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Gold Over $1400 - Again
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(February 27, 2011) With gold on its fourth trip past the $1400 mark, interested parties might begin to wonder, is this it? Will gold this time blow through the $1425 level on its way to the next Big Round Number of $1500…and beyond?
Gold has floundered on both sides of the $1400 mark since the first week of last November, and this week surged past that price point for the fourth time in about four months. Events in Egypt, Morocco, and Libya dominated the news this time, as unrest shakes up some of the region’s entrenched powers that be, with effects that cannot be predicted. Also, oil reckons to be higher in price should Libyan production be reduced or curtailed entirely for an extended period. But gold’s push above $1400 is just another in a series of record prices in nominal dollars recorded over the past few years.

“What is driving gold now is Middle East tension, inflationary concerns, people wanting to own hard assets, and disbelief in their own currencies, wherever they live in the world. I think gold gets to $2,200.00 with five years. “ –Rick Bensignor, chief market strategist, Dahlman Rose, as quoted in Barrons 2/28/11, page 12.

Two thousand, two hundred dollars per ounce may seem impressive at first glance, but Mr. Bensignor is assuming that gold’s price will increase at about half the rate it has over the past decade. Actually, since 2001, gold has increased in value 18% annually, compounded, as it climbed from $275 to $1400. Apply that same rate of price growth over the next five years, and you have gold trading over $3200, instead of merely $2200.

“While many observers feel that the gold rally has been overdone, is too crowded, resembles a bubble or whatever, the simple fact remains that central banks of the Western democracies appear on course to debase paper currencies. On the one hand, currency debasement is the path of least resistance to grapple with the seemingly intractable fiscal issues of record deficits and unchecked growth in entitlements. On the other hand, persistent economic weakness translates into political pressure for central banks to pursue extremely lax monetary policies. Under these circumstances, it is hard to argue against the notion that some exposure to gold offers protection against monetary damage still to come.” – John Hathaway, Tocqueville Asset Management, 2010 year-end letter to shareholders.

Demand for gold bullion remains steady. Although we’re only into the second month of 2011, Australia’s Perth Mint has now sold out all of its 30,000 gold 1-ounce Rabbits for 2011, the earliest sellout for any Lunar Series gold coins since they began production in 1996.

How would we know for certain that gold is becoming popular? How about a TV reality show about it? Sure enough, “Gold Rush Alaska” is the tale of a group of unemployed men who pooled their resources to strike out for the Great North in search of gold. Of all the states of the Union, none holds more unfound native placer gold than Alaska. But the obstacles to recovering that gold are substantial - harsh weather conditions prevail most of the year, and vast areas of uncharted, road-less wilderness beckon the prospector without giving many clues as to where gold may be found.

In the end, our intrepid reality show ‘miners’ risked life and limb for four months and their ‘booty’ was small enough to fit into an 8-ounce drinking glass. Were they lucky to find that much, or unlucky to only find so little? Either way, the element gold, although geologically spread over most of the world in some proportions, is simply expensive and troublesome to extract. Which is why it has always been such a suitable, beautiful, and fungible store of value.

Once upon a time, we called gold ‘money.’ Today, the stuff we call money isn’t gold at all. Which is why James Grant, of Grant’s Interest Rate Observer, called gold “the value investor’s guilty pleasure.

“Pleasure,” necessity, or simply insurance policy, we think gold is here to stay. And we can’t help but enjoy its increasing popularity.

 

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