Warren Buffett on Gold vs. Hommel on Gold!

Warren Buffet explained why he does not see the value in gold in his annual report from 2011.
http://www.berkshirehathaway.com/letters/2011ltr.pdf
 
http://ivanhoff.com/2013/04/15/warren-buffett-on-gold/
 
It was republished by ivanhoff, and came to my attention last week, which gave me this occasion to respond.   Here I go.

Buffett:
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

Hommel:
Buffett is claiming that Gold's value exists only because other people will buy it.  True.  True of all assets.  And this is exactly why gold is a good thing, because of all things, gold is most likely to be valuable in more places to more people than nearly any other item that you can consider, precisely because it is money.  But Buffett presents this as a bad thing, calling gold "unproductive".  Well, let's see, how is gold productive?  It can go up in value, just like stocks or bonds or housing, or any other asset.  People recognize that gold has value not because it gains value, but because it does not decay or rot or go bad.  Food makes a horrible form of money, partly because it goes bad.  One of the longest lasting kinds of food is the wheat kernel, which can last up to twenty years.  Gold lasts 6000 years, with no decay.

Buffett:
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.  Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

Hommel:  True, gold buyers do not buy gold for what gold will produce, but most of my gold buyers are buying gold because they do believe it will go up in value, because they do believe that others will see what they can see, that gold is special, and cannot be printed to excess like paper money is being created to excess these days.  Gold buyers buy gold also because they recognize that gold does not decay, because it has a very high value for the weight and density which makes it portable, and because it can be hidden.

Buffett:  The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Hommel:  True, gold is not procreative.  But this does not mean that gold cannot go up in value.  Gold does have a use.  The use is as a store of value.  The use is to communicate value over time.  Gold has three primary uses: as a store of value, as a unit of account, and as a medium of exchange.  These days, it is not used much as a medium of exchange, because no government on earth is issuing gold as circulating currency, but because all nations issue paper money.  This is making gold an excellent store of value, because gold is increasing in value more than all the paper money being continually printed.  The key use of gold in our times is not only in that it holds value, but gains value.  This is because the new supply of gold is far less than demand.  The world prints nearly $5 to $10 trillion worth of paper money per year, which is $5,000 to $10,000 billion.  In contrast, the world mines about 83 million ounces of new gold, at $1334/oz, is worth only a mere $111 billion.  Clearly, there will be more and more buyers of gold in the near and far future.

Buffett:  What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Hommel:  Gold buyers are derided as "fearful" by Buffett.  And he notes this has recently been correct.  But also wise.  He could have written, "The ranks of the wise will grow".  Perhaps more apt.

Buffett:  Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Hommel:  True, bubbles happened in stocks and houses.  And probably still are in a bubble.  Is gold in a bubble?  When less than $100 billion is being mined each year?  I think not.  His buddy Bill Gates could buy half the world's annual gold production, and would probably become a lot more wealthy if he tried.  I say tried, because there is no way he would succeed, because his stock is not liquid enough to sell that much, and the gold market is too tight to buy half the gold market without pushing the gold price up, too.  My point is that the gold market boom is still in the beginning stages. 

Buffett:  Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Hommel:  Today, one to two years later, gold prices are down to $1335.  Buffet was right for one year out of a thirteen year bull market in gold.  Buffett will likely be wrong next year.  But 170,000 metric tonnes at $1335/oz. is x 32,151 oz/tonne is $7.3 trillion today. 
The tiny size of the cube of gold in pile A also explains why gold is valuable.  It contains a lot of value in a small space, making it very portable.  Some people wonder why gold should be any different than copper or any other metal, asserting that the other metals could be used just as easily as silver and gold.  Really?  Well, I have a 33 kilo block of copper that cost about $300, about the same as a ten oz. bar of silver.  Which would you rather carry to the grocery store?  Also, the copper has a spread on it to buy and sell of over 50%.  Or, would you prefer a quarter oz. of gold for about $330?

Buffett:  Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Hommel:  Can you imagine an investor with $7.3 trillion to begin with?  There are no investors who are worth so much, are there Mr. Buffett?  Besides, even if there were, there is no evidence that the entire world supply of gold is being all offered at the current asking price for gold.  The vast majority of gold does not trade each year.  World annual mine supply ads only about 1.5% to the pile per year.  Well, let's calculate it.  http://www.goldsheetlinks.com/production2.htm  170,000 tonnes in existing stock.  World annual production about 2600 tonnes.  1.529%.  Yup, still the same after all these years.
But Buffett's point is that he cannot imagine any investor buying the gold instead of the farmland and oil companies.  But let's compare more clearly, $40 billion x 16  Exxon Mobils is $640 billion, plus the $200 billion from crops, which means the oil companies and land produce about $840 billion.  Well, how much does the pile of the world's gold produce?  Gold is likely to exceed $1900 in the next year or two, from $1336 today.  As it does, the pile of gold will go up from $7.3 trillion to $10.4 trillion.  Now let's compare shall we?  $640 billion gain in the oil companies, and $3.1 trillion, or $3100 billion in the gold pile.   I think I've made my point, but let me go further.  In actual fact, 16 Exxon Mobils don't exist.  It's a pure fantasy choice, as in, "not real".  The gold is real.  That makes the gold choice not only several times better, but infinitely better, doesn't it?

