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Gold at a New Magic Number
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(December 2, 2005) Gold prices reached the long-awaited $500 level this week, closing in New York trading at $502.50 on December 1st. The next day’s 2nd London fix was exactly the same, while Friday afternoon saw New York markets close at $503.30, with aftermarket trading at the $505.00 level.
This was, to say the least, an exciting week in gold. Since 1982, there have only been two brief periods during which gold traded at over five hundred US dollars, the last such being some 18 years ago. This latest move to that level seemed calm and matter-of-fact, and not at all a spike in prices born of panic or world crises. The bull market in gold which started in 2001 has been steady, and unrelenting, with each new high ($300, $350, $400, $450, and now $500) surprising at first. Yet each of those prices became accepted after a while, and soon what was once a new high, became the new floor.

But the figure $500 possesses its own magic, being a big fat round number, signifying something, at least being a landmark in gold's relentless march to prices unknown.

Of course, the growing legion of gold bulls are in full battle array, with visions of much higher prices in the future. Even local newspapers picked up the significance of $500 gold, with many running articles quoting their local commodities broker or bullion dealer on the whys and wherefores of this new market in gold.

Gold having crossed this significant number, bullish opinion is now rife. Speaking at the Victorian Gold 2005 conference, Deutsche Bank chief metals economist Peter Richardson said:

"The levels we now are trading at, we believe, are critical for determining the success or failure of a major breakout above that $US510 level to really test for the first time in 25 years a pricing environment that, even if it doesn't exceed the 1979/80 levels, will come within striking distance of it."

Those 1979/80 levels he refers to are the spike in gold prices in January 1980 in which gold briefly touched the $850 level in an atmosphere of growing inflation and sudden shocking increases in crude oil prices.

"There is an uncanny and eerie similarity between some of the factors that drove the gold price to $US800 in 1979 and '80 to that which we face," he said.

Reuters Marketwatch of December 1 cited the editor of Global Resources trade, its newsletter service:

"The strength in the metals sector is now undeniable as gold crosses key technical barriers and approaches levels it hasn't seen in decades," said veteran commodities trader Kevin Kerr, noting that the market is seeing "buying strength from every direction -- funds, physical, futures... The demand is real and at these levels of pricing, we expect to see a sustained rise in 2006."

He added that, "The short squeeze is on and bearish metals traders are certainly feeling the pinch."

Emanuel Balarie, a senior market strategist at Wisdom Financial Inc., said: "The $500 level was a psychological point and we broke through that. With gold still rising today, I think we are going to crack $600 sometime in 2006."

He went on to make the argument that the previous 1980 high in gold, at $850, if adjusted for inflation today, would be the equivalent of $2150, and that “Gold is still very cheap when you look at it in that perspective.”

Myles Zyblock, the chief institutional strategist at RBC Dominion Securities Inc., wrote a recent report on gold in which he asserts that "there has been a significant portfolio shift out of financial assets and into tangible assets."

Mr. Zyblock dates this shift from the year 2000 and the collapse of the tech stocks, an event which at the time took most of the stock market south. Gold since then has gained about 75% in dollar terms, while stock have more or less meandered in sideways. Where are we in this gold bull market? Mr. Zyblock clearly believes that it has a ways to go:

"Gold is now in its fifth year of a secular bull market, and if history acts as a useful guide, we could quite easily see another three to five years of solid performance from gold and gold shares."

There are certainly strong arguments for continuing higher prices, even as a pullback of some sorts seems inevitable. Technically, a price breakout, particularly above the $510 level that Dr. Richardson cites, could prove to be incredibly strong and swift. Barring such a breakout in the near term, a pullback in price could give this market some time to take a breather, gather strength, and bring in new participants who have been holding back for the past few weeks, desperately hoping to be able to ‘buy the dips.’

Either scenario would occur against a backdrop of strong fundamentals: an increasing demand for gold, both for jewelry and investment, and no new significant mining supply coming on line for years. On the supply side, increasing energy costs simply make it more expensive to get gold out of the ground – those costs are actually increasing faster than the rising price of gold. On the demand side, while India is slowing down due to price concerns, Chinese demand is increasing monthly, and the beleagured euro is encouraging more Europeans to invest in gold.

This bull market in gold has gone on now for five years without much in the way of US investment demand. Gold remains, to most Americans, enigmatic, foreign, and mysterious. The world’s champion creator of fiat money is still, per capita, one of the world’s most frugal consumers of gold bullion.

But this new $500 level in gold prices will certainly cause some Americans to sit up and take notice.

 

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