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Gold on a Roll, 2009
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(November 24, 2009) Gold soared into record price territory again this week, trading above $1100 per ounce for its eighth straight day, and confounding its doubters with a determined refusal to back down, even against a somewhat stronger dollar.
The gold bullion business continues strong, with a veritable plethora of new buyers deciding to put some funds into the timeless yellow metal. Gold’s rise of 7.3% so far in November, compared with bank CD returns of a fraction of a percent per month, made the case for gold irresistible to those with money parked in so-called ‘safe’ certificates of deposit.

Adding to the current urgency among gold-buyers was a total lack of any significant pullback in gold prices over the past few weeks. Those who have been looking for an opportunity to enter this market during a price correction, have watched and waited, watched and waited, and finally have come to the conclusion that standing on the sidelines is a costly mistake.

The World Gold Council this past week released world gold demand figures for the 3rd quarter of 2009. Although this quarter’s bullion demand did not match the frantic off-take we saw last fall during the panic phase of our recent economic unpleasantness, it was up significantly from the second quarter of 2009.

From their November 19 press release:

Total identifiable gold demand for the third quarter 2009 reached 800.3 tonnes, or US$24.7 billion in dollar terms, up 15% from the second quarter, as gold’s long-term store of value and wealth preservation qualities continued to attract investors and consumers. Jewellery and investment demand in non-western markets rebound from the very low levels seen in the first quarter, while industrial demand started to recover in response to an improvement in economic conditions.”

More and more we read of money managers extolling gold’s virtues, and financial institutions acknowledging its rightful place as part of a balanced portfolio. The change in gold’s respectability quotient over the past year or so has been remarkable. But it would be hard to characterize gold as a faddish investment. Gold’s rise since 2001 has been fairly steady, and lacks any signs of being a frothy or ‘toppy’ market.

Gold, up 33% so far in 2009, has simply performed well. Currencies, including the dollar, have lost ground in value against gold. This fact is attracting attention.

India’s announced purchase of 200 tonnes of gold from the International Monetary Fund’s holding in October gave a significant boost to the gold market. 200 tonnes is a lot of gold – equivalent to a month’s production from all the gold mines in the world, and enough gold to just about fill a small bedroom in your home.

This purchase cost India the equivalent of some seven billion US dollars ($7,000,000,000). Back before our recent economic unpleasantness, that would have seemed like an astounding number of dollars.

But, let’s put that once-enormous figure in context. Remember the original TARP (Troubled Asset Relief Plan) bailout? That was seven hundred billion dollars ($700,000,000,000). Which means that India’s gold purchase, in dollar terms, came to 1% of that controversial bit of federal generosity to US financial institutions.

For that matter, Goldman Sachs is on track to dole out at least seventeen billion dollars ($17,000,000,000) in bonuses to its employees this calendar year. That sum itself puts India’s gold purchase in the shade. And imagine if all those Goldman Sachs traders decided to convert their booty to gold – that would take care of the whole pile that the IMF is considering de-accessioning at this time, and then some.

The point of this comparison is: seven billion dollars is an earth-shaking amount of money in the gold market, In fact, the mere announcement of such a transaction caused a tremendous move in the gold markets, and made headlines all over the financial world. Yet, back here in the USA, one single (very large and very well-connected) financial institution is passing out nearly two-and-a-half times that sum in yearly bonuses.

Creating what passes for ‘money’ today is easy. Digging gold out of the ground is hard. For instance, if we as a nation run a trillion-dollar annual national deficit for the next six years, that sum exceeds the value, at today’s prices, of all the gold in the world. It barely seems possible.

What we have today are two parallel universes of money.

On the one side is the traditional and permanent wealth, gold, of which there is a relatively small amount in existence. At the current rate of mining, gold supplies increase at the meager rate of about 1% per year.

On the other hand, in Washington DC, dollar obligations continue to be created with astounding casualness, as if there was no tomorrow.

But if you suspect that there will be a tomorrow, you might want to plan accordingly.

 

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