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Wednesday, September 22, 2010

Gold Price In The Real World Is Falling

The funds buy and buy and their paper profits increase on their long gold positions.  As with oil two years ago, fund buying can send a commodity spiralling upwards, until someone starts to cash in their chips and the rise turns to a fall.


Yet in the real world there are cut-off points, prices where consumers start to back away.  Jewellers have to keep their prices below these levels, or starve.  The way they are going now is to trade bullion bars made from scrap, avoiding the need to buy gold in the commodity markets.  The trade in gold in the real world is now working at a substantial discount to the published commodity price.


Jon Nadler on Kitco writes - 


As expected, while the futures and options players were out raving following the Fed, Indian buying withered some more. The growing availability of bullion bars made from scrapped gold tilted the local spot market towards a larger discount and further ate into primary dealers' bullion sales. "I am hearing of a discount of about 5,000 rupees (per kg) in Chennai spot market, which is affecting our sales" said a bullion dealer from a state-run bank’s trading desk overnight. Similar trends are underway in Thailand and Indonesia as the core market is struggling amid the maelstrom brought on by the spec funds and their millions.


This will no doubt all lead to a fall as with the oil price in 2008.  Funds can all get into a bidding game, a huge game of chicken, but on street level, gold like oil has a role in society which somehow will survive.  The current price surge has no rational explanation, other than the herd instinct.  As we know with herds, they can rush the other way just as strongly, once the lead animals turn their heads.  



I found this longer term chart of silver, which shows how the rise fell back at the same time as shares and then rebounded with shares.  

Enjoy Jon Nadler of Kitco on 24th September, who describes brilliantly the slimy goings on behind the scenes in the current gold bull market 

Meanwhile, in DC, hearings over alleged shoddy bullion sales practices continued to spark heated words between businessmen, their lawyers, and politicians. “The TV gold industry is lead by one company, Goldline, which focuses its energy on fear, lies -and rip-offs. Goldline gets people scared about the economy and their future, then they transition to a lie saying buying certain gold coins acts as a hedge against economic downturns and then the consumer is profoundly ripped off almost irrespective of how high the gold market is.” Pretty charged words by US Rep. Anthony Weiner. None quite as dramatic as those spoken by a New York neurologist who testified that he instantly lost some $55K on a purchase of certain coins that he says he was pressured into buying. Some very mad men, over there, on Capitol Hill.
Not much difference between that fear-stoking and certain newsletter urgings about what to buy and where to buy it, as allegations of imminent gold confiscation by Uncle Sam and grim visions of TEOTWAWKI are in ample supply in that niche as well. Not to mention stories of gold price suppression, collusion among the world’s elite to rob us all of our last nickel and the need to dig bunkers a la the Cold War period.
Fear sells very, very well – of that there is little doubt. Then again, so does greed and all you have to do is listen to any single book-talking, long-gold, hedge fund manager who is stoking that particular emotion and is leaving Gordon Gecko way down in the dust when it comes to oratorical skills of the profit-seeking/ profit-promising type.
The same folks who ascribed gold’s 2008/2009 gains to the fear of hyperinflation are presently explaining the latest such price rallies as being due to rising fears over deflation. “What do you want to bet that we will get neither?” – they ask, leaving you in a quivering pile of nerves. CNBC titled one of its reports yesterday: “What’s behind the new gold rush? Anxiety.”
Sure, there is a dose of that present in the equation. However, do not leave out the ‘bigger’ component; the quest to make a buck with a cheap buck. That’s not what the man in the street traditionally bought a modest gold holding for. That is precisely what the men in the (Wall) street are buying it for. Of that, you should be scared (and less so, of their words).
Watch for US econ data. Durables were…almost as expected. Stock futures gained. Gold? Your guess is as good as anyone else’s right about now.


7 comments:

Alex Porter said...

Dream on,
Jewellery sales are going down because gold is too expensive for jewellers to buy these days. That is just one of the dangers of being in the business. Scrap is not a a major issue.

Gold is used in other ways apart from jewellery such as dentistry, electronics, food and drink, emroidery medicine and chemistry etc.

However, most importantly it is used as a store of wealth. While fiat currencies are being devalued investors are shifting their money into precious metals.

There is no herd yet at all as the large majority of the big international investment players still have no gold in their portfolios. You'll know there's a bubble when taxi drivers tell you gold is a great buy. That's maybe about 10 years off.

"Gold is the canary in the coalmine" as Alan Greenspan said. When currencies are volatile investors seek refuge in gold, silver, palladium and platinum. Now that interest rates are low there's no advantage to keeping cash especially when all fiat currencies are tanking.

If you look at the rise in gold prices and look at charts of stock exchange bubbles or any other bubble you'll see that gold is no where even close to a bubble.

