Tuesday, December 06, 2005


Is Short-Term Speculation Driving Gold Prices?

One gets the feeling that now gold has topped $500, the market is wondering where to go from here. "The price of gold has been rising steadily since 2001, a period that has seen a return to deficit spending in the United States and a worsening geopolitical quagmire. More recently, other trends have fueled gold's rise, including a revival of inflation, the Federal Reserve's raising of short-term interest rates and a weakening dollar."

"'By early next year, you are going to see $525, and down the road even a lot higher than that,' Pierre Lassonde, the president of Newmont Mining Corp. He said the price is likely to surpass $1,000 per ounce in the next five to seven years."

"'We question the sustainability of the recent breakout,' Morgan Stanley analyst Rick Bensignor told clients."

"Yingxi Yu, a precious metals analyst for Barclays Capital, said, 'The key driving factor behind gold's recent run-up is aggressive fund buying, both in the U.S. and Japan, attracted by gold's impressive upward trend in a variety of currencies.' However, Yu said, 'Over the long term, a true bull market needs long-term investors, and we suspect the current speculative interest reflects tactical investors likely to exit their positions at signs of the uptrend faltering, though of course it is difficult to identify what may trigger such a change in sentiment.'"

"Financial consultants say news of gold's run has prompted questions from clients about whether they should invest. John Scarborough urges them not to. 'First of all, it's purely speculative. There is no long-term benefit. It's not a long-term investment per se. It does not generate any income, it's just speculation on what will happen to the price,' Scarborough said."

"'Very often, when something like that becomes very popular, like now, it is hardly the time to invest in it. It's like the bubble in tech stocks, when tech stocks were wildly popular and a lot of people..got in at the high,' he said."

"Coin shop owner Allen Notowitz says prospective buyers have increased tenfold in the last month. Notowitz, who has been in the coin business for 40 years, said he has always considered gold 'strictly an insurance policy (against collapse of the dollar), and you hope you never collect.'"

"He added, 'You buy life insurance, and you do not expect to collect on it. You buy gold, no more than 5 to 10 percent of your portfolio, and you hope gold goes to zero. I don't want my grandchildren living in a country where the economy has gone so far downhill that gold is selling at $5,000. If that happened, do you realize what the dollar would be worth?'"

In November, Russia announced they would be increasing their gold reserve by $60 billion .

Asian Central Banks have announced their intent to purchase more gold to hedge against U$ inflation-- and who would blame them?

Hedge Funds in the US are starting to include gold as an inflation-hedge also.

Russia, Argentina and South Africa have decided this month to increase their gold reserves, in stark contrast to a six years selling trend by world central banks, especially European ones.

The US (under Nixon) severed ties between gold and the US dollar, setting up a disastrous fiat currency.

What if Asia, Russia, Argentian, South Africa, Iran (with their announced Oil Bourse coming in March 2006) and other nations got together and decided to end the failed experiment with fiat currency? What if they started stockpiling gold with an intent to return to currencies once again backed by gold? What if these nations announced at the same time that their currencies were now more stable than the US dollar since they have gold reserves to back it up?

What would happen to the value of the debt-ridden dollar and Euro? What would happen to the value of gold?
Once gold has replaced the attention that housing gets and tech stocks got, then his comments would make sense. Ask 5 random people in your office about gold and you'll see how much of a bubble there is. Just look at this blog compared with Ben's housing blog...day or week later and still 1 or 2 comments. Ben, what's the site visit count comparison? The ratio is probably the same as current rent value vs market value in CA
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