Gold Setting Records as Predicted

September 7, 2010
By James West
Here we are again in the ‘gold is going to $2,000!’ phase of the 10-year seesaw bull market for gold. Yet again, all the rosy perception management journalism issuing forth from sources innumerable declaring the economic recovery underway and strengthening have proven hollow. And now, just as before, the advent of shell game cheque-kiting by the U.S. Federal Reserve to prop up its crumbling and counterfeit currency has initiated another onslaught of gold accumulation. That’s just my wind-baggy way of saying the price is going up again.

The factors driving what will be a new price record before the end of September (out on a limb I go!) are essentially unchanged, and in some cases stronger. The Fed has run out of brightly coloured ribbons with which to adorn the dismal financial data they can’t help but generate, and so the formerly upbeat nature of their statements have devolved into reports of dissent in the ranks. Japan has announced a new US$8.75 billion ‘stimulus’ package, and so more monopoly money comes into play. The biggest gold rush in the history of the world is yet ahead of us.

Whither $2,000 gold?

Well lets see. If we agree that the primary driver in the gold price is excessive fiat money presence in the global financial system, then we can arguably extrapolate an indicator by comparing money supply with gold price. Since 2000, the M2 supply of money has grown from 4.5 trillion to 9 trillion. So it has doubled in 10 years. Gold has risen in price by 400% in the same time frame. If the average rates of increase remain stable, then gold should rise by 200% in the next 5 years. That would put it at $3,600 an ounce by 2015. If we average its price out over 10 years, we see that it has increased by an average of $90 per year since 2000. Using this number, we arrive at a much more modest and in my opinion likely gold price in the range of $1500 by 2015. $2000 gold will have to wait, it would appear.

But that is gross over simplification. More importantly, is there anything on the horizon that might cause gold to decrease in price? The long and short answer to that question is unequivocally no.

Silver
A gentleman by the name of Ted Butler, who is widely regarded as the authority on silver and silver markets, advocated in an interview with Jim Cook at Investment Rarities on the 4th of August that investments in silver would outperform investors in gold. His principle argument is that whereas gold remains more or less un-used, and therefore all of the gold ever extracted from the ground but for tiny proportions lost during recycling and ablative degradation, is still with us.

Silver, on the other hand, is used and lost. “World silver inventories,” he says, “are at their lowest point in 200 years while gold inventories are at their highest.”

While definitely food for thought, and whereas I agree with the rational argument for silver, I think, in the near term at least, that silver will never be able to compete with the irrational attachment to gold that has made it the number one historical store of value. Still, I’m going to start to accumulate silver now for the first time in my life, just because, as motivated by greed and fear, it is the fear of missing out that compels this decision. Our objective is an initial 2% holding in silver bullion, and a slight elevation in our willingness to hold silver exploration and mining stocks.

Platinum, Palladium Prices Steady
Platinum has been doing well in the last month. Platinum futures for October delivery climbed $11, or 0.7 percent, to $1,531.60 an ounce on the New York Mercantile Exchange, snapping a seven-session slump.

“There is concern over industrial demand for the metal, but emerging markets still remain strong,” said HSBC analyst Jim Steel. “Platinum has good potential to move higher.”

Palladium futures for September delivery gained $6.35, or 1.4 percent, to $471.05 an ounce. The price dropped in the previous seven sessions, the longest slide since January.

Derek Enegelbrecht of Implats forecast a “cooler” second-half “breeze” for platinum is based on the expectation of a slowing down of the growth of vehicle production; with belt-tightening in Europe and unemployment in the US, it is left to Asia to continue to drive demand.

As gasoline vehicles are palladium catalysed and as most of the growth in vehicle sales is in gasoline models in Asia, Implats expects the palladium price to range between $450/oz and $550/oz.

With the era of Russian destocking of palladium believed to be over, the expectation is that palladium is going to move into a growing deficit.

Bottom Line: We think PGE junior explorers are a buy.