Gold Price - Where is it heading?

[michael_selway]

Well it doesn't look good for gold bulls right now. Price is now drifting down in a current downtrend. Next strong support is at 750. Buyers will try and come and try and hold that price. I dunno what will happen if prices don't hold up there. I'd be shorting it now definitely.

Hm you can still short these days?



thx

MS

 

[barrett]

In tonight's discussion people seemed to be forgetting that it's quite possible to have an inflationary recession, as the US experienced during much of the 1970s.

Let's not get too caught up in money supply arguments either. All measures of money supply increased astronomically between 1980 and 2000, and yet the gold price steadily plunged by two thirds.

So what makes gold go up? When banks and markets are actually functioning (unlike now) -- gold goes up when inflation rates exceed interest rates.

Gold doesn't need to have a thing to do with what the equity markets or housing markets are doing -- as evidenced by the 30-fold rise of gold right through the multiple inflationary recessions of the 1970s.

Something else - over 70% of the gold bought in the world every year is for jewellery, most of that is Indian buying, mostly between November and January. Deepavali is coming up in about two weeks. I have my doubts that Indian farmers are planning to switch to US Treasury Bonds instead this year. If several billion Asians think gold is the ultimate currency, I'm not about to pick an argument with them!

 

[Kauri]

The spread between Eurodollar and T-bill rates (TED) ( thanks Nick) has today fallen to its lowest levels since September 15th. Although the spread remains at elevated levels, it has fallen nearly by half from its September 24 peak. Probably a better guide to how the credit crisis is being corrected versus tracking the stock market, thus also a good guide on safe-haven gold... if you subscribe to the safe haven status of gold that is...

Cheers
................Kauri

 

[Indie]

Let's not get too caught up in money supply arguments either.
So what makes gold go up? When banks and markets are actually functioning (unlike now) -- gold goes up when inflation rates exceed interest rates.

This is a contradiction. Inflation is purely monetary. Increase in money supply is inflationary. Decrease in money supply is deflationary. Nothing more, nothing less. It's all about money supply.

Gold was in a huge speculative bubble in the 70's. Priced at over $2000 oz in todays money. The fact that it didn't move much for 2 decades is just a reflection of the how big the bubble was. So through the 80's and most of the 90's it fell in value (in real terms) and it hasn't bounced back to it's 70's high. Lots of speculators are betting we will reach those 70's highs again.

Gold is bought by money. It is not money. When China crashes we'll see if they want dollars or Gold. I'm thinking they will trade their gold for dollars.

The bull market for Gold is about to undergo the same correction of every other bull market. I think we are heading to $600, then lower.

 

[Sean K]

Inflation is purely monetary. Increase in money supply is inflationary. Decrease in money supply is deflationary. Nothing more, nothing less. It's all about money supply.

Up for argument.

Wiki gives a decent overview.

 

[rederob]

Gold is bought by money. It is not money. When China crashes we'll see if they want dollars or Gold. I'm thinking they will trade their gold for dollars.

The Chinese understand a tangible asset.
Why would you want something that is no longer underpinned by value?
People now buying the greenback are as stupid as people that bought into subprime CDOs.
You can't create "value" from a printing press.
If you think gold and silver are not valuable in the present climate, try buying some "immediately" (ie, not a futures bid, or a forward delivery of the precious metal) and tell me the difference between the present chart prices and the actual paid prices.
If there was no demand for the metal, spot prices would have dried up and gold would now be in the sub-$500 range - on par with price falls amongst the base metals.

 

[Indie]

T
If there was no demand for the metal, spot prices would have dried up and gold would now be in the sub-$500 range - on par with price falls amongst the base metals.

It's coming.

Btw I bought a stack of Greenbacks a few weeks ago at .83. I'm pretty happy with that purchase. There seem to be lots of people happy to buy back those same Greenbacks at 20% more today. I might exchange those Greenbacks for Gold or CHF one day, but that day is a long way off.

There is a mad rush for dollars right now and there just aren't enough to go around. The printing is no where near enough to cover the destruction of credit, even if the money was reaching the credit markets - which it isn't. Right now, I'd rather be in cash than anything else. Greenbacks in particular.

