3rd August 2011
umours were swirling around the City that hedge funds were being forced to sell assets such as gold in order to cover deepening losses on other investments. This led to a surprise 1% drop in gold, which in recent weeks had hit record highs of more than £1,000 an ounce as a safe haven bet in the eurozone and US debt crisis. Brent crude fell 5% to $107 a barrel amid signs of slowdown in the west's economies.
Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not
For more than 3 years – since gold rose above its nominal high of $850/oz in February 2008 – there has been much talk about gold being a bubble.
Nouriel Roubini, professor of economics at New York University's Stern School of Business, is one of the more prominent financial and economic experts who said gold was a bubble and many other experts internationally echoed his sentiments.
On December 10th, 2009, with gold at $1,100 per ounce, Roubini, said, "all the gold bugs who say gold is going to go to $1,500, $2,000, they're just speaking nonsense". Roubini went on to say ,"I don't believe in gold."
Gold has now risen 50% since then and Roubini has been silent on the gold price.
We believe that he was wrong regarding gold as he, like many in the western world, is simply not aware of the facts and the fundamentals driving the gold market. He also is not aware of gold’s diversification benefits.
The fundamental drivers of the gold market are not appreciated by most and rapidly get forgotten by many due to the daily barrage of noise and fear emanating from the markets.
The facts and charts below strongly suggest gold is not a bubble.
However, even if it were a bubble, those calling gold a bubble should acknowledge the diversification benefits of owning gold and urge diversification rather than vainly trying to predict the future and the future movement of asset prices.
The precious metals of gold and silver are driven by a wide variety of factors, including money supply, debt levels, currencies, CDS spreads, interest rates, inflation and fabrication demand from downstream sectors such as jewelry, electronics, and solar applications.
Investment demand has been one of the primary drivers more recently as investors have used precious metals as a store of value in the face of dollar and currency depreciation as well as a general hedge against inflation.
Investment demand includes significant and growing demand from store of wealth buyers in Asia, investment and diversification demand from hedge funds, pension funds and central banks and monetary demand from central banks.
This demand is due to concerns about the global economy, growing inflation risks and the real risks posed by currency debasement being seen globally.
Gold remains the preserve of the smart money, many of whom predicted the current financial and economic travails.
Risk aversion and concerns about wealth preservation due to currency depreciation remain the primary demand drivers.
Demand is due to ‘risk aversion’ hedging and diversification and can be broadly characterized as ‘prudent diversification’ rather than the ‘fear trade’ that some have called it.
There is no irrational exuberance or broad based belief amongst journalists, analysts, experts and the public in general that gold is a one way ticket to being rich. Indeed, there continues to be very little coverage of gold in local media and only the occasional coverage in the non specialist financial press. This is especially the case in the UK and Ireland and in the European Union.
There is no “greed trade” or buying of gold by the general public in the belief that making a return or a profit is guaranteed.
This was seen in the Nasdaq bubble and more recently in the property bubble that afflicted western countries.
Thus, retail demand, contrary to some hype and silly talk of people “piling in”, remains negligible but is gradually increasing from a very small base.
Increasing global demand (especially from Indian and Chinese savers, investors and their central banks) is being confronted with anemic supply as mining supply is marginally lower than the record levels seen in 2001 (see chart below).
This year scrap supply (due to the global ‘cash for gold’ craze) will be much lower than last. Hard pressed consumers internationally, and especially in the western world, have already misguidedly parted with the ‘family gold’.
All of the gold in the world that has ever been mined, if refined (0.9999 pure), would fit into a 21 metre high cube and is very rare. Thus, if even a fraction of flows in global capital and currency markets flows into gold, prices could rise very sharply and go parabolic.
Another factor, not known by most, is the massive concentrated short positions held by a few Wall Street banks.
The Gold Anti-Trust Action Committee (GATA) has gradually amassed evidence of market manipulation and a covert attempt to keep gold and silver prices low. Its London conference is this week and will hear from very astute analysts that there is now the real risk of a massive short squeeze that will lead to a gold cartel losing control of prices and a parabolic surge in the gold price and significant dislocations in financial markets.
GoldCore does not endorse GATA but has always found its work thorough and thought provoking. Indeed, its key contention has never been refuted or rebutted by the banks in question or in the media.
Should gold go parabolic, it may be time to reduce allocations to gold – but we appear to be a long way from there yet.
This is not the end game which unfortunately looks increasingly like an international monetary crisis – centered on either the U.S. dollar or the euro or both.
Having looked at the reality of supply and demand in the gold market let us now look at some important charts courtesy of Bloomberg Industries.