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Gold Eyes $2,000 /oz – Is it a Bubble Ready to Burst?Gary Dorsch Even the most avid gold bugs, who’ve been stockpiling vast quantities of the barbaric metal for decades, and endured their fair share of panic shakeouts, were probably in a surreal state of “shock and awe,” while watching the price of the yellow metal soar to within 1% of the psychological $2,000 /oz level this week. It’s as if somebody launched a rocket on the Fourth of July. Since then, the price of gold has soared $400 /oz, zooming higher in a parabolic pattern. After all the bullish chatter on the blogosphere over the past decade, Gold, - the so-called barbaric metal, has triumphed over the stock peddlers on Wall Street. Undoubtedly, there will always be snake oil salesmen, - who will tout blue-chip stocks as an effective hedge against currency debasement, and a hedge against inflation. Money managers, whose livelihood depends upon selling equities have been taken aback by Gold’s historic surge, and are at a loss to explain to their clients, why they missed the move. “Gold doesn’t have any intrinsic value,” a bewildered money manger declared. “Investing in gold is irrational because, compared to buying a blue-chip stock whose value rises and falls based on what the company produces, and the profit that it earns,” the equity salesmen says. Thus, for all the talk of the Gold market being in some type of speculative bubble, that could burst at a moment’s notice, a contrary argument points to the fact that vast legions of money managers, have yet to participate in Gold’s long-term secular bull market. Furthermore, there seems to be a misunderstanding about what drives the value of Gold, which essentially is the reciprocal of the public’s trust in the world’s central banks, and their paymasters, - the corrupt and inept politicians, who drive their economies deeper into debt. Undoubtedly, the skeptics who find comfort in holding paper currency will soon be writing articles in the media, warning that Gold’s latest upward explosion of $400 /oz in just seven weeks, to $1,900 /oz has all the characteristics of a classic bubble that’s bound to burst. Late comers to the game would be left holding a bag of “Fool’s Gold,” and could suffer big losses if purchases are made now, and losses that might never be recouped, - the skeptics say. Yet the most recent buyers might not be small retail investors, but rather the powerful Asian central banks, that control more than $5.5-trillion of foreign currency reserves. They might be shifting their portfolio holdings, from troublesome Euros and US-dollars, and into Gold. On July 28th, Xia Bin, an adviser to the People’s Bank of China (PBoC) said Beijing should speed up reserve diversification away from US-dollars to hedge against risks of the US currency's long-term decline. Chinese officials have long pledged to broaden the mix of the country's $3.2-trillion currency stash -- as much as 70% of which are now in US- dollar assets, but the process has been gradual. “We will continue to diversify the asset allocation of our reserve assets and continue to optimize the holdings based on market conditions,” China’s Administration of Foreign Exchange said on July 28th.
What many reporters in the Western media, and what many money managers on Wall Street, who are wedded to equities fail to realize, is that 57% of the Gold that was sold by miners in the first quarter of 2011, was shipped to anxious buyers in China and India. Asian giants India and China are the world’s two biggest buyers of the precious metal, because paper money is increasingly worthless in economies where there is runaway inflation.India imported 959-tons of gold in 2010, up +72% from a year earlier, while India’s wholesale price index is +9.5% higher than a year ago. China’s gold demand is on pace to increase by +20% this year to around 700-tons, from 570-tons in 2010. China’s M2 money supply has increased +70% over the past three-years, expanding at an annualized +23%, far exceeding the +9.5% annual growth rate of the Chinese economy. Consumer inflation is reportedly +6.5% higher from a year ago, but China’s citizens say the true rate of inflation is higher than what the government is reporting. Beijing has lifted the 1-year bank deposit rate 125-basis points higher to 3.50%, but that’s still -3% less than the so-called official inflation rate of +6.5%. Therefore, the frenzy for gold has prompted the Chinese central bank to step up sales of gold Panda Coins,to 500,000 1-ounce gold coins, or +66% more than its earlier target of 300,000. It also tripled sales targets for half-ounce, quarter-ounce, 1/10-ounce and 1/20-ounce gold coins to 600,000 each from 200,000 earlier.
Since the near collapse of the Western banking system in 2008, the basic underpinning of the floating currency rate system has been under severe stress, and is still in danger of breaking down. Traders no longer trust central banks to keep their money printing operations running at a slow speed, that’s basically in line with the underlying growth rates of their economies. Instead, central banks in England, Japan, and the US are all heavily addicted to nuclear QE, and the European Central Bank has also joined the club, by agreeing to monetize the debts of five Euro-zone countries, - Greece, Ireland, Italy, Portugal, and Spain. Since the Federal Reserve began to telegraph QE-2 a year ago, the US’s MZM money supply has increased by roughly $1-trillion, buoying the price of Gold. In turn, many central banks in other countries that peg their currencies to the US-dollar were forced to expand their money supplies, in order to keep their currency exchange rate on an even keel with the massively inflated US-dollar. Although the Fed was trying direct most of the high powered money into the US-stock markets, much of it flowed into Gold, Silver, copper, soybeans, corn, rubber, iron-ore, and North Sea Brent crude oil, which is trading around $110 /barrel today. To read the rest of this article, please click on the hyperlink located below: http://www.sirchartsalot.com/article.php?id=156 ### Aug 23, 2011 321gold Ltd |
