Dave Gonigam

Buzzing around the Internets this week has been a prediction from the London-based precious metals consultancy GFMS that gold will reach $1100 or even higher during 2008… and then crash back to $600.

The problem as GFMS sees it is that the current gold rally is being
supported almost entirely by investment demand rather than jewellery
demand. With continuing bad news out of the U.S. and growing global
inflation concerns, investment should continue to drive the gold price
in the near-term — the consultancy thinks a price of US$1,100 or
higher is achievable this year.

But once U.S. interest rates head
upward again and the economic picture improves, Mr. Meader said that
"the whole basket of drivers we've seen supporting the price will
unwind."

Unlike the outspoken "gold bugs" who predict that the
global monetary system as we know it will collapse, GFMS does expect
the situation to get better. And that means investment demand will
eventually decline and jewellery demand will need to pick up the slack.
The consultancy figures the growing gap between mine production and
jewellery demand means prices have to come down.

Ed Bugos, editor of Gold and Options Trader, says there's a reason GFMS pooh-poohs investment demand.

It represents the gold
mining industry and tries to distance itself from "gold bugs" per se.  Its
valuation of gold is based on the idea that the jewelry industry determines it. 
It sees investment demand as an unsustainable speculative
force.

GFMS has never
genuinely criticized the monetary schemes of central banks, the concept of
fractional reserve banking or the entrenching global inflationism.  Why would
it?  In reality, if it represents a coalition of gold producers it does not want
inflation to stop.  Gold production would be a boring business if the value of
fiat money weren't constantly falling.

GFMS expects the
economic situation to improve and for investment demand in gold to decline as a
result.  But its analysis of the economic situation is conventional, and
discounts the magnitude of the inflationary cycle, and its implications for
gold, because it literally works with gold producers and central banks, and
can't criticize either. 

It simply does not

speak for investment demand.

It is not telling
investors they should own gold to protect themselves from the ultimate effects
of the unprecedented world-wide manipulation of money and interest.  It can't. 
But certainly there is no sign of a stoppage in those
policies. 

The degree of
"speculative" buying in gold has been tamed by frequent corrections so far, and
lingering fears of central bank selling.  We are seeing confidence return to
gold, not exuberance.  Investment demand will continue to grow; it is the
fundamental driver of this bull market, not a speculative one.  The transfer of
gold from the central banks and governments to public hands is bullish for the
structure of the market.  The fundamentals that are driving investment demand
today are rooted in the mistakes of central banking and the world's increasing
infatuation with inflationism.

GFMS is out of touch
with the fundamentals that drive demand and gold values… yet its basic model for
gold prices is not that different from mine in the medium
term. 

Of course, my call is
more bullish, and I don't expect investment demand to fundamentally disappear in
the subsequent correction.  The inevitable deep correction will represent simply
the higher volatility that comes into the gold market, but which has only just
begun to arrive.  A correction from $1100 would bottom out at $750 today based
on a normal volatility analysis.  It remains to be seen if gold tops out at
$1100 or $1600, or whether it has already topped
out.

But the only way gold
would fall to $600 from $1100 or lower is on a speculative (irrational)
liquidation.

Anything is possible,
but that price wouldn't last a week.

Yet, the timing of
GFMS's call is revealing.  It comes at a time when the central banks typically
pound gold, and is buried within a half-hearted bullish short term call, which
is more like a hedge.  And it comes just when the news of the IMF's approval for
selling some of its gold failed to push the market
down.

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

  • http://tomjacobsen.name Tom

    There is no chance that demand for gold coins will diminish, and gold will not fall below $800 again… guaranteed.

    Many people overlook this, but much of the demand for gold and silver these days is coming from young “millenials” who were raised by the internet (like me). I have no illusions about the evils of fiat money, and neither do millions of other young Americans- notice the immense support that Ron Paul gets from young people for proof of this.

    The genie is out of the bottle, and may God have mercy on anyone who tries to put it back in.

  • Donny

    GFMS should take a read at Is gold an investment?.

    Are they deliberately dumb by applying conventional supply/demand analysis on gold???

  • Mario

    Well, every human beeing has it’s right to have an oppinnion – the same as GMFS ( or the poeple behind those letters ), but some of those oppinnions looks more like comming from entities from outer space!
    I enjoy them like any other commics, and , in the mean time, I’m still hopping to finish my greenhouse till Fall, and never forget to make a stop to the coin dealer every two weeks…just to trade some paper money for something more sound…
    God make them be right! What an opportunity; gold at 600$!Wow!
    But I’m not waiting to see it!

  • John

    $600 gold? Maybe it is possible, when there is a Great (or Greater) Depression style of deflation raving the world!

  • Daltica

    Deflation? Reminds me of “Should you hold gold or cash in times of deflation?” at http://cij.inspiriting.com/?p=275

    But GFMS’s reasoning behind $600 gold is nonsense. If they say it’s deflation, maybe we can believe them. But since they are speculating that the ‘speculators’ will pull out of gold, they have no credibility.

  • Newt

    I trust metal coins more than digital dollars. It’s that simple. The only two things that would get me to part with my gold is housing or higher education. My coin dealer *can’t wait* until those stupid rebate checks start rolling out…

  • Newt

    Addendum: does this LOOK like deflationary conditions? http://ap.google.com/article/ALeqM5i7EAtIpIs4oZP8lIPHXobu2zPZnQD901L5E00

  • Jim Pips

    “The problem as GFMS sees it is that the current gold rally is being
    supported almost entirely by investment demand rather than jewellery
    demand.”

    Obviously, GFMS does not understand the fundamental nature of gold. Its function is not to be a raw material for jewelry. Its function is to maintain its value against the vagragries of government-controlled fiat currencies. As long as you can print more ‘money’, you can manipulate a currency. But you can’t print up gold.

  • jmb

    Well I for one would be willing to bet the farm that we will see $1600 gold before $600 gold. Somehow I think GFMS would not be willing to take the bet.

  • jg

    $600 gold is certainly a possibility — we were last at $600 gold in October 2006, not so long ago. But I don’t think that price will last long. The baby boomers are starting to retire, the $40 trillion of unfunded liabilities will convert to bona fide debt on a regular schedule and so the federal debt will continue to spiral out of control. The dollar is doomed, so the dollar price of gold is certain to go up over the long run. Where it will be in a month or a year is anyone’s guess.

  • ES

    Gold is dropping today 4/24/08, and fell below $895. as I write this. Just to let you goldbugs know, you can protect your long gold positions by purchasing the gold short ETN position DZZ, which is one of those inverse funds that are computed at 2x the move. So, here is a good hedge for those days when gold gets slammed-not only a good opportunity to go long by legging in while it drops for the long haul, but a good short opportunity for those quick moves down! Gotta love making money, no matter what direction the market goes…hedge your positions, it makes sleeping at night so much easier.

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