The Telegraph reports that gold price could hit $1,500.
(emphasis mine) [my comment]
Gold price could hit $1,500
The aggressive monetary policy of central banks around the world is playing havoc with the structure of the bullion market, creating a chronic shortage of gold that may soon push the metal to fresh records above $1,500 an ounce.
By Ambrose Evans-Pritchard
Last Updated: 12:11PM BST 20 Apr 2009
Charles Gibson, a gold expert at Edison Investment Research, argues in a new report that negative real interest rates (below inflation) in the US and beyond has upset the "leasing" machinery in the gold industry and led to a sustained market squeeze. [Agreed]
This is what occurred in the late 1970s, driving gold prices to $850 and ounce – roughly $1,560 in today's terms. Gold finished last week at $870.
Mr Gibson said the powerful dynamic could lead to a second leg of this gold bull market, even though the metal has already enjoyed a torrid run over the last eight years.
In normal times, gold mining companies sell – or "hedge" – a chunk of their output in advance through bullion banks. These banks cover their positions by leasing gold from central banks. This bread-and-butter trade created excess supply of 500 tonnes each year until the start of this decade. [Gold carry trade]
Low real interest rates have caused the process to reverse, creating a shortfall of about 500 tonnes [Turning point was the 1999 Washington Agreement on gold]. The process accelerates as rates turn negative, leading to a scramble by market players to find physical gold.
There are already reports that gold bars are becoming scarce, partly due to fears that futures contracts and other forms of paper gold may not prove reliable if there is a serious break-down in the global financial system. Pure metal -- whether Krugerrands, Maple Leaf coins, or the "five tael biscuit" favoured by the Chinese – entail no counterparty risk.
Mr Gibson says the Fed's monetary blitz will end in another burst of inflation akin to the late 1970s [It will be far worse than the 1970s]. That is a disputed claim as deflationary forces tighten on the global economy. Some of the big global banks are already calling the start of a bear market. Rarely has the gold fraternity been so schizophrenic.
My reaction: As I have written before, I expect the next shoe to drop in the financial crisis will be the collapse of paper commodities, especially paper gold.
1) Negative real interest rates (below inflation) in the US and beyond have upset the "leasing" machinery in the gold industry, creating a sustained market squeeze.
2) Gold bars are becoming scarce, due to fears that futures contracts and other forms of paper gold may not prove reliable.
3) Pure metals (Krugerrands, Maple Leaf coins, etc…) entail no counterparty risk.
Conclusion: I agree with Mr Gibson: the Fed's monetary blitz will end in another burst of inflation, except it will be far worse than what was experienced in the late 1970s. It will be a dollar collapse.
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Thank you Eric again for valuable info.
I've set my mind to invest in gold already, but are there any other currency to invest on other than the dollar? maybe euro or yuan?
Many are long in Aussie dollar, CAD, Norwegian Krona, Singaporean Dollar and Brazilian Real. Some are long in Yuan.
People have been saying this same story for YEARS. I'm long gold but frankly I'll believe a shortage and price squeeze when I see it.
What do you mean when you predict a collapse of paper commodities? I trade options and am currently in silver and plan on diversifying into grains soon, then energy. Are you saying contracts will go to zero? Or will prices skyrocket? How is it likely to play out in your mind?
Eric,
Have you any thoughts on the future commercial real estate market in the US?
Anon,
It is certainly possible that paper commodities will not be trusted, and thus not trade, along with many contracts suffering from force majeure.
Paper is just a promise.
Singapore Dollar is bad idea.
They are going to recover real slow, in Asia but too tied to the US and despised by China.
Investigate deeper for yourselves.
Guys, I've made this pic today in the ordinary regional office of Sberbank (Russia, Izhevsk city, 157 Pushkinskaya str.): http://talks.mark-itt.ru/forums/icons/forum_pictures/000765/765675.jpg
Looks like gold bullions is still in free sale in my country :) I wounder how is the situation in US?
It's foolish to own gold. You have storage/security costs, a 28% tax rate, and a market that is not quite as liquid as you think it is.
They've suppressed the price for years. What makes you think they'll stop now, when that suppression is essential to keeping you in the system? Any time the price gets too high, the IMF, or Switzerland, or the USA, sells a big chunk to pound the price. Years later, the purchasing nation sells it back, pounding the price again.
What good is a possible $2000/ounce in, say, 3 years when, while waiting for that, you have to endure 3 years in the doldrums of the $600s? Will you really be able to hold on when you're broke? Good luck with that.
Pay off all your debts, buy a little piece of land, and a reasonable amount of food. Leave the gold to the big banks to play with. Otherwise, they'll eat you for lunch.
Look on the bright side for gold it`s value will surely rise. If you own the yellow metal look at the price difference on ebay thats where the real price is struck not at comex amex etc how can any one honestly say they have faith or trust the system today and who in their right mind would trust any thing coming out of America or GB the whole show is a scam. Gold is a hold for me. Trader.
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