Sunday, March 14, 2010

Gold for the Long Run

In another example of the MSM/Big Finance trying to tell you that up is down, Credit Suisse wants you to believe that if the price of gold drops below $1000/ounce, demand will decrease. "Business Insider" reports in Credit Suisse: The Upcoming ETF Unwind Will Pummel Gold, that:

Davis (the Credit Suisse analyst) believes if the gold price remains above $1,000/oz investment demand will remain muted but if the price drops below that level annual demand for the product could fall to between 300 and 350 tonnes. In the three years before 2009, an annual average 280 tonnes of gold was absorbed by ETFs.

For something as non-speculative as gold, and one for which the fundamentals hardly change (unlike that of an industrial company), investors are value investors. India will buy more as the price (in rupees) drops. The same is true for China. Has some hot money gone into gold ETFs? Probably. But it's a drop in the bucket compared to what the NASDAQ did in the later 1990s, forgetting the complete lunacy of 1999.

Earlier in the article, more silly stuff is cited:

If investors start turning away from gold ETFs because of improving economic data from the United States, a strengthening of the trade-weighted dollar and increases in real interest rates this could lead to an oversupply of gold in the market.

In fact, the U. S. had economic growth in 2002, 2003, 2004, 2005, 2006 and 2007. Guess what the gold price did each year? It went up, generally more than the stock averages. The non-silly part of that sentence relates to real interest rates. It is no surprise that the gold bull market ended 30 years ago when Paul Volcker jacked rates up well above inflation.

If and when gentle Ben starts practicing that sort of tough love, it may very well make sense to exit gold and start truly believing in stocks and bonds for the long run rather to be rented. I'm not holding my breath for that to occur, though.

The article does point out at its conclusion that:

The over-supplied position should begin easing as mine supply drops off, with global exploration unable to yield enough replacement ounces for those being mined. The deficit in gold supply should start widening from 2014.

Of course, the gold market knows the above. It also knows that "analysts" such as Mr. Davis are as likely as not part of an elaborate scam in which Credit Suisse is planning to buy gold after it and other firms help engineer a decline.

There will be growth in the spring.

The Fed will be behind the curve.

All that points to negative real short-term interest rates. All this is fundamentally bullish for precious metals.

Is that enough to deter more profit-taking?

That's why they play the game.

But in the scheme of things, it doesn't matter what gold does next month or next year if one is holding it as a long-term store of wealth. For traders, gold is indeed acting a little "heavy" here and there are indeed too many TV ads for it. But a lower price is a buy signal, and Mr. Davis and Credit Suisse are devils for suggesting otherwise.

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