Wednesday, May 19, 2010

The Coming Gold Bust: $800 Per Ounce?

CNN Money -- "Barclays Wealth in London predicts gold will fall to a fair value of $800 an ounce by 2012, as investors eventually dump it for riskier trades; Societe Generale, the French bank, in April 2009 predicted $800 gold by the end of 2010, though it has reversed its stance since then. Analyst John Nadler of gold deal Kitco predicts gold will fall to $900 in 2011. Their reasoning is simple: investors are keeping prices high even as demand from non-investors is cratering.

Take gold jewelry, which accounts for more than half of the world's gold market. Demand there fell 8% in the fourth quarter of 2009 and is likely to continue to fall amid high prices that turn off shoppers. For example, in India, the largest gold buying country, high gold prices this week kept Indians from purchasing metal for the gold-buying festival of Akshaya Tritiya, which in turn drove down prices.

Then there's price pressure from the supply side. Higher gold prices mean miners work overtime. The supply of mine gold around the world jumped 7% last year to 2,572 tons-the second largest increase in history.

Gold bullion dealer Kitco says places like China and Russia will help boost the amount of gold from mining by 4% to 6% a year through 2014. Because it costs miners about $480 on average to extract an ounce of gold, they plow ahead when prices are high, eventually leading to an oversupply situation."


At 5/19/2010 10:35 PM, Anonymous gettingrational said...

Jon Nadler, of Kitco, says high gold prices not sustainable. One reason for the rise in gold is the bet against currencies but it's overdone.

At 5/19/2010 11:25 PM, Blogger Moses said...

Jon Nadler has been wrong for about 10 years running now.

At 5/20/2010 7:03 AM, Blogger Mining Maven said...

Funny how Nadler (a.k.a the Tokyo Rose of gold commentators) always seems to poke his head above the parapet just when Gold is getting lively - here is what John Embry of Sprott Assets Management said about him.

“as long as Nadler keeps getting press, it is reasonable to assume we are a long way from the end of this b...ull market in gold”

We recently wrote a piece about what we believe to be Nadler’s true motives. It has had hundreds of thousands of page views and was picked up by many investor facing blogs - please feel free to reproduce it so that people will get a different take on why Nadler and Kitco are talking down gold.

Whats eating Jon Nadler??

Suffice to say if Kitco, as bullion dealers, also need to get people to sell them gold. There is no problem with demand, but lack of supply is pushing up the price. So they wheel out Nadler to draw out the sellers!

At 5/20/2010 8:07 AM, Anonymous morganovich said...

there is no question that gold prices are being driven by investors.

this is a clear bet against fiat currencies, and one that i suspect will pay over 10-15 years. name a major western currency whose issuer has its fiscal house in order and or will not need to engage in competitive devaluation to keep exports flowing.

that said, this is unlikely to be a linear trend. because gold's primary use is investment, it's going to be very volatile.

the fact that US M3 is currently shrinking at over 7% bodes poorly for near term gold, but monstrous fear over the euro is offsetting that despite dollar appreciation. these guys may be right that if euro fears subside, the effects of shrinking money supply may make themselves felt in the near term.

i don't really trade gold and don't have a terribly poignant near term view, but i think over a decade or 2, it'll pay pretty well.

At 5/20/2010 9:10 AM, Anonymous Anonymous said...

Gold is a good hedge against high inflation. The problem: where's the inflation?

At 5/20/2010 9:28 AM, Anonymous niknaknoo said...

I'd rather have gold than paper.

If it does drop to $800 lump on because in 5 years time or so it will be $5,000 to $10,000 an ounce.

At 5/20/2010 9:46 AM, Anonymous Anonymous said...

Forget about gold 800, we have have to worry about S&P 500 at 800.

As if to calm the market, Sheila Bair just went on CNBC in a scheduled interview about Europe and said she hoped cooler heads would prevail. Her reason? More regulation is on the way, of course. Why can't they get it that their trying to control everything is exactly what is causing all the paralysis.

Companies can't make any long term plans with the rules changing every other month.

At 5/20/2010 2:45 PM, Anonymous gettingrational said...

What if oil producers demanded payment in gold for their crude? There is an interesting chart that shows the recent historical ratio of gold/oil in an article describing The curious relationship between gold and oil.

Maybe purchases of large amounts of gold with U.S. dollar reserves is a petrol hedge.

At 5/20/2010 3:26 PM, Blogger Benjamin said...

Gold is ofr people who like metal and ear tin-foil hats.

I will say that the Chinese like gold, so there may be a long,long, long run in gold, but eventually it will go nowhere and then down.

At 5/20/2010 6:35 PM, Blogger OA said...

gettingrational said...There is an interesting chart that shows the recent historical ratio of gold/oil in an article describing The curious relationship between gold and oil.
Maybe purchases of large amounts of gold with U.S. dollar reserves is a petrol hedge.

On a longer run basis, the ratio is a bit higher than those recent years suggest. The chart here from 1965 to I think 2005, has an average of 15.4.

Single digits and even 10 is actually pretty rare. Wish I'd known about the history of this ratio through '06 and '07.

I think the Tresury's monitoring of dollar wire transfers puts a little bit of upward pressure on this ratio. Although the Patriot Act started higher levels of scrutiny, there was some step up in monitoring relatively recently for tax reasons. There's a lot of people who end up with petrodollars who don't want the Treasury to know where their money ends up. I also think a lot of people who had bank accounts got a bit scared by the forced disclosure by UBS last year. Offshore accounts exceeding some amount have to be disclosed, but offshore stashes of gold don't have to be.

At 5/20/2010 11:53 PM, Anonymous Dave Pinsen said...

Glad I bought puts on GLD on Tuesday.

At 5/21/2010 8:47 PM, Anonymous Die Fledermausmann said...

$480 on average to extract an ounce of gold, they plow ahead when prices are high, eventually leading to an oversupply

The illusion stems from linear graph of the GDP deflater. You need to look at exponential plot. You will then see lot of real estate at the bottom of the curve. Lot further to go along our historic trek through deflation. Gold is a reflection of jewelry sales and inflation, if any.

Believe it or not

At 5/22/2010 8:57 AM, Blogger VangelV said...

I think that it makes more sense to look at the gold/Dow ratio to see how the barbarous relic is doing against the markets. So far, it is looking as if the long trend where gold outperforms the equity markets is still intact.

As for the USD price, we have seen the increase since Nixon closed the gold window in 1971. Since then, the USD has lost about 80% of its purchasing power. There is little reason to expect that trend to increase over the medium to long term, no matter how many times Mr. Nadler chooses to give us his usual song and dance routine. One would think that after a decade of being mostly on the wrong side of the gold market Mr. Nadler would be more careful.


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