Gold is Screaming Buy Me

May 13, 2011 | By | Reply More

This has been a week that has severely shaken the faith of the most diehard gold bugs in the continuation of the metals epic bull run from $500 an oz. five years ago to a high of over $1500 an oz. where it sits today just before the New York open.

Many a reason has been given for its dive from the heights of $1575 to $1465 in three days and its reluctance so far to reoccupy the high ground. Our theory is that nature took its course as traders cashed in profits after both gold and silvers’ swift rises triggered sell order stops from hedge funds and major investors that had been moved up in line with the rises and not readjusted in time to catch the falls.

Of course there was a knock on effect resulting in an exodus of justifiably panic stricken investors and speculators thinking that they had been caught with their pants down but that was a consequence of the main event. Thereafter a stream of commentators were only to happy to tell us that they had foreseen the bubble about to burst despite the fact that there were only three major factors of dubious significance to support that point of view.

A marginal strengthening of the dollar index where the index is loaded with even weaker currencies such as euros and sterling. The raising of margin requirements for silver, ( note, not gold) and a threat by OPEC to increase oil production while US reserves were unexpectedly high for the month.

Why we think that gold is a screaming buy is that the only other changes that we are aware of strongly support our view.

There is a presidential election due in 2012. Does anybody seriously believe that Obama or any of the fat cats that benefit from his office are going to jeopardize his chances of re-election?

Raise interest rates and bring in austerity measures that will knock inflation on the head as in Volckers time. Not a chance! The consequent effect on the already poor employment figures, the disaster posing as a housing policy, the honest cutting back on government expenditure via employment, medicare and the other schemes so dear to the quasi socialists inhabiting the corridors of US power, retailing and small business – all in the name of restoring the dollar and US prestige and future prosperity are simply not in their remit.

The next round of fiscal stimulus, call it QE3 or whatever, money printing in all but name, is an odds on favorite. The buck will buy you even less! Joe Public may still think that something is better than nothing, which would be his temporary fate if interest rates rose and government expenditure was brought under control.

The stock market will continue to rise as all that extra paper money needs a home, even the property market might benefit if prices continue their slide enough. The only assets that are likely to hold their value and are publicly accessible are gold and silver. Its all about the election, stupid!

Picture this scenario. The Chinese politburo are meeting, the finance minister announces that their massive holdings of  US dollar denominated assets continue to lose value, and are likely to continue to, at least until after the presidential election. He finds it difficult to conceive how the US will find an effective way of sufficiently reducing the money supply to a level where the value of the dollar will cease to erode.

As an aside he tells fellow members that even some US states are proposing to legalize gold and silver coinage. He notes that the price of gold is around $1500 an oz, just off its previous highs. Unlikely but he might also mention that both the weekly and monthly gold charts are showing an inverted “head & shoulders” pattern indicative of an imminent rise.

He tells them that the proportion of their enormous reserves held in gold is only 1.7%. Even Italy has a higher proportion. Would he be recommending that they stay out of the gold market? Much more likely that he would be saying we must buy, and buy, and buy whenever the price is at or below our target level. Lets face it, he would have been saying this for years as the dollar has sunk.

No foreign country or central bank has been reported as selling gold for the last two months, in fact both Mexico and, from memory, Indochina have been buyers and quite possibly there have been others. Gold has reached its highest price ever against the Euro. Annual gold production is and has been for some time, insufficient to meet demand, recycling is slowing down.

Our final question, what event or series of events can realistically take place to undermine the confidence that the world has in the yellow metal in the foreseeable future? We promise to publish all your replies as long as their content is serious.

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