Let's take a one year time frame and revisit this thread from time to time. Where would you rather be? Greenback or Gold?

 

[rederob]

Let's take a one year time frame and revisit this thread from time to time. Where would you rather be? Greenback or Gold?

GOLD
Chickens come home to roost.
The greenback is in its death throes.
Until governments guaranteed bank deposits the "cash is king" mantra was a crown of thorns.
Strong currencies are backed by tangibles. Intermittent price strength does not imply the currency is strong: It presently means it's "in demand".

 

[barrett]

Let's not get too caught up in money supply arguments either.
So what makes gold go up? When banks and markets are actually functioning (unlike now) -- gold goes up when inflation rates exceed interest rates.

This is a contradiction. Inflation is purely monetary. Increase in money supply is inflationary. Decrease in money supply is deflationary. Nothing more, nothing less. It's all about money supply.

Yes, the word inflation technically refers only to monetary inflation. I was referring to consumer price inflation.

My point is that consumer price inflation exceeding the interest rate available on bank deposits naturally causes people to seek a store of value that does not pay a negative yield. It's just common sense. I'm attaching a chart showing that it also works in the real world - gold rises when CPI exceeds interest rates - ie when the real interest rate is negative. Can you post something similar for the effect of money supply on gold?

There is a mad rush for dollars right now and there just aren't enough to go around. The printing is no where near enough to cover the destruction of credit, even if the money was reaching the credit markets - which it isn't. Right now, I'd rather be in cash than anything else. Greenbacks in particular.

Let's take a one year time frame and revisit this thread from time to time. Where would you rather be? Greenback or Gold?

Right. I saw an estimate on the news earlier in the week that the destruction of wealth internationally in this credit crunch so far has been close to $50 trillion - but the central bank plan of last weekend for instance injected just $6 trillion. So a lot of wealth is being wiped out. I just wanted to point out that it's not a foregone conclusion from this that gold will continue to go down. It's still possible to have an inflationary recession.

The short term trend is down. US dollars may outperform short term, as they have at the beginning of every global economic slowdown since the early '70s - but on a one year timeframe, I'll be holding gold, because I think consumer price inflation is going to show up again before anyone thinks.

 

[Indie]

[QUOTE=rederob;351044]GOLD
Chickens come home to roost.
The greenback is in its death throes.
Until governments guaranteed bank deposits the "cash is king" mantra was a crown of thorns.
Strong currencies are backed by tangibles. Intermittent price strength does not imply the currency is strong: It presently means it's "in demand".[/QUOTE]

We are only interested in whether the USD remains more "in demand" in relation to Gold over the next 12 months from the present par level of: USD$780 = 1 oz Gold.

So let's see.

 

[barrett]

Here is a graph of the Dow Jones during 1973 and 1974.
It fell from 1075 down to 575 - so it nearly halved in two years - one of the worst developed economy bear markets in history. Over the same period gold went from $65/oz to $195/oz. Indie, I agree with your general assertion that a serious credit contraction is likely to be bearish for all asset prices - but prices of hard assets (like gold) and paper assets (like stocks) can also go in quite different directions.

 

[GreatPig]

My point is that consumer price inflation exceeding the interest rate available on bank deposits naturally causes people to seek a store of value that does not pay a negative yield.

I agree with that, but is that '73-'75 period really a good example? The price of gold was effectively fixed up until Bretton Woods collapsed in 1971, and according to this article (PDF), the price was so low that many gold miners had shut up shop.

In both prior cycles, gold prices were held at unrealistically low levels during the peak years to hide inflation and make governments look good. In each case, much higher gold prices were subsequently a necessary part of the adjustment process. By the end of the last cycle, gold prices were so low relative to mining costs that much of the gold mining industry had closed down amidst a level of devastation not since approached until today.

In that extract "both prior cycles" refers to pre-1935 and 1935-1971. "Today" means around 2000.

Once gold effectively floated, the price would naturally be expected to rise under those conditions.

GP

 

[Indie]

Here is a graph of the Dow Jones during 1973 and 1974.
It fell from 1075 down to 575 - so it nearly halved in two years - one of the worst developed economy bear markets in history. Over the same period gold went from $65/oz to $195/oz. Indie, I agree with your general assertion that a serious credit contraction is likely to be bearish for all asset prices - but prices of hard assets (like gold) and paper assets (like stocks) can also go in quite different directions.

