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What Will Take the Gold Price Higher?

By Julian D.W. Phillips      Printer Friendly Version
Mar 7 2008 2:09PM

Gold and silver prices are making new ground every day and are consolidating, seemingly in preparation for an attack on $1,000. Thereafter, who will buy gold and pay over $1,000? It seems a daunting price for any new Investor or even one with a sizeable holding already.

A Psychological Barrier

euro dollar symbolWhy is $1,000 such a barrier? The move to four figures implies it is in a new league, in top gear and can’t hold that level. If one looks at the gold price in the € the picture changes. In those, now distant days, when the € was worth $1.25, the € price of gold battled heavily to get past €530; it now sits at €640. It seems that a 20% rise is not so outrageous as we thought. Look at gold in the Australian $ or the Japanese Yen. There hasn’t been any where near such a rise as we have seen in the US$ price of gold?

The big problem (particularly in the US) is the thought that the $ is not rock solid. The $ price of gold involves cultural as well as value measurement problems which have to be considered too. In other words: Is this really about the $ and the [global] monetary system or about gold in isolation?

Look at gold relative to the oil price and its performance pales into a reasonable move. That’s why OPEC is talking about a € price of oil. If we look at the oil price in the € then its performance looks considerably more reasonable. If oil were priced in the € then its rise would not focus attention on them but on the $ managers, the US authorities and the public outcry would be against them, not the oil producers. If the attention were pointed this way, perhaps then they would actually do something about the $’s value internationally. Something has to be done and soon, or confidence will not only be lost outside the US, but inside as well (inflation describes its dropping value all too well). But that may well be after Capital [and perhaps Exchange Controls will have been imposed. (Subscribers, contact us for more information on Capital & Exchange Controls). So if one can overcome the US$1,000 barrier and look at gold through Euro eyes or Yen, or A$ eyes, one’s perspective will change.

Gold as a Thermometer

thermometer in macroWhy did gold go up to $990 in the first place? Was it simply demand versus supply, isolated from external factors? No, not at all!  

Gold has risen as other investments have lost their glitter. The sapping of confidence, away from the $, away from the subsidence of consumer confidence, the threat of ‘contagion’ caused by the sub-prime crisis, which metamorphosised into the ‘credit crunch’ where bankers became scared to lend to bankers right across the world, the fallout from which we will see as the reporting season is now upon us. When these and the other ancillary factors are synthesized, we have a structural crisis, which the Central Banks are finding it very difficult to fight, let alone conquer. So people look for an investment that will not suffer when the alarm bells ring.   They look for something that will go the other way – up!

Gold is doing that very well indeed. It has acted remarkably as a “Thermometer”, rising as the investment temperature rises across the globe. When we read of the ripple of these crises in the system, each day carrying another consequence of the drama in the media, realistic investors put a little more into gold. And with major institutions now moving into commodities and with the various types of funds that never held gold [in the shares of Exchange Traded Funds], with all these factors finding this alternative investment, an enormous tide of money is considering gold. As something that cannot be printed and is nobody’s obligation, just a small amount of investment would propel gold up beyond the market’s imagination. Don’t just look at the last 20 years of the history of gold; look at why it went up in the ‘70’s and ‘80’s. It was for the same reasons; only this time the power to hold it down has declined alongside the will to do so!

What Else Can Do the Same Job?

When you sell an investment you actually buy something else immediately, even if it is just the cash. When you sell gold in the States, you buy the $. When an oil producer sells oil, he buys the $. The nifty of foot will quickly go elsewhere, but that is now selling the $ to buy something else? One is trapped with an investment alternative that is just not doing the same job. Even if gold did not rise anymore, but held current levels it would prevent the pernicious decline of either the $ or the alternative investments [equities?] one may choose. One can hold gold simply to preserve your wealth. The question is: Will gold fall back at this point? Yes, there will be pullbacks, then rises as with any consolidation; the trend, however, remains up, so its wealth preserving qualities look like they will persist.

detailed orange gradient map of IndiaA look at India paints the picture very well. The Indians love gold for several reasons: financial security, religious reasons, avoidance of official prying eyes and the corruption that attends this. They are long-term buyers of gold and this characteristic will not change. As more disposable money comes into their hands, they buy what they can. With prices now at close to or over Rupees 13,000, few Indians have the appetite to buy gold. And this loss of appetite will continue until gold has established its place around $1,000. The price at which they will buy will continue to rise until they are convinced it will hold around $1,000. Should it fall, it will be seen as a buying opportunity at the levels it turns at and Indians will be in there too. But the bulk of Indian retail buyers need to be convinced that these prices will hold before they re-enter the market. You can be sure they will be back, as they have been all the way up from $275 to current levels. We believe the same will be true in the developed west!

Reasons for gold to go higher

Take a look at the fundamentals that have driven gold higher; have they changed? Have they been exhausted? Not at all! Has the $’s fall terminated? Has the oil price stopped rising? Has the credit crunch been resolved? Has the world’s money system been repaired and solidified? Has the wealth’s move from West to East stopped? Has confidence in the U.S. housing market and the global economy been restored? Can any of these matters worsen? Is the investment climate globally looking solid and worth more investment? Will the potential Tsunami of capital stay in one place only? If the answer to these questions remains negative gold has good reason to rise further.

“ has good reason to rise further!”

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