Buffett:  Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion.  Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

Hommel:  As we have seen, the existing annual production of gold is now $111 billion, and being purchased not by "frightened individuals, or speculators", but by "wise investors," and even central banks now!  And again, with $5000 to $10,000 billion dollars worth of currency being printed world wide, I think the new gold will have plenty of ready buyers for decades to come.  In fact, Gold is acting not only as a value preserver, but value gainer, for those investors who don't want be robbed by governments.

Buffett:  A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Hommel:  I'd wager that a century from now, none of the world's currencies today will have any value at all, but the gold still will.  Gold is not a choice between oil and gold, it's a choice between paper money and gold.  No investor will ever go out and buy 100 barrels of oil at $103/barrel to store on his lawn, to preserve $10,000 worth of paper money value, because the oil is extraordinarily inconvenient, and expensive to store and ship for the relative value.  But anyone can buy 7 gold eagles that will fit into the palm of your hand for $10,000, which takes up about 1/10th of the space as a stack of 100 of the $100 bills.

Buffett: Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Hommel:  In contrast, I'm supremely confident that the world's pile of gold will increase in value far faster than oil.  The reason is that gold has been money for about 6000 years of human history, and mankind has only been using oil for about 160 years or so.  Furthermore, the world's bankers began attacking gold as money about that far back, so the world has never had a good historical gold to oil ratio in place during a time when the world used gold as money!  Therefore, we have to use intuition to determine a proper value for gold as compared to oil, assuming the world returned to using gold as money, and it probably will.  I would supsect that the world's gold production should be valued more than the world's oil production, because the world'd gold production must be spend on more than "just oil".  As it is, oil is no more than 5-10% of the world's economy, but let's assume oil were as much as 50%.  Well, then, the world's gold production would be worth about twice as much as world oil production, because people would need some gold left over to buy everything else.  That would assume a value for gold as follows:
World annual oil production is about 90 million barrels per day.
x 365 days/year x $100/barrel =
That's about $3.3 trillion per year in dollar value, of oil production.
If world gold production of 83.5 million oz. were worth $6.6 trillion per year, that divides out to $79,000 per oz. for gold!
Oh yes, in the last five years, gold and silver have solidly outperformed Birkshire Hathaway stock.
http://finance.yahoo.com/q/bc?t=5y&s=BRK-A&l=on&z=l&q=l&c=slv%2C+gld&ql=1
And I suppose gold and silver have significantly outperformed BRK in the last 13 years.
https://www.google.com/#q=brk.b
Since the year 2000, BRK.B has gone from $40 to $114, an increase of 2.85 times.
Since the year 2000, Gold has gone from $255 to $1314, an increase of 5.1 times.



I strongly advise you to take possession of real gold and silver, at anywhere near today's prices, while you still can.   The fundamentals indicate rising prices for decades to come, and a major price spike can happen at any time.

Please note our new shorter hours, I'm working in each shop every other day.

JH MINT in Grass Valley
Open 11AM to 4PM Pacific Time, Monday, Wednesday, Friday.
Closed Tuesday, Thursday, weekends and bank holidays.  (Also Closed from Dec. 25th to Jan 1st)
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www.jhmint.com

Why the Gold Selloff is Not Over Yet

At this point, I think it's pretty clear the general stock market is now in the initial phase of a new bear market. It's trying to generate a bear market rally over the last three weeks, but so far it's been pretty weak. That doesn't bode well once the cyclical and secular bear trend resumes.

The HUI mining index is now on the verge of breaking down out of the multi-month megaphone topping pattern. Once it does, that will confirm that the bear now has his teeth in the last holdout sector. The sector that led the bull market over the last 2 1/2 years and now the last sector to succumb to the deflationary forces.

As I have noted in the chart, I do expect the miners will find at least temporary support at the 200-week moving average. That should correspond with gold putting in an intermediate degree bottom sometime in the next two or maybe three weeks. Presumably, it will come with gold below...

Read full article (with charts)...

Weekly Commodities Update : Commodity Pessimists Feel the Squeeze as Futures Rally

The dramatic rally in riskier assets continued last week with stocks and commodities rallying hard while bonds sold off. Improved U.S. economic data has given traders enough confidence to believe that a recession is now more or less out of the question. The 23 October EU summit is expected to yield a substantial announcement and European politicians therefore have got less than a week to hammer out a sustainable strategy to finally get the European debt crisis under control.

So far the market has been prepared to believe that a solution is coming and stock markets have responded in a dramatic fashion while the dollar has dropped out of favour, at least for now. The main downside risk now lies with another round of extreme risk aversion, which could spark broad-based liquidation, as in September.

The Reuters Jeffries CRB index is four percent higher over the past week and in just two weeks the index has rallied 8.5 percent from the early October low. Some of the rally can be explained by the dollar - which has slumped by 4 percent during the same time. The agriculture sector which, surprisingly, had seen long exposure being reduced dramatically over the last couple of months, rose the most as traders returned to rebuild long exposure, especially in corn, soybeans and rice.

Speculative positions reduced despite rally
Another reason for the strong rally in commodities over the past week has been due to hedge funds and large investors rebuilding long positions. Recent data (to 11 October) from the CFTC shows that exposure to commodities fell to the lowest level since September 2009. The data was compiled at a stage where the rally was into its second week, showing that speculators had continued to offload positions and most likely would have spent the remainder of the week rebuilding exposure thereby adding to the upside pressure.

