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Wow, Pow, Holy Cow! Gold on a Roll!
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Gold prices in US dollars surged $30 in nine trading days, catapulting from $456 on Monday November 7th to close at $486 on Thursday November 17th. A ‘buzz’ is growing about gold, now trading within chump change of the once unimaginable $500 level.
Gold demand has been roaring this calendar year (the World Gold Council announced a 56% increase in investment demand in the 3rd quarter), and now a seemingly inevitable $500 price is causing a lot of new participants to hop aboard the gold bandwagon. This week even saw two of the biggest gold producing countries in the world, Russia and South Africa, hint that their central banks were looking to significantly increase, and in the case of Russia, possibly double their central bank gold reserves.

As a sign of this being a true rally in gold, and not just another instance of the market taking the dollar down a peg (although the dollar has stepped down quite a few pegs this decade), gold's rise, since early this past summer, has been in the face of the dollar actually strengthening against most currencies.

Of the amazing gold/dollar market action on Wednesday, 11/16/05, Adam Hamilton of Zeal Intelligence wrote:

“This week to witness gold actually close at its highest levels in this entire bull market the very same day the rallying dollar achieved its highest level this year is staggering! Gold is being driven to new highs not by flight capital fleeing a crumbling dollar, but by prudent investors around the world bidding up its price because they want to own gold.”

Gold is undergoing a fundamental revaluation. To buy a given measure of gold, today it simply takes more of the world's ephemeral fiat monies – whether yen, pounds, yuan, dollars, or rupees.

Or, weakest of all recently, the poor euro. This week, for the first time, it now takes more than 400 units of this, the most recent and artificial of all currencies, to buy one troy ounce (31.1 grams) of pure gold.

In the November 21st edition of Barron's, Sandra Ward's article entitled "Four-Digit Gold?" included an interview with John Hathaway of the Tocqueville Gold Fund, in which he said:

"Look at all the people who were bearish on the dollar a couple of years ago - they've been slammed because they put their money in the euro. The should have put it in gold." Asked by Ms Ward if he was surprised at the recent behavior of the euro, Mr Hathaway replied:

"Not really. It is a piece of garbage, really. There is no national treasury that stands behind it, but a committee of bureaucrats."

Two weeks ago, the US Mint actually ran out of 1-ounce gold Eagles. Normally this time of year, the Mint has built a sufficient stockpile of gold Eagles to take care of demand for the balance of the year, while they begin striking bullion products with next year’s date for their huge release of product in the first week of January.

But this gold bull market fooled Mint officials, and what looked like an adequate supply of 2005-dated gold Eagles ran out in a few days. The rush to acquire America’s most popular gold bullion product left the Mint short, and there was actually a two-week gap in which Eagles were not available. Currently, the Mint plans to sell one more batch this month, and then go back to production of 2006-dated Eagles for release in the first week of January. So it’s possible that we may see some more shortages in US gold bullion product before this year is over.

Similarly, China’s production of 2005-dated gold Panda coins is sold out, catching dealers and distributors unawares when China made that announcement earlier this month. Those who were left out were not mollified by the news that new 2006 Panda gold and silver coins will be available in early December.

A major international refiner that distributes throughout the world is stretching out delivery times for gold bars in the face of increased US demand, as their large Swiss melt and pour facility simply doesn’t have sufficient on-line capacity.

Anecdotal evidence suggests that US gold retailers of the ‘mom-and-pop’ variety - those who rely on gold bullion products to just ‘walk in the door’ - are losing sales. Because buyers outnumber sellers by such a wide margin, these small retailers just don't have enough inventory to meet demand.

At the upper end of the gold bullion business in the US, increased demand has shown up strongly over the past year. One avenue of gold investment, the Exchange Traded Fund, or ETF, has been a huge success in the gold field. GLD is the name of the US gold ETF, and each GLD unit represents one-tenth of an ounce of pure gold. In this way, US investors can buy gold in pooled accounts rather than in physical form.

Rhona O’Donnell The Mineweb.com writes:

“The US product is obviously the most successful to date, was launched a year ago today on November 18th 2004 and is the fastest growing ETF in history (and the market has more than 200 different securities with capitalisation amounting to roughly $300 billion in assets on a global basis). GLD currently stands at slightly over $3.3 billion in assets. Global gold ETFs attracted 38 tonnes of investment in the third quarter, of which 32 tonnes went into GLD, thus registering an 18% growth in tonnage in the US and 28% in dollar terms. These trends are expected to continue in the fourth quarter.”

If you have any doubt as to the strength of US investment gold demand, consider that this $3.3 billion in GLD gold is backed with a warehouse containing about 211 tonnes of gold, out of an annual world production of some 2600 tonnes.

In other words, this one single US gold ETF in its first year of operation has taken more than 8% of the world’s annual gold output off the market.

Going back to the big numbers that we have so much fun throwing around, at today’s gold prices, a mere $40 billion would buy all the gold mined in the world this year. And at current rates, the US budget deficit achieves that figure every five weeks or so. The US trade deficit hits that number every 20 days.

So if the dollar, which has rallied this year against virtually all currencies, should start to falter, where are gold prices likely to go then?

 

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