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2010 - Where Do We Go From Here?
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(January 4, 2010) The decade just ended saw gold progress from total obscurity ($282.05 on 1/4/00) to fame (four-figure prices every day since October 2009). During that decade, its price almost quadrupled in US dollars, as the US (and much else of the world) went from national surpluses to staggering deficits. Yet gold's 2009 close at $1095 was some 10% off its record high for the year. Does that mean anything?
Gold ended the year 2009 at $1095, about 10% below its record price of $1212.50, which was the PM London fix on 12/2/09. This price correction marked a cooling of the yellow metal market as 2009 wound down, and inevitably raised the question - what is gold really worth today?

When we ask the value of gold, we are really asking the value of the dollar. Our view is simple: our economic lives today are subject to a worldwide experiment, in which the traditional money, gold, has been shunted aside in the name of political expediency, and replaced by artificial money, created by governments at will. Further, recent events have overwhelmingly proven that monetary creation is now being practiced without restraint, discipline, or, for that matter, any evident adult supervision at all. This money being created is still our current medium of exchange, but by no means should it be considered a reliable store of value.

The most practical and timeless store of value is gold. In the future, some unimaginably high gold/dollar price may change our mind, but current gold prices are a long way from that point. Therefore, we do not yet see gold as anything other than a prudent long-term holding.

But over the past few weeks, gold has experienced a downturn in price, not unlike many other such dips we have seen over the past ten years of this gold bull market. Which opens the door to considering some aspects of the case against gold.

David Olive, business columnist for Toronto's Thestar.com, dutifully echoes some of the lamest and most cliche-filled arguments against gold in a 12/27/09 column on that website:

"Gold, truth to tell, is a lousy investment. It pays no dividends and incurs high storage costs. It is illiquid (try paying for groceries with a gold bar). And it's in almost infinite supply. Central banks and the International Monetary Fund can and do regularly sell off gold from their reserves, flooding the market. Gold producers bring uneconomic mines back into production when a rise in gold prices makes them viable again. And gold, unlike oil, does not change its chemical composition, and turn into something else, when used. Practically every bit of gold in use since the Pharaohs remains in existence."

Mr. Olive should be reminded that gold, that 'lousy investment,' has nearly quadrupled in ten years, can be stored safely for less than what many mutual funds charge for management fees, is liquid to the extent of billions of dollars a day (but not yet at your local grocery store), is bought as often as sold by central banks, is increasingly expensive to mine (production has fallen while prices have increased), and that all the gold mined since the time of the Pharoahs amounts to less than one troy ounce of the stuff for each person on this planet.

In reality, gold is a market commodity, subject to changes in supply and demand. And though gold mine production has been flat for years, Curt Harler, writing for Recycling Today, makes some good points about increased supply through scrap processing. As he points out, not all precious metals that come onto the market are being dug out of the ground:

"Tough times run up precious metals prices and bring materials out of nooks and crannies. The current crunch is no exception. The housing market is dead. The dollar is weaker than any time in recent memory. Business is slow almost everywhere. As a result, prices of gold, silver and PGMs (platinum group metals) are up. For recyclers who make a living on the spread between their buy and sell prices, things are fairly comfortable right now. Materials are flowing. Even the PGM area, where dismal car sales generally mean fewer vehicles scrapped, has a bright lining in the form of “Cash for Clunkers.”"

Jon Nadler, that often infuriating thorn in the side of goldbugs everywhere, and chief market commentator for kitco.com, digs into the World Gold Council's gold demand figures, and paints a bearish demand picture for the shiny yellow metal. From his article of 12/29/09, "Weapon of Demand Destruction:"

"Here is a brief list of gold demand areas and their respective declines in tonnage terms, in Q3 of this year, versus the same period in 2008:

Jewellery Consumption: -30%

Industrial and dental: -11%

Identifiable Investment: -46%

Net Retail Investment: -31%

Bar Hoarding: -36%

Official Coin: -15%

Other Investment: -26%

ETF & Similar: -72%

"Total Identifiable Demand was off 34% on the quarter. What was ‘up’ in the period in question? Why, the price of gold, of course."

Mr. Nadler makes the case here that gold demand slackened considerably during the 3rd quarter of 2009 versus 3rd quarter 2008, and that the gold market is up in price in defiance of all reality. At first glance, the figures seem supportive of his constant theme that gold is overbought, overpriced, and likely to disappoint its tinfoil-hat-wearing proponents.

But if memory serves, the last six categories of gold offtake cited hit screaming new highs in 3rd quarter 2008, as all hell broke loose during the virtual meltdown of world financial markets in September of that year. As noted here previously, investment off-take of bullion coins increased six-fold in the US, and over 1,100% in Europe during that quarter of 2008.

So although Mr. Nadler's comparisons might best be described as both accurate and misleading, they do make the point that gold is a market commodity subject to the normal forces of supply and demand.

During 2009, the US Mint sold a total of 1,425,000 ounces of its popular gold Eagles, and in the same year some 1,410,000 US citizens filed for personal bankruptcy, according to figures from the Wall Street Journal of 1/5/10. Do either of these very similar numbers resemble a bubble in any way?

The point to be made is that while gold may be temporarily "overbought," it is fundamentally "under-owned" by the average investor.

There really is no magic to gold. The ancients considered it divine, and some people today still grant it mystical powers. But despite its colorful history and universal appeal across all of the world's cultures, it is simply #79 on the periodic table of elements that we were all introduced to during high school chemistry class.

In the end, gold is only gold. Yet, alchemists tried to make it out of lead, governments tried to make it out of paper, and today, we try to make it out of electrons. But in the end, only gold is gold. Some say gold is useless, others say that it is irreplaceable. Paradoxically, both views are probably correct.

 

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