Posted on 12/01/2005 10:40:52 AM PST by .cnI redruM
NOTHING swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back.
This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
Advertisement The fascination of gold lies in its being not only a commodity but also a store of value and means of exchange. The glamour and the mystique lie in the latter, monetary part. This is what draws gold bugs, but their story doesn't quite add up. The unbalanced world economy still faces risks. But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. Oil prices are plainly far higher than they were, but they have come off their peaks. Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening.
Bear on bullion Gold's renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist's metals index, which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. Chinese investors now have other places to put their money.
Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint.
The principle of investment companies: Sell High, Buy low.
For that to work, they need their clients to Buy High and Sell Low. I would love to hear from anyone who had their broker tell them in 1999, "Yahoo! has peaked, you had better sell now before it starts down." Brokers will call to tell you, "Yahoo! just broke $100, buy before it goes to $250. If it keeps on like it has been, you can't lose."
That just means that they want to dump their institutional holdings before it drops.
Not really. One of the reasons the price of gold is inching higher is that physical demand has been greater than production for the last several years. It has been acting more like a commodity than in the past when, as you mention, emotional reasons have influenced the price.
Many of the world's large producers, especially in South Africa, are running out of economically produced reserves. The huge open pit producers in northern Nevada are mature mines and grades and reserves are falling, (meaning operating costs per ounce are rising).
During the late 80´s and 90's, when the price was below $300/oz, nearly all mining companies drastically reduced spending on exploration. This had the effect of forcing many very experienced exploration geologists into other professions and there has been a drought of new discoveries, and new production. The current price bump largely reflects this production lag the industry is passing through.
People need to realize, there is a very long lead-time between exploration-discovery-production in the metals business. It's not like an oil well, where if the well is productive, you just connect the pipe and turn on the valve. From discovery to production can easily take as much as 3-years, (fast track), and normally from 5 to 10-years.
Over the next several years, as recent discoveries are brought into production and marginal deposits at low gold prices are now profitable, the price will stabilize. I suspect the price will hit $575 sometime next year then drop to the high $400's.
My two ounces worth.
From the article:
"The world is an unpredictable place."
That's why I have a little bit of gold stashed away. Along with cash, water, spam and ammo.
Exactly!
And if you bought gold at its low in the 1990s, you'd have doubled your money. And if you bought a basket of Nazdog stocks at the same time, you'd still be out money.
You gotta know when to hold 'em, and know when to fold 'em...
Gold is a "barbarous relic" to those economists and politicians and bureaucrats who desire to control from the politicval center the ups and dwns of economies. The Keynesians, especially, believe that all facets of the economy should be under the direct control of the Political authorities and that they should be abe to "manage" inflation and production and everything else by making "adjustments." Gold is a very visible measure of the failures of the Keynesians and the Monetarists and the politicians to accomplish anything, at least the things they wish to accomplish. They work for short term ends and use tools that produce long term effects which are not at all understood by the tool users. Gold is not an investment for value gain because gold is the measure of value. Gold is a safe harbor for assets in that its value does not change appreciably.
The price of oil has, indeed moderated from the short term increased scarcity in the market but it is still double what it was only a couple of years ago. And housing, levelling off, remains much higher. The rapid and large increases in both these things shows the working of very real inflation. If they actually decline we can expect rises in the market generally. The extra dollars that are inflation have largely
gone into real estate and oil since 2000. If those areas decline then those dollars will be in the market chasing everything else. Evidence that these price rises are, in fact, the manifestation of inflation is that while oil and RE have gone up rapidly, other goods have not declined or disappeared. If the money supply were stable, i.e. no inflation, the sharp rise in a major segment of the market would be accompanied by declines in the rest of the market
I bought gold calls for $150 each just before the last gold run-up in um....1999, I think. Sold them for $2250 each, greedy capitalist that I am, lol!
No, I haven't.
If we become nomadic bands of people again in some post-apocalypse Road Warrior society, give me shotguns, canned goods, and water over gold.
Good point about institutional clients and stockbrokers.
Example: Pension fund "A" wants to sell 3 million shares of DuPont, but does not want to run the price down as they do so, getting a little less for each successive share due to selling pressure.
Stockbrokers working at the Brokerage for Pension Fund "A" are instructed that now is a good time to tell all their small clients to buy a 100-1,000 shares of DuPont.
Pension Fund "A" distributes the shares, the brokers make commissions (plus a good spread since they "make a market" in the stock), and how DuPont subsequently performs is immaterial to everyone involved except the share buyers.
Yeah, but in this case, didn't the crash of the stock market pretty neatly correlate with the beginning of the "real estate bubble"?
He might be on to something with the Paris Hilton recommendation ;-)
Lordy ain't that the truth.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.