Gold doesn't glitter, yet

Posted: November 20, 2008, 10:03 AM by Diane Francis

Greed, Canadian Politics, U.S. Politics

"Buy gold, silver and oil as fast as you can, you morons, or die a horrible death by inflation like the people of Zimbabwe!" – Mogumbo Guru (Daily Reckoning)

Gold has not glittered, but just wait, say the goldbugs, who have been wildly wrong since the monetary maelstrom sped up during the summer. They invested in gold’s reputation as a safe-haven investment and prices have fallen 30% from the March 17 peak of US$1,033.39 an ounce. Gold for December delivery is around US$740 an ounce, representing a return to values one year ago. Gold stocks have fallen even more.
Gold fan, Canadian money manager Eric Sprott,

wrote recently that gold is not performing the way it should in hard times. Consensus is that hedge funds and other large investors who drove gold up are cashing in those positions to cover losses. This has also driven down other commodity prices.

But there are some interesting, recent developments which could make true Gold Bugs Beam:
1. Saudi Arabia just doubled its gold reserves position by US$3.5 billion and other Gulf state potentates are doing the same, amid fears that Washington will simply have to print too much money and will create hyper-inflation.
2. The eminent Wall Street Journal recently published a recommendation that a return to a gold standard is the only way to curb the printing presses spewing out cash at the Federal Reserve and other central banks. This is a remarkable development.
3. The worldwide market for gold coins is so tight that in some countries people are paying up to 25% more per ounce than the spot price. This bodes well, says Sprott and others, for increasing interest in gold again as a hedge against the looming, tsunami of paper currencies about to flood everywhere,

On the Gold Standard one more time which would be bullish
One estimate by a banker is that US money supply growth in the past few months has leaped by 111%. In the early 1930s, only 15% in money supply growth occurred.
Here is the WSJ piece by former vice president of the Federal Reserve Bank of Dallas, Gerald P. Driscoll about a gold standard:“The economy now confronts deflationary forces. If past is prologue the Fed will concentrate on those deflationary forces for too long and rekindle an asset boom of some kind. The fiscal "stimulus" being contemplated by Congress could be another economic accelerant. If both the fiscal and money stimulus efforts kick in just as market forces also kick in, we're likely to see another unsustainable boom that will be followed by a bust.”

“The incoming administration must think about that possibility because the timing of boom and bust cycles seems to be shortening. The next bust could come five or six years from now -- or about in the middle of an Obama second term. Should that happen, Mr. Obama would be unable to blame Republicans for the mess and would be tagged as the second coming of Jimmy Carter.”
“To avoid such a fate, Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply. Today the government can inflate asset bubbles without paying a cost for it because the currency isn't linked to the price of a commodity.”

“With a commodity standard in place, the government would also have price signals that would alert it to the formation of a bubble. Why? Because the price of the commodity would be continuously traded in spot and futures markets. Excessive easing by the Fed would be signaled by rising prices for the commodity. In recent years, Fed officials have claimed that they cannot know when an asset bubble is developing. With a commodity standard in place, it would be clear to anyone watching spot markets whether a bubble is forming. What's more, if Fed officials ignored price signals, outflows of commodity reserves would force them to act against the bubble.”
“The point is not to deflate asset bubbles, but to avoid them in the first place. Imposing a commodity standard is a practical response to the repeated failures of central banks to maintain sound money and financial stability. What would be impractical is to believe that the next time central banks will get it right on their own.”
(It's important to note that the United States has the largest storehouse of gold bullion in the world in Fort Knox, or more than 8,100 tonnes, which represents 77% of its total reserves. Americans may become very happy to return to a gold standard after they have wrecked their currency.)

Bearishness based on why gold will continue to be pulled down
"Gold is being pulled down by indiscriminate selling of virtually every asset," said Jeffrey Nichols, managing director at New York-based American Precious Metals Advisors on a recent blog. "You could call it collateral damage."
Investors are fleeing to cash, or U.S. T-bills, thus pushing that currency up to highs against others.
Another drag on gold prices is the fear that a widespread, sustained economic slowdown will lead to mass asset deflation. Gold may or may not respond in this scenario,
"Gold hasn't been tested in a true deflationary crisis so we don't what will happen to prices," said Jon Nadler, a precious-metals analyst with Kitco Bullion Dealers Montreal in another blog.

We wait as usual - Andy K