No argument from me on this.

I never suggested that Gold moves in tandem with stock prices. And this isn't 70's style stagflation either. Do you see any supply shortages? Do you see rising wages? All I see is over supply and rising inventories (ask BHP and RIO), falling wages, rising unemployment and falling commodity and asset prices. Sounds a lot like deflation. Everything is being re-priced and in this phase there's only one place to be - cash. One by one the bubbles are popping all around us. But we agree on this, so let's enjoy some music:

http://www.youtube.com/watch?v=etfVMtCq9Oc

 

[Reealjrd]

The way US gold stocks are behaving, down 10% night on night, and silver falling to $9.20, I'm looking to hedge with a short around 825 if possible. The initial target would be the pennant support at around 750. Happier if I'm wrong though!

It is true that the US gold stocks are down. But before hedgeing any position please study the market carefully. Because this time the maket is not certain it can bounce back any time.

 

[IFocus]

Any one got a long term inflation chart they could post?

 

[refined silver]

Gold is bought by money. It is not money. When China crashes we'll see if they want dollars or Gold. I'm thinking they will trade their gold for dollars.

5,000 years of human history says you are wrong. Every paper currency ever used has eventually returned to its intrinsic value of 0. Gold has been accepted as money for basically all of human history. It can't just be created at will like paper.

As for China, they already have $1.7t of USD paper and very little gold reserves (1-2%). Various officials have already publicly stated they need to diversify from USD and increase gold holdings.

In the 1930s the US stopped re-valued gold upwards from $20-$35/ounce - 75% in one night. In the 70s, gold's price peak, basically balanced the external liabilities of the US against their stated gold reserves. The same will happen again.

 

[Uncle Festivus]

As for China, they already have $1.7t of USD paper and very little gold reserves (1-2%). Various officials have already publicly stated they need to diversify from USD and increase gold holdings.

China is calling the shot's with the US - yes sir, no sir Mr Hu! They are about the only, maybe the last thing holding all this together at the moment. It is in everybodies (the central banks) interest to keep the fiat jalopy on the road so that is why all the manipulation is via the currency markets, and gold gets the collateral damage as well as some well timed technical selling.

------------------

One observation, if the global governments have found the magic panacea with the move to back all bank deposits, does that mean that if there is a run on the banks that everyone will get their money?

Apparently, for Australia, it works out to $700 BILLION cold, hard cash.

Has anyone tried printing $700 BILLION cash?

But keep it to yourself, we don't want the public to work out that it's physically impossible to make good on THAT promise?

3rd call for the end of the credit crisis? Starting to look like Groundhog Day, but Ben & Hank don't seem to learn from their mistakes?

 

[refined silver]

gold gets the collateral damage as well as some well timed technical selling.

Huge redemptions from index funds are creating massive forced selling of gold and commodities, many of whom were long-only.

However there is a MASSIVE disconnect with physical markets. Physical silver is already at a 40-50% premium over the paper price. Physical gold is at a 10-25% premium.

The chart below is a couple of weeks old, and it is the BUY PRICE! What dealers will buy your physical silver for. If you want to buy from them, the price is a couple of dollars higher. Tulving have offered Jason Hommel $4 over spot silver for his 90% silver bags that he is auctioning off , and are happy to have him publicly state their price. He intends to rebuy on COMEX, standing for delivery, to make money on the arbitrage.

Paper silver and gold WILL default at some point in my humble opinion (ETFs included).

 

[chops_a_must]

However there is a MASSIVE disconnect with physical markets. Physical silver is already at a 40-50% premium over the paper price. Physical gold is at a 10-25% premium. He intends to rebuy on COMEX, standing for delivery, to make money on the arbitrage.

Lol.

That will cause all manner of ****.

 

[Indie]

5,000 years of human history says you are wrong.

Wrong about what? Everyone knows all fiats end the same way. I'm not arguing any different. I'm betting gold takes a big hit from deflationary pressures over the next 12 months, maybe more. There have been plenty of periods throughout history where fiat has out-performed gold.