of gold was $386 per ounce- 22%
higher than it is today.
• From 1979 to 1999, the Average Annual High for gold was $455 per ounce- 45%
higher than it is today.
• In 15 out of the last 20 years, gold exceeded $400 per ounce.
• The price of gold is still trading at less than half of its all-time high.
3. SUPPLY FUNDAMENTALS. For the entire decade of the 1990s, demand for gold has
outpaced new supplies. The low gold prices of the past 2 years have only contributed to that imbalance as the price of an ounce of gold has fallen below the cost to produce that ounce of gold in many areas of the world. As a result, thousands of gold miners have been laid off, particularly in South Africa, and several mines have been closed. Furthermore, many mining firms have cancelled or curtailed exploration plans.
Less exploration and lower future production, coupled with curtailed central bank sales, will make a tight market even tighter.
4. DEMAND FUNDAMENTALS. For the entire decade of the 1990s, demand for gold has
outpaced new supplies. With the spectre of central bank gold sales seemingly removed for the next 5 years, the gold market?s fundamentals can finally assert themselves.
Gold's recent rise in price was touched off as evidence of gold's demand
fundamentals became obvious at the most recent Bank of England auction. At that
auction, 25 tons of gold was offered, but bids were taken for over 200 tons - 8
times the amount being auctioned.
Meanwhile, demand for gold continues to set records. The World Gold Council
reported that worldwide demand for gold in the 2nd quarter set a new record.
With the recent recovery in Asian economies, demand for gold in that part of the
world has been skyrocketing. Investment demand has also remained strong in the
U.S. As a result, the physical gold market should remain tight.
5. TECHNICAL FACTORS. For the past year or so, a major factor keeping gold prices down has been a large volume of short selling in the futures markets, primarily by proprietary traders at banks and brokerage houses. Momentum-based traders were waiting for something to happen in the market before they could shift from shorting the market to a long position.
This is exactly what happened when the European Central Bank announced the
5-year agreement on gold sales. The rising gold price triggered a massive wave
of short covering. As more and more short positions were unwound, this added
fuel to the rally.
Not all of the shorts in the market have been unwound, which means that gold
prices may have excellent support. As all positions are unwound, gold prices
could rally more and spark momentum buying, driving prices higher.
6. FEAR OF INFLATION. The Fed is clearly concerned about inflation and the markets are starting to come around to the same point of view. Almost every government statistic released these days indicates that our economy is in danger of overheating. Unemployment is at a 30-year low, the labor market is tight as a drum, oil prices have more than doubled this year, and almost every commodity index has been on the rise. The combination of a tight labor market and rising raw materials prices has not occurred since the 1970s. As inflation begins to build, stocks and bonds will suffer, while traditional inflation hedges, such as gold, will appreciate.
7. RISING INTEREST RATES. There is an old saying in the investment world: "Don?t
fight the Fed." The Federal Reserve's recent hikes in interest rates have
created a climate in which stocks and bonds simply cannot thrive. History has
shown that rising interest rates often coincide with rising gold prices.
8. UNCERTAINTY IN THE STOCK MARKET. The U.S. stock market appears to be in at
least a corrective phase and there are lingering questions about exceedingly high stock valuations. Should this correction turn into a bear market, more and more investors will look to alternative investments, such as gold. Gold's correlation with stocks has historically ranged from nil to negative, therefore it provides very effective diversification of a stock portfolio.
9. A DECLINING DOLLAR. Over the past 3 years, the price of gold has languished under the weight of a strong U.S. dollar. Because the dollar is the world's reserve currency and gold is priced in dollars, a strong dollar tends to depress the price of gold and attract investors to U.S. stocks and bonds, particularly Treasuries. Over the past 2-3 months there has been a shift in the dollar. The dollar has been losing ground, particularly against the Japanese yen and the Euro. Should the dollar's decline be sustained, gold will benefit on two fronts: first, because gold is priced in dollars, as the value of the dollar declines, the price of gold will tend to increase; second, as the value of the dollar declines, foreign investment in U.S. stocks and bonds will decline, adding to the negative momentum in those markets.
10. RISING COMMODITY PRICES. Commodity prices have been on the rise for months,
but, even with the recent price rise, gold has not kept pace. Base metals, raw materials, and energy prices are all up. The CRB Index (a broad basket of commodities traded in the U.S. and Canada that is used to represent the commodity market as a whole) is at a 15-week high. Meanwhile, gold prices have been lagging. History has shown that a wide disparity between commodity prices and gold does not persist for long.
The price of oil has more than doubled this year. In the final analysis, a
significant, sustained rise in oil prices is likely to exert an upward push on
gold prices. An oil price rise also increases inflation. The two major upward
moves in the price of oil in the 1970s were accompanied by increases in the
price of gold.
11. REVERSION TO THE MEAN. From 1970 to 1998, gold predominantly moved in the
opposite direction of stocks. History also proves that the prices of both stocks and gold tends to revert to the mean over the long-term. A crucial question then arises. When will equities move down to their mean, and when will gold move up?
In the past month we have seen both. The Dow is down 10% from its highs, whereas
gold moved from a 20-year low to a 2-year high. How much more would gold have to
rise to get to the mean?
From 1979 to 1999, the average annual price of gold was $386 per ounce. At the
current price, gold would have to rise 22% just to get back to that level.
blanchardonline.com
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