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Gold Opens 2001 at Lowest Price in Twenty Years
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(Jan 11, 2001) Gold began this Millennium at $271.10, the lowest opening price seen since 1979, a year in which it went from $226.80 January 2nd to $512 by December’s end. With equities markets uncertain, and the “R” word in the air, what’s the lowdown on gold?
For three years in a row, 1997-1999, gold prices closed between $284 and $291. Prices have now slipped below that level, tumbling today to $264.00, and all sorts of talk is in the air.

Normally, we don’t much concern ourselves with the implications of gold market fluctuations. Gold goes up and down, and really hasn’t made a significant move in years. Check out our “Gold Charts” section to see what gold prices have been doing since they were cut loose from the dollar in 1970. The 1970’s and 1980’s were pretty exciting decades for gold price movements, but then the placid gold market of the 1990’s just about puts you to sleep.

We at OnlyGold have done a great deal of gold bullion business at the relatively low prices of the past few years, and our clients are generally not traders or speculators. Usually our clients buy gold for their own reasons or at the suggestion of their financial advisor. They primarily buy gold as a hedge and an insurance policy, and a way to take absolute, immediate, in-their-hot-little-hands control of some of their wealth. They really don’t care much whether it goes up or down once they buy it – they have no plans at all to sell it, possibly ever.

So daily gold price fluctuations are not important. What is important in this extended period of relatively low gold prices is not to be lulled to sleep, imagining that gold prices will always be this low. Don’t miss this chance to buy gold ‘on the cheap.’

Because this comfortable, low price gold situation is subject to dramatic change at any time.

Our opinion about gold today is the same as John Hathaway’s: the potential move upward in gold could be strong and quick.(go to our Archives to read his article, dated October 2, 2000) With gold prices so low, it makes no sense to procrastinate and dither, waiting for the perfect time to buy. Gold is such a good value right now by almost any measure (supply vs. demand, price relative to 20-year average, real price adjusted for inflation, etc.), that trying to pick an absolute bottom as an entry point seems penny-wise and pound-foolish.

But many people unnecessarily bother themselves with the unanswerable question of where gold prices are headed. We purposefully avoid that sort of speculation on this site, mostly because most of what you read about the gold markets is a bunch of useless hooey, and why should we contribute to that?

Nonetheless, there are opinions out there. And in the spirit of the New Year, and with a promise that we won’t do this again for at least another year, let’s take a look at some of the more qualified thoughts on gold.

First of all, the word from a couple of big brokerage houses, Salomon Smith Barney and Merrill Lynch. Last week, Salomon Smith Barney actually came out and formally recommended gold as an investment to their clients, according to Leonard Kaplan’s newsletter of 1/9/01. Their bull call on gold is based on the annual gold shortfall of 1,000 tons in newly-mined supply versus the demand in the areas of jewelry, coins, and investment.

But, Merrill Lynch almost simultaneously came out with an opinion that this is not the time to buy gold. Merrill Lynch repeats their gold trading range prediction of $265 to $320 for this years, a call which was nearly dead-on accurate when they made it last year. They opined that this isn’t the right time to buy gold, either for an intermediate or long-term investment.

Kaplan himself, a long-term trader, broker, and commentator in the precious metals field, says “I tend to favor the opinion of Salomon as gold may, in some minor way, recapture the safe haven status, to some minor extent. At least I don't believe that long-term investors will suffer buying gold at these levels as the risk, in my opinion, is just not there.”

But, for the gloomiest of current opinion on gold, let’s turn to the always-quotable Andy Smith of the Mitsui trading house. Smith sees a return of the same forces that dominated the gold market up until about a year ago. That negative atmosphere is one in which mining companies sell gold they won’t produce for years in the futures markets, central banks loan out their gold holdings, and a there’s a general lack of investor interest.

Of course, if you think about those first two factors, they’re actually very bullish for gold in the long-term. When you have miners selling gold they don’t own, and bankers loaning out gold that is then made into jewelry, the net result is an increase the huge worldwide ‘short’ position in gold.

According to Andy Smith, as quoted by Dow Jones News, this combination of forces, if the gold market continues to be thinly traded, may lead to gold prices as low as $210 during the year 2001. The last time gold traded that low was the end of 1978.

Of course, one fact ignored by such dire predictions for lower gold prices is this: the Fed knows that $210 gold would signal a deflationary train-wreck in our economy. Gold prices, inflationary expectations, interest rates, and our fragile economy are all tied together.

Steve Forbes, publisher and erstwhile presidential candidate, reflects on that relationship in his “Fact and Comment” column of January 22, 2001. Recognizing that the Federal Reserve Bank has long had a strong influence on gold prices, and that the economy depends on Greenspan’s manipulation of interest rates, he writes the following:

“…the Fed could still make the mistake of thinking that easing interest rates is the equivalent of monetary ease. How can you tell if Greenspan & Co. are getting it right? The most sensitive measure is the price of gold….If the yellow metal moves into the $300-to-$325 range, breathe easy, because the economy eventually will, too. However, should the “barbarous relic” (as John Maynard Keynes mistakenly called it) stay in its current range in the months ahead, keep worrying, because the Federal Reserve will be destructively imitating the Bank of Japan.”

“Of course our central bank could make the opposite mistake, easing too much in a panic. Be ready to short bonds if gold surges past $350 an ounce.”

Now, let’s make a few points here.

First off, it is in the Fed’s interest to keep gold prices fairly steady. You can call it price manipulation or a conspiracy, but at least face the fact that it’s true (and there’s no sense whining about it).

Secondly, the Fed can do this because they have the power to overwhelm the weak investment demand at these lower price levels. The total volume of daily gold trading may look impressive at the rate of $billions per day, but U.S. stocks alone trade daily in $trillions.

Thirdly, if just one-tenth of 1% of the money currently in stocks and mutual funds in this country went into the gold market, the increased demand would swamp the current supply of physical gold. Tremendously higher prices would follow, no matter what the Fed tries to do.

Our fourth point: these predictions about gold prices may be fun to take a look at once a year, but that’s about it. Basically, if you consult the experts about what gold will do, they will disagree with each other. And if you go further out, to the amateur opinions found in newsletters, websites, and gold ‘forums’ on the Internet, the information you get is even less than useless.

At any rate, most of us have more important things to do than follow the wiggles and squiggles of the gold market. The big picture is what is important. And at OnlyGold, we think this is the Big Picture in Gold:

1. Gold prices today are cheap by any measure.

2. Gold will fluctuate, and the forces that move the gold market are huge and unpredictable.

3. Gold will never become obsolete as a store of value, because it enjoys an almost primal cultural role of great power for our species.

4. Nothing can replace gold. It is rare, brilliant, soft, lustrous, and innately desirable.

5. Gold’s permanent worth derives from the fact that it is valued for itself – it is not the obligation or debt of someone else.

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