Gold: Cheap as Chips? - 18 August 2008
THE SHARP DROP in world Gold Prices starting in late July has now knocked the cost of physical metal almost 25% off its record top of mid-March.
That level – just around $750 per ounce – also happens to sit right where the uptrend starting in Sept. 2005 now lies. Meaning, for technical analysts at least, either a test (and perhaps collapse) of the bull market...or a screaming opportunity to Buy Gold on the cheap.
Whichever way prices now move from here, however, it's worth considering the typical shape of a year in the life of the Gold Market.
As this chart shows – swapping the Dollar for British Pounds Sterling, to remove the impact of the Dollar's 30% drop on the foreign exchanges – the past 10 years have seen the Gold Price follow a clear and regular pattern.
There have been exceptions, of course – most notably 2003 and 2006 – when the "summer lull" that followed a sharp rise failed to match those high prices again by late-autumn.
But in the main, and with a near-tedious rhythm, the price of Gold has risen in spring, slipped back or steadied in summer, and then enjoyed very much sharper gains once more, before the next year really gets started. This pattern holds true, but with a greater accent on the summer lull, for the entire post-Gold Standard period starting in 1971.
FULL DISCLOSURE: There are no guarantees this shape could be repeated this year. With the Gold Price falling so far, so fast, from its recent all-time record highs, sentiment amongst professional and institutional traders has clearly turned against the metal.
Gold Buying by the world's No.1 buyers, meantime, has indeed collapsed, with imports to India dropping by 47% in the first half of 2008 from the same period last year. Indian gold buyers tend to account for the surge in physical buying seen during the autumn, as their festival season culminates in Diwali, the "festival of lights".
Diwali falls at the end of October this year. Reports out of India say the recent sharp falls in Gold Prices has already led to strong investment and jewelry demand. And here in the West, the economic background remains very bullish for Gold – at least according to history.
US interest rates now lag inflation in the cost of living by more than 3%. A mountain of leveraged debt still teeters above Manhattan and the City of London. Government debt is rising worldwide, with a true "monetization" of bad loans at Freddie Mac and Fannie Mae now only a few weeks or months away.
If you thought about Buying Gold but were deterred by this spring's sudden high prices, it may be worth noting that the Case for Gold remains as it was. Too much debt, plus too much inflation, threatens to destroy the value of savings and wealth held in paper (whether in bonds, cash or equities). Physical gold, in sharp contrast, cannot be created at will. Owned outright – in your name alone – it's also no one else's liability or promise to pay.
Professional gold bars, stored securely and at very low cost in – say – Zurich, Switzerland, also represent one of the world's deepest and most liquid capital markets. That's simply not true of Gold Coins.
Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, Adrian Ash was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern and FT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.