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5 Days of Trading & Gold Drops 4.7%
(December 16, 2005) All good parabolic rises in prices must come to a peak, and gold prices reached that level last Friday. This week, a market that could only go up, reversed itself and could only go down. Technically, the bloom is, at least for now, off the rose.
It’s no surprise that things today cost more than ever. From base metals (copper, zinc, lead) to exotics such as rhodium and titanium, to the whole precious metals complex (gold, silver, and platinum), it simply takes an increasing amount of this limitless creation known as the world’s currencies to purchase the absolutely limited supply of real stuff in the world.

Gold, lately, has become subject to those same broad increases in prices that we’ve seen over the past few years. What doesn’t cost more today than it used to? Real estate, energy, services, and raw materials from steel to plywood have seen huge jumps in prices.

Gold started rising in 2001, a time when inflation seemed to be an obsolete worry. "Deflation” was then the economic bogeyman everyone was concerned about. As we have learned since then, gold once again was proving itself to be a reliable leading indicator of future inflation.

Which makes us think that gold’s rally over the past few weeks (up about $70 since November 1st) portends some really serious fiat devaluation coming our way.

A fellow we know who has been around the block a few times when it comes to commodities markets said today about gold that the “the horse is out of the barn.” In his view, gold prices are now mimicking the recent movement in oil prices, and will fairly quickly trace the same percentage trajectory as did oil, with an anticipated peak of around US$875.

So, let’s imagine that the shiny yellow stuff is “worth” about US$1200. That means the $875 figure may just be an intermediate pause, or a temporary spike. But after a pullback from such a level, envision a whole new group of investors climbing aboard, and then taking gold prices inevitably past its “worth” level of $1200 and from there to some unreasonably high price that today we dare not name.

It is safe to project that gold prices will overshoot on the upside, and eventually fall, probably dramatically. Finally, after a settling period, with prices see-sawing back and forth for a while, gold will find its new “worth” level (say, the aforementioned US$1200).

Barring a total currency collapse, gold would then become as stable as it was during the 1990s. But that stability will come with gold prices somewhere in the four-figure neighborhood.

David Davis, one of Johannesburg’s top-rated gold analysts wrote an article on “The Future of Gold” in June of 2005 (back when gold was some $100 cheaper than today), and summed up the fundamentals of gold accordingly:

“Our study indicates that gold supply is inexorably falling behind demand as a diminishing number of new reserves fail to compensate for dying mines. This has been happening for some time but, until now, the effect has been masked by Central Bank sales and producer hedging. However, this will soon come to an end, and that will be the turnaround when the supply-demand imbalance heats up the gold price.”

Davis pointed out the folly of mining firms hedging the prices received for their product, when there is no way they can hedge their expenses. “The future cycle of events is likely to be different. Capital costs, working costs, labour costs, royalties and environmental costs are undergoing an upward quantum change.”

To sum up: It’s increasingly expensive to get gold out of the ground. The era of central bank net sales is ending. World demand for gold is increasing, especially in the booming economies of China and India. The problem is, there is only so much gold in the world.

How much? All the gold ever mined in the world is variously estimated as between 130,000 and 150,000 tons. That is less than the amount of steel that can be turned out by the US in a single day.


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