Brent crude approaching critical level
The ongoing speculation about a solution to the European debt situation and improved U.S. economic data continued to drive oil markets last week. With the dreaded fear of recession having moved to the backseat investors has been piling back into the black gold.

Brent crude outperformed U.S. WTI crude on a combination of continued tightness in the European markets together with news from Dow Jones UBS that its commodity rebalancing at the beginning of 2012 will support Brent crude. The DJ-UBS is estimated to have around 80 billion dollars of funds tracking the commodity index and they announced that the weighting of WTI will be reduced from 14.7 to 9.7 percent while Brent crude will be added for the first time with a weighting of 5.3 percent. The adjustments to its positions will take place between the fifth and the ninth working day of January and could result in the Brent WTI spread widening back out to its recent record given that many other fund managers will adapt the same strategy.

Technically Brent crude will find tough resistance ahead of 115 dollars per barrel as it seems to have moved ahead of levels that current economic activity can justify. 

Gold slow recovery continues
Investors continued to regain some of the confidence that was lost after the biggest slump in three years. Their return to gold was highlighted in the last week's CFTC data which showed that long exposure to gold was increased for the second week in a row. After having been a clear choice for months its relation to risk has confused many over the last month as gold has moved in line with other riskier assets.

Its strength will be tested soon as we approach resistance around 1,700 dollars per ounce. Gold priced in Euros has traded flat over the past two weeks indicating that much of the new found strength has been down to dollar weakness and on that basis further progress could slow down as the Euro approaches strong resistance at 1.3950 versus the dollar.

Crops rally from oversold situation
Crops like corn, soybeans and rice, were the main performers last week as exports kicked back to life, especially to China, while the United States Department of Agriculture in a report forecast a smaller-than-expected 2011/12 production for corn and soybeans. The price of wheat continues to suffer amid ample supply both in the U.S. and the world. The dramatic fall in prices have led U.S. farmers to hold back some of their production hoping that reduced supply eventually will trigger higher prices.

The latest data from the CFTC showed that investors continued to dump agriculture commodities despite the ongoing recovery, something that will add to the momentum if and once a rally takes hold.

Gold's Schizophrenia: Pulled Apart By Commodity And Safe Haven Status

Agustino Fontevecchia

www.forbes.com

Gold appears to have entered a new phase, acting as a hybrid, sometimes sympathizing with risk assets and other times acting like a safe haven, UBS' Edel Tully explains. While this makes it incredibly difficult to trade the yellow metal, the gold strategist remains bullish.

After falling about $20 on Tuesday in response to a stronger dollar, gold recovered its footing on Tuesday, hitting $1,693.90 an ounce, its highest level in two weeks. By 1:25 PM in New York, the yellow metal had given up some of those gains and was trading up $19.50 or 1.17% to $1,679.20 an ounce.

Gold's relentless climb, when any and all headlines seemed to fuel the precious metal's bull run, came to an end after peaking above $1,920 an ounce last August, falling almost 20% in a few weeks to bottom out around $1,562.

Still, the yellow metal remains up about 20% this year and most analysts remain bullish. It's as hard to explain gold's skyrocketing rise as it is its precipitous fall; UBS strategist Edel Tully notes gold is now behaving like a hybrid, acting as commodity or safe haven as investors try to find balance amid opposing forces.

Tully had said she expects gold to hit $1,920 in a month and $2,100 in three months, but recognizes gold's safe haven't status isn't keeping it afloat anymore. "Trading the yellow metal [has become] very challenging, as while one can have a view on an event such as US payrolls for example, deciphering how gold reacts has become a lot more difficult. And while buyers are nimbly returning, it is no surprise that there is caution given the struggle for conviction."

Regardless, gold will continue to react to macroeconomic news, particularly in Europe. While the yellow metal barely flinched in reaction to Slovakia's failure to ratify the EFSF (markets appear to factor in a positive vote sometime this week), the Merkel-Sarkozy "comprehensive package" could be setting investors up for a big disappointment, Tully says. "And considering how gold has been behaving recently, market reaction to euro-negative developments will not be as straightforward as it has been historically."

Gold miners have been an alternative to holding physical gold, either via an ETF or through the physical metal. Miners continue to under perform bullion, though, with the Market Vectors Gold Miners ETF flat in the last three months compared with a 5% gain for the GLD gold ETF. Barrick Gold, GoldCorp, and Freeport McMoran are among some of the underperformers within the mining group.

Q4 Commodity Outlook: Tricky Road Ahead as Dollar Strengthens

Commodity markets will continue to be driven by worries about the potential impact of a slowing global economy. A solution to the sovereign debt crisis has still not been found and with governments running out of fresh ideas this has caused tremendous stress on the financial system. Cyclical commodities like energy and base metals have suffered as a consequence while safe haven flows and adverse weather have been the main reasons for gains across precious metals and agricultural commodities.

We believe that renewed dollar strength during September will continue into the last quarter and this could potentially have a dampening effect on the performance of commodities, ensuring a relative flat 2011 performance of the major commodity indices.

