Shamik Bhose On Gold As Money


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Report on World Gold Markets

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Shamik Bhose On Gold As Money

  1. 1. Gold is set to continue its record run this year ; Can prices double in the next 12-36 months ie. go to 1240$ -1620$- 2450$ ?? We begin Gold and the Dollar with a look at Gold Seasonality Since the beginning of its long-term bull market gold has tended to be flat from late May through to mid August. In fact, during the 7-year period from 2001 through to 2007 the average change in the gold price between 21st May and 15th August was only 3% and the maximum change was only 6%. Last year was an outlier in that it produced a 15.6% decline during the mentioned period. Here are the details, updated to include this year's performance: Year: Net Change in Spot Gold Price Between 21st May and 15th Aug: 2001 -2.8% 2002 -0.3% 2003 -2.4% 2004 +3.9% 2005 +6.0% 2006 -5.2% 2007 +0.9% 2008 -15.6% 2009 -1.0% Clearly, gold followed its seasonal pattern over the past 12 weeks. Let's now look at what we can expect if gold follows its seasonal pattern over the remainder of the year. Since the beginning of its long-term bull market gold has ALWAYS risen between mid August and the final trading day of the year. The gain over this period has ranged from 1.1% to 24.7%, with an average of 11.4%. Moreover, even last year's September-November crash failed to prevent gold from keeping this perfect record intact. Here are the details: Year: Net Change in Spot Gold Price Between 15th Aug and 31st Dec: 2001 +1.1% 2002 +10.5% 2003 +14.4% 2004 +9.6% 2005 +17.0% 2006 +2.1% 2007 +24.7% 2008 +12.0% 2009 + 8.25% 17 August to 22 Sept
  2. 2. In other words, the seasonal pattern represents a tailwind for gold over the remainder of the year. The yellow metal is very near its all-time high of $1030 per ounce, reached earlier in 2008’Feb And its value would continue its unprecedented upswing, now eight years running, amid continuing economic and geopolitical turmoil. Seen as a safe-haven investment, the metal does best when many other factors are at their worst. With uncertainty in the market about how long the global credit crisis will drag on, the falling value of the US dollar and fears about tightening oil supply, have been underlined with rising hedge fund activity, ETF buying from investors diversifying and the price has also been helped by falling mining production, which dropped by about 1 per cent last year due to a sharp decrease in South Africa, home to the world's largest deposits. The weakness of the dollar has also contributed greatly to the strong run of the metal, which is denominated in the US currency and thus becomes more valuable for investors in other currencies as the greenback falls. Expectations of further dollar weakening, has led many analysts to predict that the gold price will continue to rise. Some cautioned, however, that it could hit a short-term speed bump as investors sell out and take profits but that the overall geopolitical and economic picture bodes well for the price of the metal. Goldfields, said last year that they feel quite comfortable about gold at $1,200 per ounce in the next 24 months. Even at those levels, in inflation-adjusted terms, it still has a long way to reach the equivalent of the $850 level it reached in 1980. In today's market, that would equal about $2,500 per ounce. Targets of 920$ and then 1030$ shall be seen as a pit stop for gold, occasional volatility and corrections due to technical and monetary reasons should be taken into account. Thus to conclude we must take into account both fundamental and monetarist reasoning for gold price rise and a sudden change in either shall bring out about short term profit booking and thus volatility – this could basically come from the behavior of dollar and the views from the Federal Reserve. In current context assuming that there are no more interest rate cuts left in the arsenal of the FED to stall any possible credit crunch or the recessionary meltdown from spreading further, dollar will decline. That plus the rise of crude oil prices, which is inflationary is providing a boost to gold. These trends are usually self re-enforcing and the cross current of issues should take gold and silver much higher before the trend tires or its under lying reasons change !! It was said in 2008 * In a desperate effort to revive the economy and the electoral chances of the Republican Party, the US Federal Government will become the primary engine of debt/money expansion (inflation) during 2008. As a result, the people who doubt the ability of the powers- that-be to maintain a high level of monetary expansion in the face of a 'tapped out' consumer will receive an "Inflation 101" course. They will learn that there is no limit to the amount of bonds that the US government can issue to the Fed in exchange for newly-created currency. Note: The "pushing on a string" analogy often cited in discussions about the inflationary abilities of governments and central banks is based on the patently false assumption that every increase in money supply will be met by an equivalent increase in money demand with no change in the price (purchasing power) of money. This assumption goes against basic economic law. Until the law of supply and demand is repealed there will be no question that an entity with the power to