Right now as currency wars heat up and you have a race to the bottom in terms of devaluation investors will move out of the bond bubble and currencies and into gold.

Gold has certainly been the best performing asset in recent years and yet still investors have been shy. In order to hold up the price of currencies whilst money printing governments in collusion with central banks have been suppressing the price (see GATA).

When the price suppression scheme comes undone as it seems to be doing now prices will continue on the up side.

In $ we are seeing new highs in gold prices every other day but that's in nominal terms. When the $ collapses and you divide the number of dollars in the system by the amount of gold the $US has (depending on M1 or M2 calculations) gold will hit between $5000 and $11, 000 per ounce.

That's not a prediction just a calculation based on a currency collapse which is looming.

Gold is vital to the banking system. Until recently gold has been sold by central banks but is now being bought by them. Mining firms have stopped hedging against future price falls which lifts another form of price depression.

It is believed that it is only a matter of time before China, Russia or Brazil move to a gold backed currency. When the current $reserve system fails you'll see gold go through the roof. And given that Brown sold half of Britain's gold at about 250GBP which was about covering supply when physical was demanded and the shadow banking system and Deutche Bank required it. The price is now 824GBP meaning yet again Britain was robbed. As banks are lending multiple times against gold the value of gold to banks is monumental.

Let's just say that banks, governments and the corporate press don't want to talk gold up. There's been an apparent gold bubble for years and here we are seeing gold steadily trending upwards.

I'd be careful about suggesting people sell their gold. You did to me recently and I'd be out of pocket right now had I listened...

As for the black market, gold in Greece is selling at 20% above spot.

I really think you need to rethink your idea of what gold is all about..

Tapestry said...

Gold is close to $1300 from $1266 two months ago. In the same period shares have bounced 15%. Treasuries about the same. It seems that asset prices rise in tandem, and they will fall in tandem. Gold is thus a risk asset, which is caught up in the same 'everything rises an falls together' market. It is not a one way ticket as you imagine.

Deflation is sending the value of money upwards. House prices are falling. Share prices will no doubt be caught up in a downturn soon, and gold will not escape.

At least Treasuries pay you 4% a year or so. Gold pays you nothing.

Thanks for offering your views. Obviously we will never agree on this one!

Anonymous said...

I agree with Mr Porter.There will of course be a correction at some point,possibly soon, but gold will resume its climb thereafter as governments intentionally diminish the value of fiat currencies.Colin

Anonymous said...

Mr Porter has got it right.There will of course be a correction at some point-that will be a good time to invest more in gold.Thereafter it will resume its climb. Colin

Tapestry said...

If prices in the real world are falling, and they are, then currencies are not diminishing. They are increasing in value. The opportunities for holders of cash are increasing.

While gold is rising, it is rising. But it has risen near five times in nine years. The real world of gold traders says enough is enough. Only funds are buying, as they did with oil when they drove its price way above its natural market level. It went to $140 from $30. Then halved, and is still weakening.

Gold gets the headlines right now. But once shares top, and head south, gold will get caught up in the fall in asset values. Holders of dollars will be sitting pretty.

The debts were created in the past. There is a race going on to deleverage by the whole of the world right now. The rise in gold disguises the big picture which is a fast approaching and severe deflation.

Alex Porter said...

I would trust all the data though. For me prices are going up. Naturally there is some deleveraging in some asset classes and so prices are going up and down at the same time. There is absolutely no doubt that governments are deliberately devaluing currencies in a race to the bottom. When the US announced more 'quantative easing' investors dumped cash for shares, bonds, gold etc. What you had was a devalued $ pumping up the market. It looks like shares are going up but going up in a currency that's going down.

Measured against a real currency 'gold' the Dow has dropped 20% in the last year.

If you see 'gold' as a commodity then I see your reasoning. During the 2008 crash gold took a hit. Shares took a greater hit but not by much. Gold bounced back faster and continues upwards as its role as a currency surpasses its function as a commodity.

Compared to gold, the 'bond' market is a crowded place. Yields are getting smaller too. As $ weakens it is becoming clearer that the US is in technical default and actual default increases in likelyhood. Prepare for a dumping of bonds. The flight from safety in 'bonds' will go to commodities and precious metals.

At that point your cash holdings will be useful for lighting bonfires under merchant banks.

Tapestry said...

If your wish is to buy assets as their value is deflating, cash is the safest and surest vehicle.

Prices falling equals currencies rising in value. That's where we differ

Gold is only being bought by funds now. Demand otherwise is falling away to a fraction of output. Scrap sales are rising. Mines say they are not selling forward, but you can't be sure. It is easy enough to start doing a bit.

One group of gold sellers are the japanese. They understand deflation, and are selling all the way knowing that they will get back in later.