Energy: The dramatic spike in oil prices earlier this year has been a major reason for the surprise slowdown in economic activity witnessed during the past six months. The price of Brent crude, which has taken on the role as a global benchmark for a majority of global transactions, has so far averaged 111 dollars in 2011, well above the averages for the previous three years. Despite not reaching the record levels seen in 2008 it has nevertheless already spent more days above 100 dollars during 2011, thereby squeezing private consumption.

Increased demand drove prices higher in 2008 while this time supply disruptions and constraints have been the culprit for higher prices. Libyan oil production will be limited for months while supply disruptions from Nigeria, Syria and the North Sea have ensured higher prices compared with WTI crude which has stayed at depressed levels over the summer.

All of the growth in oil demand is now stemming from Emerging Market (EM) economies and in order to determine future price movements the economic well-being of these economies will be the decider. We expect the price of Brent crude to remain range bound for the remainder of the year between 100 and 120 with an end of year target of 105 dollars.

Precious metals: The rally in gold, which has now lasted for more than 10 years and has returned nearly 21 percent annually, is undoubtedly the world’s most powerful trend. Investors and central banks have all been competing for the yellow metal over the past two years as the global financial crisis has triggered an exodus out of other asset classes into “safer assets”, such as gold and silver.

During the third quarter record high prices led to increased volatility which dented some of the lustre for gold as it became increasingly difficult to trade. As a result we saw investors pulling out of long positions, both in ETFs and futures during August and September and we began to see 100 to 200+ dollar corrections. The super trend however remains firmly intact and only a move below 1,500 could spoil the party for investors holding close to 3,000 metric tonnes through various investment vehicles. We believe that gold may have another push to the upside reaching the magical 2,000 dollar level in early 2012 before a period of consolidation sets in.
Continued volatility could trigger additional margin increases on the major futures exchanges and force some investors to scale back positions even further. We see gold trading in a 1,650 to 1,950 range with an end of year target of 1,900. Silver has gone from being a driver to a follower of gold since the April price collapse. Given the weakened outlook for industrial metals we see silver potentially weakening further relative to gold with the value of one ounce of gold going from 50 to 55 ounces of silver.

Agriculture: Despite record planted acreage this crop year poor weather and reduced quality has led to a reduced U.S. production of corn and soybeans. This has caused a strong rally of the two over the summer in order to force demand rationing through higher prices. This rationing now seems to have begun having an impact on both feed demand and export. On this basis we believe that the prices of soybeans and corn have already peaked and could settle into 13 to 14 and 6 to 7 dollar ranges respectively for the remainder, also given our forecast for a stronger dollar which could dampen exports even further.

Weekly Commodities Update : Has Gold Left its Safe Haven Status Behind?

Over the past week sentiment towards riskier assets improved ahead of the monthly U.S. jobs report. In Europe two central banks provided further stimulus while officials showed increased willingness to support the banking sector after one bank in particular came very close to the edge.

Despite the somewhat improved sentiment commodity markets continue to be driven by risk aversion stemming from the financial crisis and the focus on a global economic slowdown. The market seems to be caught between two chairs for the time being as fundamentals have not supported parts of the recent sell-off while a recession, if it materialises, will trigger an even bigger sell-off just like 2008-09. The dollar has stabilised after its recent rally and it has helped commodities to recover, also taking into account how Hedge Funds have halved their long exposure over the last few weeks.

The Reuters Jeffries CRB index rose for the first week in a month as the energy sector especially staged a strong comeback on hopes that further stimulus will reduce the risk of a U.S. recession. Industrial metals also received a welcomed boost with copper staging a strong rally after having fallen by one third since early August.

 

Drop in U.S. stockpiles supportive for oil
The dramatic sell-off in crude oil over the last couple of months seems to be at odds with fundamentals as tightness in especially Brent crude is not yet being off-set by the expected slowdown in demand and increased Libyan production. The price of WTI crude reached a one-year low at 75 dollars per barrel before a surprisingly large weekly drop in stockpiles triggered a sharp recovery signalling the emergence of a new 10 dollar trading range with resistance now located at 85. U.S. crude stockpiles compared with the five-year benchmark average dropped to the lowest level since November 2008 while inventories at Cushing, the delivery hub for NYMEX WTI crude dropped to the lowest level in 18 months. This supports the narrowing spread between WTI and Brent in the months ahead as the graph below shows.

The Brent crude forward curve is still pricing in reduced demand as the economic slowdown takes hold and this will continue to be the main focus in the weeks ahead giving us a limited upside potential. Further price falls below 100 dollars on Brent crude, which is currently being priced in, will create problems for some OPEC members and Russia which requires high prices to balance its budget and this will increase the likelihood of Saudi Arabia removing excess production to balance prices.

Gold just another commodity – for now
The price of gold has settled into a range between 1,685 and 1,585 as it tries to recover from the recent sell-off. What has been interesting to observe is how the trading behaviour has changed from a safe haven play, more towards a commodity that moves in line with other riskier assets such as oil and stocks. The presence of physical buying at the lower end of the established range should help cushion any attacks on the downside.

This return, at least for now, to “just another asset” has helped other metals such as platinum and especially silver to outperform gold. Platinum at one stage traded at a discount of 10 percent to gold compared with an average premium of 30 percent over the last five years. Given this massive underperformance we could see a relatively large recovery bounce once the perception of the global economy improves.  

