www.preciousmetalstockreview.com
October 22,
2010
Gold Explained, And Then Some
Before I get to the meat of this short article I’d like to say that the
correction in Gold is very welcome by myself.
I was a bit early calling for it, but it was inevitable, and the chopping
action would have just teared a trading position to shreds the past two weeks. I
am glad we got out when we did.
Now we wait...maybe a few days, maybe a few weeks. There will be an
exhaustion low though before it resumes it’s move higher and that low is what
I’ll be aiming for.
But enough of that, I will be getting into that and so much more over the
weekend in the free weekly letter.
Junaid Anwar Khan wrote an article recently titled “Soaring gold prices
explained”.
He did an admirable job, but I thought I’d throw in my comments/
thoughts on his views. My commentary is in italics.
GOLD prices have risen about 25 percent this year, reaching a record high of
$1,387.35 an ounce on October 14.
The precious metal had touched all-time highs in eight out of the last 10 trading
sessions leading up to last Thursday, fueled by a decline in value of the U.S. dollar.
The recent rally is the icing on a meteoric rise in the value of gold, viewed as a hedge
against inflation and dollar depreciation, over the past 10 years.
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P r e c i o u s M e t a l S t o c k R e v i e w Page 2
Here are some of the factors behind the metal's price rise and why the rally is likely to
continue.
1. Financial crisis
Gold prices scaled new highs after the financial crisis of 2008-09 as investors shaken by
the global economic turmoil found refuge in the safe haven metal. The story continues
till today as we see gold prices setting successive records above $1,300.
! True. Some investors began investing in Gold during and after the financial
crisis, which is still underway...by the way.
! But by 2008 Gold had traded at over $1,000. It then dropped to $700 briefly and
the Gold bull market was apparently over.
! What about investors whoʼd seen the crisis coming (a fairly easy thing to see
coming in reality) and had been in Gold since the housing bubble peak in 2005 when
Gold was at between $400 and $500 dollars.
! And the real prophets who began investing in Gold since 2001 while Gold was
under $300 and the internet bubble was fresh off itʼs popping.
2. Big investors
Institutional investors and hedge funds have been increasingly putting money in gold
through physical purchases on the spot or in the futures exchange market.
! Yes. Absolutely correct....however the amount
we are talking about today is very, very small as
evidenced by the graph directly to your right.
! Letʼs even say that so far in 2010 Institutions
and Hedge funds have really accelerated their
buying of Gold and Gold mining shares and this
figure is 5%....even if it were 10% weʼd still only be
halfway there.
! There is NO BUBBLE!
3. Shaken confidence
Low interest rates and quantitative easing in major recession-hit developed economies
such as the U.S., euro zone and Britain have also shaken the confidence of investors in
major currencies - inevitably, gold's allure has grown.
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P r e c i o u s M e t a l S t o c k R e v i e w Page 3
Bingo! But these Johnny come latelyʼs are reacting to economic conditions, not being
proactive and trying to see whatʼs next.
4. Central bank gold reserves
Major central banks with sizable gold reserves have also halted sales and made known
the shift in policy, with some in the emerging markets converting their currency holdings
into gold reserves.
! Absolutely. The Washington Agreement, as itʼs known, is all but dead.
! The only Central Bank selling anymore anything worth mentioning is the Central
Bank of Central banks, the IMF which is selling 400 tonnes of Gold through the
agreement and has sold over half of the 400 tonne total they have vowed to sell.
Soon, there wonʼt be ANY SELLERS!
5. Mining firms
With the rising gold price, producers have also stopped selling their anticipated
production forward.
! En masse, absolutely and itʼs about time they got bullish on the product they are
mining and selling.
! The buyers of the hedges got the best deal since sliced bread and were the true
prophets who saw Goldʼs ascent coming.
! They bought copious amounts of Gold around $300 for future delivery!
! Smart cookies they are.
6. Exchange-traded funds
Perhaps the most significant player to enter the gold craze has been the ETFs or
exchange-traded funds. These funds allow investors the opportunity to own the
commodity through the purchase of ETF shares or certificates without hoarding gold in
its physical form.
! There is no doubt the ETF market has helping increase demand for Gold, but just
how much is the question. Itʼs impossible to know, no matter what anyone tells you.
! The most recent reasons to mistrust these types of structured product is the
Foreclosure Gate fiasco.
October 22, 2010
P r e c i o u s M e t a l S t o c k R e v i e w Page 4
! No doubt ETFʼs are increasing demand, but to 100% ensure increasing demand
you have to physically own it in your possession or stored securely by yourself or
someone you trust.
! And heaven forbid you ever actually NEED the Gold for transactions or bartering
purposes one day. There would be a 0% chance of retrieving your Gold from these
structured products in that case.
7. Sovereign debt default fears
Fears of sovereign debt defaults have added to the worries of investors, already rattled
by stock market volatility. Add to this existing geopolitical tensions, continuing economic
uncertainty and declining gold production in key mining nations and you get an idea of
goldʼs unshakable safe haven status.
As long as these factors persist, gold is likely to find favor among institutional investors.
However, if history is any guide, one can be sure that volatility in the price of gold will be
the order of the day.
! As I said above. Those who took the hedges on Gold are the powers behind the
political facade of government. They knew a currency crisis was coming and sovereign
debt default was a real possibility.
! I may even suggest they structured it this way...but Iʼll leave that to wear their tinfoil
hats out in the open. Mineʼs still in the closet!
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Until next week take care and thank you for reading.
Warren Bevan
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