Is Gold Influenced by the Power of Words?

February 16, 2015 | By | Reply More

My Father loved an argument. So much so he would deny the obvious just for the sake of pitting his ability with words to deny the logic of his own father and his son. I remember my grandfather pointing at some white floor tiles and saying “ your father would argue all day long that those tiles were black just to be different and to get us wound up”.

Why have I told this story? Because the current price performance of gold illustrates the power of words over the logic that should be driving the price – but isn’t!

Gold is an Old Fashioned Anachronism and Will Sink to $700

How often in the last three years have we read or listened to some self appointed analyst or central bank mouthpiece telling us that gold is an old fashioned anachronism with no bearing on modern economic theory and practise and should be relegated to the dustbin of history.

Why even this week we read of one of these so called investment gurus declaring that it is a certainty that gold will sink to around $700 dollars an oz. by 2015 -2016 and possibly to $250 an oz early in the next decade. Briefly put, his argument revolves around deflation. Government policies, i.e. continuous money printing will cause bursting asset bubbles that will lead to deflation.

Deflation But Gold is UP by 7.5%

But we are already experiencing deflation with negative bond yields in major European economies and Japan, lowest retail sales in January for six years, a minuscule 1.75% yield on US 10 year Treasuries, oil prices down over 40% to around $50 a barrel. During this period gold is up by 7.5%!!

Take into account the strong dollar, thought to be bad for gold and we see that gold has kept pace with the rising dollar index since November last year when the threat of deflation was causing concern.

Central Banks Buy Gold

It is also worth noting that the price of gold rose in 2014 in virtually all the worlds major currencies except the US dollar. Central Bank buying rose to 477 tonnes, a multi year high and investment demand was up 2% to over 900 tonnes, although overall jewellery demand fell 10%.

Gold Production Costs

A further nail in the coffin of this price forecast is that the worldwide overall cost of gold production is currently around $1100 an oz. How many mines will be in production if the price falls to below $1000 an oz and stays there, let alone $700 an oz? Shortages are the best drivers of price.

Gold and the Fear Factor

Throughout history gold has been the safe haven in times of trouble, war and economic collapse. Although recognised as the ultimate hedge against inflation by those of us who believe that gold has the only truly consistent value against all other currencies the fact is that fear has been, and likely still is, the major price driver of the yellow metal.

By no means could the present deteriorating world situation, with both economic, war and terror scenarios firmly in place and spreading, be considered safe. Would my father have enjoyed arguing down the value of gold if he was around now?

Yes indeed is my answer although I bet he would be putting his money into gold for the long term but perhaps, being a gambling man, trying to prove to me that he was right by having a few profitable in and out trades while the doomsters try to justify their forecasts to a gullible investing public.

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