Financial flows are holding the key as investment demand for gold through ETFs and especially futures has been reduced by 500 to 2,700 metric tonnes during the last couple of months. Before this demand and safe haven interest returns further upside above 1,700 dollars seems limited unless we see an unexpected sharp sell-off in the value of the dollar. 

Food inflation easing further in September
The dramatic declines seen across different agricultural commodities in September have filtered through to the United Nations Food and Agriculture Food Price Index. In total 55 commodities are included in the Index which averaged 225 points in September, a two percent decline from August and a 5.5 percent decline from the peak reached in February but still higher than the value of 195 points during September 2010. The decline was lead by sugar (-3.8%), cereals (-3.0%) and oils (-2.3%).  

Grain prices stabilising after rout
The price of CBOT December corn rallied strongly after finding demand below 6 dollars per bushel which coincided with the July low. This followed a 26.5 percent correction during September where focus dramatically switched from supply worries to signs of demand destruction triggered by a stronger dollar and lower domestic demand. Speculative long positions have now been much reduced and talk that China may be falling short of a record 5 to 10 million tonnes also helped stabilise the price.

On 12 October the United States Department of Agriculture (USDA) will release its latest World Supply and Demand report for corn, wheat, soybeans and cotton. This will be viewed with much interest given the scale of the sell-off during September.

Gold Margin Increase Triggers Rout

The past week in metals has been one for the record books. Silver dropped by 34 percent in a matter of days, its sharpest drop in 30 years. Gold meanwhile corrected by 20 percent from its peak, which has only happened twice before during the last decade. Copper corrected by one third from the February high as hedge funds reversed their positions into shorts for the first time in more than two years.

The reasons behind the sell-off are numerous: risk adversity, a scramble to realise cash to cover loss-making positions elsewhere, economic slowdown reducing demand for industrial metals and not least another margin hike by CME, the world’s largest futures exchange. Added to this there has been market talk about heavy selling by Chinese investors. They have been focusing on the strength of their domestic economies and have been caught out by the slowdown elsewhere.

Since early August gold volatility has been stubbornly high indicating increased uncertainty about the future direction. Up until and following September 6, when a new record high at 1,921 was reached, professional investors had begun to reduce exposure despite global stock markets going into reverse. Several 100 dollar corrections during the last month added to the unease among investors who had been viewing gold as the ultimate safe haven asset. 

The rout happened last Friday as rumours about an imminent CME margin hike on the gold futures contract pushed it below 1,700, only to accelerate Monday when Far Eastern investors could react to the new situation. Silver extended the sell-off that began in early May and gold reached but did not breach the line in the sand being represented by its 200-day moving average. 

In our article “Heads up! Gold futures margin could be raised again” from August we argued that the ongoing volatility and daily price swings probably warranted another hike to between 8,200 and 9,000 dollars per contract. On Friday the margin for holding a gold futures contract was raised to 8,500 which means an investor at the current gold price needs to pay 5.2 percent of the contract value to maintain a position. 

Such a margin is historically relatively high and unless we see a further escalation this should probably be enough for now. Technically gold held and bounced strongly of its 200-day moving average, currently at 1,530, and this has returned some of the confidence that was lost during the rout. The arguments for holding gold have if anything strengthened during August so once this nervousness subsides gold could shine once again. 

What are the risks from here? It took 18 months to reclaim a new high during the previous two major corrections in 2006 and 2008; investor redemptions from exchange traded funds (ETF) have so far been very limited and as such carry the risk of further selling should that type of investor decide to scale back as well. Lastly and probably most importantly we need to see volatility reduced as excessive volatility poses the biggest risk to gold’s safe haven appeal.

Gold: Too Fast too Soon but Fundamentals Still Very Positive

Jeff Nichols warned that the summer run-up in the gold price was too far too fast and predicted a big fall but still feels that fundamentals support much higher prices ahead.

www.mineweb.com 

NEW YORK

"At some point, however, we will see a correction, perhaps a sizable one. After all, even strong bull markets never move up in straight lines. I would not be surprised to see gold stumble - falling back $100, $200, or even $300 - before prices begin working their way higher once again."

That was my view published here on Mineweb in late August.

Gold has certainly taken a dive - and could stumble further in the days immediately ahead - but I think we will see the yellow metal begin its comeback sooner rather than later, possible in the next few days.

This summer we raised our year-end price forecast to $1,850 an ounce - but remained reluctant to adjust our expectations upward as the price moved past this level and briefly traded over $1,900 an ounce in early September.

Although physical demand in world bullion markets remained firm, it seemed to me that the price was moving up too fast too soon as institutional speculators extended their "long" positions in "paper" derivative markets.

SHOOT THE SPECULATORS

Now - rather than any dramatic reversal in world physical markets - it looks like the precipitous price decline in recent days can be blamed entirely on these same speculators (including some prominent hedge funds and the trading desks of the big Wall Street banks) reversing their positions or cashing out of gold altogether.

Nothing that has occurred in the past few days in any way diminishes my long-term enthusiasm about gold-price prospects. The same bullish gold-market fundamentals and macroeconomic trends that I have been discussing for many years now remain in place and promise significantly higher gold prices over the next five years or longer.

