Now Could Be The Time To Buy Gold

April 25, 2013 | By | Reply More

After last weeks price crash, about which many and varied are the theories that caused it, gold looks to have settled down with $1400 an oz. looking like a strong support level.

There is every indication that the physical metal is enjoying premiums not seen for than a year, with record sales of Gold Eagles in March from the US mint leading to up to a six week delay in deliveries to dealers.

Dealers in India, the worlds largest buyers of gold are reported to have run out of stock. Emerging market central  banks continue to buy gold.

Miners are faced with an ever increasing cost of production and exploration resulting in many marginally profitable mines in the good times last year now being closed down, and there is a lack of new mines coming on line. It is reported that present mining production is way behind annual gold demand.

In other words gold should be continuing, or at least levelling off, at around $1700 an oz. bearing in mind that a sharp reversal from profit taking could be expected after its rapid run up to a peak of $1900 an oz. back in August 2011. Based on the the growing demand for the physical gold and the fact that the fundamentals that have been driving the gold bull market since 2008 have only changed for the worse then now could be the time to buy gold.

Gold Backed ETFs Suffer

But all is not as it seems. It is the paper market in gold that has lost its way. Professional money managers started the retreat from gold ETFs, promptly followed by the big speculative operators in the forward contract market when the healthy ratio of forward buys versus the shorts began to rapidly diminish urged on by well timed leaks from the last Fed meeting resulting in Goldman Sachs et al announcing the end of gold bull market and urging investors and speculators alike to short the metal.

Perfect timing, coupled to the fact that the dollar was looking good, government bonds being bought despite enjoying yields below the rate of inflation, real or imagined, and just as the Fed would wish.

With George Soros bailing out of the worlds largest physically backed gold ETF SPDR Gold Trust (NYSE:GLD) investors also scurried to bail out with GLD looking at the largest out flows for years. Wednesday saw further outflows bringing its holdings down to 1093 tonnes, its lowest level since September 2009.

Are Gold ETFs in Bed With Bank Shorters?

The problem here seems to lie with the SPDR Gold Trust lack of transparency. Although much of their gold holdings are held in London at HSBC in paper form where it is purported to be audited twice a year, there are grounds for believing that this is compromised by the belief that both HSBC and  JPMorgan Chase, with whom the Trust also has a close relationship, have large short positions in gold.

As SPDR Gold Fund is by far the largest physical gold ETF with some eighty percent of all the gold held within the world wide Exchange Traded Gold group, it is not difficult to understand, or sympathise, with those that have decided that paper gold is little better than paper currencies.

In other words that there may not be enough physical gold to meet demand if everybody decided to take delivery, any more than the governments printing dollars or Euros or pounds could meet their obligations if called upon to immediately pay back their debts.

Gold the Eventual Winner

This leaves those of us retaining our faith in gold with a dilemma. The truth is that we just do not know if gold can plough its way back to $1500 an oz. or more within the shorter time frame although at the time of writing it has climbed back to $1450 an oz.

Those experienced chart technicians that we know of cannot yet see a clear indication of the likelihood of a sustained rise back to previous levels. It does seem to be a question of which time frame is used as they happily contradict each other.

In the long term we have little doubt that the combination of weakening currencies will lead to excessive inflation and that the BRICs and other developing nations will become more and more reliant upon gold or at the very least that the US, Europe and any other nation printing their currency to excess will be expected eventually to settle their debts to them in gold.

Even if deflation precedes inflation history shows yet again that the price of gold, and not to forget silver, will rise. In the meantime gold could plunge to $1300 an oz or even less if the paper market in the metal continues to shed credibility. If, however, this could be restored without further major damage, then around $2000 an oz. would be reasonable target to aim for in the first instance.

Our problem is that we bought at the  $1500 an oz level when we thought that it was an opportunity and would bounce back to near $1600 where it had remained since mid February.

If we had more cash to invest would we get in now? Well probably not, maybe silver is a better short term bet, but that’s another story. We’ve had our fingers burnt so for us it will be wait and see with gold.

We learn from Bullion Vaults that new account levels are up 250% with internet traffic more than doubled, so clearly there is a growing body of opinion that now could be the time to buy gold, providing its the physical metal! ETFs and miners will have to wait and see.

 

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