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Gold Breaks Through $360 for the First Time Since 1997
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(January 25, 2003) “You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.” – Bernard Shaw, 1928
Judging from the commentary in the popular press and media, one comes away with the impression that this gold rally is all about the “war premium.” Prospects of a shoot-out in Iraq, according to this line of thinking, have been the overriding factor that has pushed gold upward in these unstable and fearful times.

Switch over to the gold interest chat rooms, the writings of hard-money advocates, and the Internet-enabled chatter of the general gold-bug population, and one finds the latest moves in gold cheered as a moral victory, a driving of the enemy into the sea, a long awaited and righteous dam-burst of pent-up recognition of that old yellow metal.

Of course, in a perfect market, half the world is rooting for gold prices to sink, while the other half hopes for gold prices to rise. It’s not a moral battle, it’s not a struggle of good vs. evil, it’s market forces at work, just like in real estate, soybeans, or Beanie Babies. People buy and sell the stuff, and root for their own interests.

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(Our position as gold merchants? Deeply conflicted. To the good, higher prices mean our clients who bought gold over the past few years are doing well and are glad that they bought from us. And if they take profits in the future, we hope to have a chance to buy their gold in a higher, more frothy market when demand is really red-hot. On the other hand, higher-priced gold increases our cost of doing business and capital needs. When all’s said and done, a gold dealer’s interests are best served by fluctuations - the wilder, the better. A fast-moving market keeps people interested, and keeps us busy.)

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The thing about a rally like the current one in gold is that it feeds upon itself. We have just completed the second calendar year in a row in which gold mining stocks outperformed every other area of the US equities market. That’s starting to attract attention.

And what favors has the stock market done the average investor lately? As one refugee from the good times of the 1990s equities boom (my brother) puts it, “The brokerage houses have brought utter ruin to their clients, but what do they care, they still have all of their dough. The perception is spreading that there is no money to be made as an investor in the stock market.”

As Andy Smith of Mitsui Metals puts it in his latest report, “…as gold rises from the bottom it usually attracts new species of buyers, finally drawn to bullion’s bright light, more worried about dull returns elsewhere than why gold is shimmering.”

Investors are looking beyond the Iraqi factor and towards two simple truths: the stock market is a scary place to be right now, and the interest rates being paid today by banks, money market funds, and government instruments are insultingly low.

Who can blame the average person for being attracted to gold’s recent bullish moves? He or she is also cognizant of gold’s millenniums-deep monetary history, and thinks “Maybe it makes sense to own some gold.”

Given the enormous amount of US dollars in circulation thanks to the Fed’s massive infusions of liquidity into our struggling economy over the past few months, it wouldn’t take too many US investors buying a bit of physical gold to exert a considerable demand-pull on available supplies.

All the bearish cases against gold assume a steady (and small) US demand for the stuff, primarily for jewelry. It has long been thought that only India and the Far Eastern countries exert enough ground-level, consumer-led demand for gold to make much of a difference in world market prices. The missing element in the gold picture for nearly two decades now has been that 800-pound gorilla known as US investor demand – and that’s where the money is.

But Americans are nothing else, if not followers of trends. And in this current leg of gold’s bull market, we are seeing a huge upturn in demand for gold bullion in this country. Not only that, but because gold has gone up in price for seven weeks in a row now, there are currently a tremendous number of buyers on the sidelines, just waiting for a break so they can ‘buy the dip’ rather than chasing gold’s recent surge in price.

When we finally do have a nasty day in gold, maybe a $10, $20, or even $30 downdraft in price (perhaps on the day that George W. finally revisits his daddy’s war), there will be an astounding surge in sales of that old reliable yellow metal right here in the USA.

Historically, US retail investor demand for gold barely made a dent in world production during the years 1982-2000. But things are different now. And slowly gold is growing back into our public consciousness.

As we’ve said before, there are a lot of dollars out there (and billions more being created by the Fed each week) and not nearly enough gold at today’s prices.

And someday US gold demand will finally reach its tipping point, and everyone and his sister will be buying it, even your slightly slow brother-in-law. How many dollars will it take then to buy an ounce of gold?

 

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