It is important to remember that violent sell-offs in equity and other asset markets typically spill over into the gold market . . . but after an initial selling wave, gold tends to disassociate itself from and act independently to other asset markets.

At first, when other assets are under extreme pressure, as has been the case this past week, gold's immediate reaction reflects reflexive selling by institutional speculators - including momentum, program, and other "black box" traders. Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility but, in my book, it does not affect the long-term price trend. In a sense, gold is an "innocent bystander."

NOTHING WE HAVEN'T SEEN BEFORE

While the magnitude of gold's decline seems stunning in absolute terms, keep in mind it is not unusual for gold prices to correct by 10%, 15%, 20% or even more after a run-up the likes of which we've seen this year. Old timers may recall the 1970s, when we saw at least a couple of bigger percentage corrections in the midst of a long-lasting bull market.

Now, from its September 6th all-time high around $1,923 an ounce to this Friday's (September 23rd) low around $1,628 an ounce in New York trading, we are off just about 15 percent - certainly not so much when you consider the previous advance . . . certainly not so much to those who remember gold's volatile price history . . . and certainly not so much as to cause much alarm among those who pay close attention to gold's fundamentals.

FUNDAMENTALS COUNT

And speaking of fundamentals - with the exception perhaps of India - physical demand in recent days has held up fairly well. Meanwhile, it is not unusual for more price-sensitive trading-oriented Indian gold dealers to pause, at times like this, for the dust to settle before stepping back as buyers. For sure, there is nothing here to diminish India's long-term appetite for gold.

Meanwhile, my China contacts report no immediate diminution in retail gold demand from the world's biggest national gold market. Driving Asian demand - in India, China, and elsewhere has been the continuing rise in household incomes in tandem with worrisome inflation - and this pro-gold combination is unlikely to change in the foreseeable future.

WATCH THE CENTRAL BANKS

For the past few years (in speeches, published articles, client reports, and on my website NicholsOnGold.com), I've been talking a lot about the revival and growth of central bank gold interest - and its long-term significance to the market and the future price.

I believe that a few central banks - central banks that have been fairly regular buyers, acquiring gold month in and month out - have already stepped up their purchases in reaction to the lower, more attractive, price levels now prevailing. And other countries are likely to add to their own gold reserves in the days ahead as it becomes more apparent this correction has run its course.

The central banks of Russia and China (which does not report or publicize its on-going gold purchases) are the first that come to mind, but quite possibly other central banks will also use this episode of gold-price weakness to acquire metal without causing any overt market reaction.

In my book, gold's own supply/demand situation and other recent-year institutional or structural changes in the gold market per se (such as the introduction and growth of gold exchange-traded funds or the legalization of private gold investment in China) suggest more gold price strength ahead.

AND SHOOT THE POLITICIANS TOO

So, too, does the inability and disarray among of our economic policymakers and politicians, those entrusted with our financial and monetary wellbeing, to frame appropriate policies that would deal effectively with today's economic realities.

Indeed, U.S. and European economic prospects continue to deteriorate, suggesting we will see still more desperate monetary stimulus from the Fed and the European Central Bank (the ECB) before the end of this year.

Here in the United States, the Fed will be facing continued signs of renewed recession or recession-like business and employment conditions.

Across the Atlantic, the ECB will be struggling to prevent the approaching Greek sovereign debt default and the insolvency of some European banks holding Greek sovereign debt. Some fear this would be a catastrophe far worse than the Lehman Brothers bankruptcy - with dire consequences for the world economy.

While these problems are unlikely to trigger any immediate policy response from the Fed or the ECB in the next week or two, as pessimism grows among investors and traders, expectations of further monetary accommodation could stimulate more investment demand in the days and weeks ahead.

So, too, could U.S. Congressional bickering and inaction on both the U.S. Treasury debt ceiling and on the Federal budget impasse as these issues again become headline news.

LONG-TERM BUYERS RULE

To recap: Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility but, in my book, it does not affect the long-term price trend. What governs the price of gold over the long term are the market's real-world supply and demand fundamentals - and these have been decidedly bullish and are becoming even more so. Hence, my long-standing forecast of much higher gold prices in the next several years.

Importantly, to the gold-price outlook, today's buyers, both private investors and central banks, are likely to be long-term holders. Much of this gold, once bought, is unlikely to be resold any time soon even at much higher price levels. For central banks, the holding period will be measured in decades if not longer. This promises less liquidity, more volatility, and much higher prices in the years ahead.

Jeffrey Nichols, Managing Director of American Precious Metals Advisors, has been a leading gold and precious metals economist for over 25 years.

Gold Heading to $2,350 Per Ounce After 4th Wave Consolidation

In my most recent few forecasts for subscribers and public articles I’ve discussed a major correction in Gold, and it dropped $208 within 3 days of that forecast several weeks ago as Gold traders will recall. Last week I wrote about further consolidation being required in what I’m seeing as a either 4th wave likely “Triangle Pattern” that will consolidate the 34 month run from $681 to $1910 into August of this year, or a 3 wave “A B C” pattern. We are right now in some form of C wave, it’s just a matter now of confirming if we are going to get a “D and E” wave to follow, or the C wave drops lower before we bottom.

