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Is Gold Simply a Retreat to Safety, or Potentially Much More Than That?
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(June 22, 2002) Gold now seems solidly locked in bull market territory, and doesn’t show much sign of tiring. After gold prices were held virtually comatose for nearly five years, prices are now up by 25% in a little over a year’s time. With equities and the dollar under pressure, gold’s “safe haven” appeal seems stronger than it has since the 1970s. How safe is gold, and where is it going?
When prices are going up, things get busy, and everyone is happy.

Buyers feel that they're acquiring a winner, and sellers are happy to be getting a price that's 25% better than what they'd been offered as recently as April of 2001.

Today, demand for physical gold is strong, business is good, clients are happy, and dealers in physical are enjoying both sides of bullion trades more consistently (and profitably) than at any other time in the past few years.

The bull seems firmly in place, and those trading from the long side don't even seem to be bothered with the prospect of an intermediate correction. Talk of gold slipping to $312 or $305, or even dipping down into the $290's, doesn't seem to faze the new, emboldened crowd of gold bulls.

Simply put, more money is moving into gold and gold stocks now that this bull is showing the beginning of a positive track record. Money is flowing out of stocks, mutual funds, and low-yielding money-market and bond funds.

And first of all, that money is looking for safety.

So it may be helpful to play devil's advocate here, and consider the hazards of the gold market as it stands today. It just recently bounced off an inter-day, 2 ˝ year high of $330, and the consensus is that gold likely has a bit of correcting to do. In the short-term, is this a safe time to enter the gold market?

So how safe is gold? You could argue from the past five years or so experience that it's a commodity with an extremely stable price level. There are reasons for that action over the past few years. Many would argue that, like the price of domestic sugar, gold’s price is essentially regulated by government action.

Safe? Gold's been safe as milk, and just as boring.

But now gold has broken out of that old range, and to the upside. The gold market today is strong and active, demand is increasing, supply out of the mines are diminishing, and all the old bets are off.

The break through $330-340 will be our next confirmation of this new market, but crossing that bridge may take more calendar time than many think. In the meantime, things may be a bit unsettled. Long-term secular market changes don’t happen all at once, and not without some choppy and often violent price actions.

Yet whenever gold finally breaks above the $340 area, not to be too blunt about it, all hell could break loose in the gold markets.

Tim Wood at TheMiningWeb.com reported the following in an article dated Friday, June 21, 2002:

“The money management arm of one of Canada's most prestigious banks, RBC Global Investment Management, has issued a no-holds barred punt for gold. It is thought that top-rated professional gold investor, John Embry wrote the report…”

“The RBC writer doesn't pull any punches: "[Gold] will more than rally; it will explode spectacularly to the upside", thanks to an accumulated short position in physical gold, overlaid by a mountain of derivatives.”

This report by RBC, and quoted by Mr. Wood, goes on to cite many factors first raised by GATA in their efforts to uncover the conspiracy against gold, chiefly as practiced by the U.S. Treasury, Federal Reserve, and bullion banks, most notably Germany’s Bundesbank, J.P Morgan, and Goldman Sachs.

Mr. Wood’s article cites RBC Global’s report as the first mainstream international investment firm to acknowledge a belief in the most recent gold price conspiracy, comparing the current situation to the actions of central bankers when in the 1960s they more or less openly colluded to maintain the $35 per ounce price that had held since 1933.

Almost immediately, the Royal Bank of Canada disavowed this report, maintaining that it was a working document for internal consumption only. Tim Wood of TheMiningweb reported this repudiation on Monday, June 24th. This disavowal seems peculiar, in that the original source of this 'working document' was supposedly one of the bank's larger clients. That client was given this report by RBC Global through routine distribution channels to him and other clients of the firm.

So we are given to believe that the bullish arguments in this report are not to be considered the official opinions of RBC Global. The situation seems similar to the recent dust-up at Merrill Lynch, whose internal emails written by Henry Blodgett and other analysts expressed opinions of certain stocks as "trash," "junk," and worse even while the official opinion of Merrill Lynch was that these stocks were "Strong Buys."

Predictably, Merril Lynch's reaction was to apologize for the truthful, but scatological, emails. Of course, the proper thing for Merrill to do would have been to apologize for stock recommendations that probably cost its clients billions of dollars. But it was much easier for Merrill to apologize for bad language in a few emails than to admit the vapidity of their published equities research.

So the controversial RBC Global report, even if we treat it as a working document not for external consumption, still raises some interesting questions about where the gold market is today.

Is today’s situation of gold breaking out of a long-maintained price range comparable to the events of the late 1960s?

If so, keep in mind the interesting fact that when in 1968 the $35 price level was breached, by 1973 gold prices had increased six-fold to over $200 per ounce.

That was the first modern “perfect storm” for gold.

Gold’s dramatic price rise in 1978-1980 from the low $200s to over $800 was the second.

Is the third "perfect storm" upon us? An increasing number of analysts are coming around to the position that it began in April of 2001, which was the last time we saw prices below $260.

 

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