A Triangle pattern serves to let the “economics of the security” catch up with the prior large movement upwards in price. In essence, the crowd behavior pushed the price of Gold a bit too high too fast, and this consolidation pattern lets the fundamentals catch up to price action. We had a parabolic move I discussed many weeks ago, and those always end badly to the downside. The $208 drop in three days is a typical reaction to a spike run like that. At the end of the day though, I had been forecasting what I call a “Wave 3” top and was looking for a multi week or multi month consolidation pattern before Gold could move higher.

Let’s examine what that triangle projection may look like. They take the form of 5 waves, or what we can call ABCDE in a pattern. The biggest drop is always the “A” wave, and that was 1910 to 1702 in 3 days or less. The next biggest drop is the “C” Wave, and that was 1920 to 1793, noting it was a Fibonacci 61.8% drop relative to the A wave. In other words, each successive wave down in the 5 wave triangle is smaller. This is due to the sentiment finally shifting and the trading patterns moving from people chasing the hot sector or stock or metal, to the long term investors accumulating the dips.

If we end up consolidating in a “Triangle”, then Gold should end up looking something like the below pattern I drew, with a target of $2,350 per ounce many months out:

The other pattern we are watching for at TMTF is the ABC Correction pattern. We had the A wave down to 1702, which corrected 50% of the move from 1480-1910 in 3 days. Rarely do you get a major move down like that and not get some type of “re-test” of that low, but because the fundamentals for Gold are strong and getting stronger, we are favoring the Triangle pattern still as most likely. With that said, there is a fat and juicy “Gap” sitting in the chart around 1660 on Gold and dropping down there is what a lot of traders are watching. If that were to fulfill, then we will see an ABC correction ending around $1643, and then Gold will begin another multi month rally to new highs:

Gold continues to correct as forecast in a 4th wave pattern

 

I got a bit of hate e-mail over the last few weeks from the Gold Bugs who thought I didn’t know what I was talking about when I forecasted a multi-month consolidation and correction in Gold was imminent. I’ve written ad nauseum about crowd behavioral patterns as they related to both stock markets and precious metals. It should not come as a surprise that Gold is continuing to drop after a 34 Fibonacci month rally from $681 to $1910 per ounce. That rally came in five clear Elliott Waves and ended with a parabolic race to the top. I consistently warned my subscribers and readers of my articles about not being caught holding the bag and to take defensive measures.

My most recent update was to simply try to figure out whether the continuing correction in Gold would take the form of an ABC pattern or an ABCDE Triangle Pattern. It is becoming more clear that the official pattern is ABC. In English it means that the first leg down from 1910 to 1702 was the “A” Wave, the rally back up to 1920 was the “B” wave. The C wave is continuing underway and one of my longstanding targets is $1643, which is a Fibonacci fractal relationship to the prior lows and highs, and also conveniently fills in a “Gap” in the Gold chart in the 1650’s.

During these 4th wave consolidation periods, it reduces sentiment back down to normal levels and lets the economics of the move in Gold catch up with the price action that was extended. The first area to watch is the re-test of $1702 spot pricing for a C wave low, but the evidence is for a further drop to $1643 before I would get too interested in trying to game Gold to the upside.

Here is the chart I sent out 9 days ago with Gold at $1837 forecasting a possible C wave continuing lower:

I’ve stayed away from either shorting Gold or going long gold while I watch and confirm the 4th wave pattern. It’s simply the smart way to go knowing that upside will be difficult to obtain and downside risks are high. It does now appear that I am eliminating the Triangle pattern and sticking with the ABC Correction with the C wave still working its way lower. If $1702 breaks, then you should expect to see 1620-1643 as next pivot low ranges.

www.MarketTrendForecast.com

 

Going for the Gold

The rising price of gold is hardly breaking news; after all it’s been on a parabolic climb for the last several years. However, even though it’s had a meteoric rise, I think we have barely seen the start of just how high the yellow metal will go.

Everyone from individual investors to central banks are snapping up gold hand over fist. And $2,000 may just be a rest stop before the real parabolic move higher.

Denial Is Not Just a River in Egypt

On December 1, 2009, gold closed at $1,197. The same day, I spoke with Larry Kudlow of CNBC about why gold is going to $2,000.

Now this bullish claim is not new coming from me. I’ve been saying this for well over 8 years and battling it out with gold bears on TV and radio, at seminars around the world, in print, and elsewhere, since gold was trading around $450.

The same arguments I have heard over the last 10 years against buying gold, I’m still hearing today. The denial is really sad! You can hardly blame some of these analysts and economists though. Even the chairman of the Federal Reserve, Ben Bernanke, when asked by Senator Ron Paul if he thought gold is money, Mr. Bernanke basically said “No.”

Now with gold close to hitting the $2,000 mark, wouldn’t it be nice to go back in time and be able to buy it at $1,200? Sure, it would! But I think that in a few years when gold is at $4,000, people will be saying the same thing about $2,000. The fact is that adjusted for inflation we need to see gold at about $2,200. 

Back to Bullion

Let’s face it, nothing has changed on the fundamental front for the U.S. dollar. And the global economy is actually more in tatters now than it was when gold moved from $450 to $1,900, and I expect things to get worse.

We still have high unemployment, near-zero interest rates, endless printing of fiat currency by the Fed, and a debt-to-GDP ratio that is mind boggling! Now add in what looks to be the disintegration of the euro, and possibly the end of the entire European Union, and you have all of the elements in place to see gold prices really explode to the upside.

But in my opinion, one factor stands head and shoulders above the rest, and that’s central bank buying.

European central banks have once again become net buyers of gold for the first time in more than twenty years, which is a very clear indicator of how uncertain things are in the currency and debt markets right now. 

Countries such as Mexico, Russia, South Korea, and Thailand have made sizable purchases this year. The reason is clear why these countries are taking this action: They want to reduce their exposure to the dollar. Worldwide, central banks are set to buy more gold this year than at any time since the collapse of the Bretton Woods system four decades ago, which by the way was the last time the value of the dollar was linked to gold.

So far, on a relative basis, the purchases by central banks are small when compared to the size of the global gold market overall. That in turn, is very bullish to me. This level of buying is a complete U-turn for most of these central banks, especially in Europe, who sold gold heavily.

Even the small increase we have seen in central bank buying has helped lift the price of gold by more than 25 percent so far this year, hitting a high of $1,900 on 9/5/11. 

For years I’ve been encouraging people to have gold in their portfolios.

Will there be corrections in gold, certainly. Volatility in gold, and silver for that matter, remains very, very high. The exchanges have tried repeatedly to raise margins in an effort to slow buying, but it’s been about as effective as butter stopping a hot knife.

So is it too late to get in on the gold rush? Not at all!

Golden Opportunities

There are many good ways to invest in gold, including: Gold coins, bullion, key mining shares, and options on futures. Diversification and risk management are key. One of my favorite vehicles for investing in gold is key gold ETFs.

Bottom line is that gold has had an incredible run higher over the last few years. But that could simply be a dress rehearsal for the real show that’s about to begin. As central banks and individuals shift out of fiat currency, one of the few safe harbors is gold. It’s that simple.

So don’t be intimidated by the gold bear; take action and hedge your portfolio against the falling dollar and euro using limited risk strategies like I have discussed.

Yours for resource profits,

Kevin Kerr

Kevin Kerr is a considered one of the best resources on how to trade commodities, futures, and options for the new and advanced resources trader alike. He is co-editor of Global Resource Hunter, a monthly newsletter designed to help you ride the commodity supercycle — an ongoing surge in price of food, energy, metals and more.
Kevin is also the editor of Master Trader, a service meant to use ETF options for gains in any major asset class in the world — stocks, precious metals, commodities, bonds and even foreign currencies — no matter what event or trend is happening in the world!

Gold May Top $6,000, Silver $600: Asset Manager

www.cnbc.com

Gold prices may reach $6,200 per ounce in a bull run which will "end all major bull markets," Urs Gmuer, asset manager at Dolefin, a Swiss investment advice firm, told CNBC.

Gmuer's prediction is based on analysis of the last major gold boom of the 1970s, during which gold prices rose from $35 per ounce to $850 per ounce. Gmuer said that in the current bull run, prices would be pushed upwards by a protracted period of global economic difficulty--potentially lasting years--during which investors would continue to search for so-called safe havens.

"Gold prices have risen over the last few years, as the macroeconomic picture has become worse. The deterioration of the fundamental situation has now gone even further.

"Purchases by investors of gold will be based on fears of systemic risk or banking crashes," Gmuer said.

The investment manager said that as no "safe" currencies remain, cautious investors had no choice but to opt for precious metals.

"The ultimate currency, which has stood the test of time, which has no political support behind it, is gold. Nobody can print gold out of a machine or a PC.

"What the Swiss National Bank did two-and-a-half weeks ago, increasing the supply of the Swiss franc, means the safe currencies are all gone. That is why gold will have a revival," he said.

Gmuer said the precious metal had entered a "super-cycle," which he likened to the 1998-to-2000 boom in technology media and telecommunications.

He added, "This bull trend will end all the other major bull markets," and singled out debt capital as an asset class for which demand and prices would decline.

However, Gmuer denied that high and rising gold prices could be indicative of a bubble. "If everybody is saying a particular asset is a bubble, that reflects the fact that most people have disposed of it," he said.

Other calculations indicate that gold prices could peak at $3,500 or $4,000 per ounce. This is based on historical data regarding the long-term ratio of gold prices to the global money supply.

On Sept. 2, gold peaked at $1884.60.

Silver Set for 14-Fold Price Rise?

In addition, Gmuer said silver is set for an even greater upward run than gold, with the market due to correct a distortion in its pricing of silver in relation to gold.

Gold and silver currently price at a ratio of around 45:1. However, Gmuer said declining silver output over the last 60 years--as a result of inventory depletion and mine closures--meant silver supplies currently outnumber gold by a ratio of less than 10:1, thus indicating a market correction is due.

Once this occurs, Gmuer said silver prices would settle at 6.7 percent to 10 percent of gold prices. This implies that if gold reaches $6,200 per ounce, silver could peak at $620 per ounce.

On Sept. 2, silver peaked at $43.24.

Gmuer added that markets for all precious metals were benefiting from the surge in demand for commodities, food, and energy from developing countries.

"Since World War II, the world population has almost quadrupled. However, most of the increase was in countries that had closed political systems, such as the Soviet Union, China and India," he said. "When these countries started to open up in the 1990s, these people saw they could increase their level of well-being. It is pent-up demand."