  3. 3. expand the supply of money ad infinitum will also have the power to reduce the purchasing power of the money (bring about a general increase in prices, that is). The challenge facing the monetary authorities isn't to maintain a high level of inflation; it's to do so whilst keeping inflation FEARS in check. Is that Provocative; yes it is We are presently bullish on both gold and the US$, but this does not mean that we expect gold and the Dollar Index to rally together over the next few months. Rather, it means that we think the upside potential outweighs the downside risk in both markets. In the case of the Dollar Index we think that a bottoming process is underway and that while this process continues the downside risk will be limited to a test of the last November(2008) low (74-75). In gold's case, the potential will exist for significant additional gains until the dollar's bottoming process is almost complete, following which a sizeable gold-market corrective phase via sideways range bound trade could begin. If the dollar's current bottoming process follows the typical historical pattern then it will take 3-6 months to complete, after which a strong rebound should begin. This suggests to us that intermediate-term US$ rally will start before the end of next March and that gold will reach an intermediate-term peak during the first two months of the next year by Feb 2010 (since turning points in the gold market usually lead turning points in the currency market) and this could be 1240$ per ounce . We expect that that real interest rates will remain low; and that financial market volatility will increase. If so then the backdrop will remain 'gold bullish' and a US$-inspired 2-4 month downturn in the gold market during the first half of the next year will be followed by another powerful advance. Our guess is that gold will end 2010 above $1600, but will trade at a $940- 1250 at some point during the first half of the year. Gold's upward trend relative to the base metals should continue during 2009…. Also, we expect that gold will move sharply higher relative to oil. Further to the above discussion, we suspect that gold is within about 10-12 weeks of an important peak. In the mean time, however, significant additional gains are likely amidst some intense volatility as gold gyrates to movements in the currency market namely the yen and the Euro amongst the components of the US$ Index. Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. Commodities, as represented by the Continuous Commodity Index (CCI), commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2014-2020. US $ index to gold and crude oil --There is a strong inverse correlation between the $ index and both gold and crude oil. However, crude oil's correlation has strengthened while gold's has weakened.
  4. 4. 2007 US $/gold -91% 2007 US $/crude oil -96% 2008 US $/gold -76% 2008 US $/crude oil -82% 2009 US $/gold -64% 2009 US $/crude oil -96% Conclusion -- if the US $ index stays weak, crude oil was soon set for another rally even though there is a seasonal tendency for crude oil to weaken from the last week of Sep until the first week of Dec. One can take argument with some conclusions but the strikingly high correlations in the $ versus crude oil and the $ versus the gold is persisting and a higher crude oil price is pro-inflation, thus gold friendly. Current Market Situation Silver versus Gold As discussed many times over the years, the silver/gold ratio tends to function as an indicator of financial and/or economic confidence in that silver tends to out-perform gold when confidence is rising and under-perform gold when confidence is falling. As a result, we expect that silver will do well relative to gold until the stock market reaches an intermediate-term peak, after which it will become relatively weak. For this reason, SLV (the silver ETF) put options would provide a means of hedging a portfolio heavily laden with gold- and silver-related investments. This is just something to bear in mind. The US Dollar Drivers ; Almost all the international trade in oil is conducted in US dollars, which means, according to some that a higher price of oil will create additional demand for dollars and, therefore, that a rising oil price is bullish for the dollar. This 'logic' is back-to-front, however, because one of the main reasons for the higher US$ oil price is WEAKNESS in the US$. It is true that higher prices will tend to increase the demand for a currency (if prices are higher then more money will be needed for each purchase), but this is not a 'chicken or the egg' situation because prices wouldn't have risen in the first place unless there had been an increase in the supply of the currency relative to the demand for the currency. The way it works is that inflation (growth in the supply of money) causes the purchasing power of a currency to fall, resulting in an increase in the demand for the currency. (The current price of anything, including currencies, is, by definition, the price that brings supply and demand into balance; so an increase in supply will always lead to a corresponding increase in demand and, most likely, a lower price). But if this increase in currency demand is followed by a further increase in currency supply then more purchasing power is lost, prices rise again and more currency is then needed to complete each transaction (there's a further increase in the demand for currency). This process will continue until the currency becomes completely worthless or until the inflation ends.
  5. 5. Phones 0091-33-30512100 Fax 009133-30512020 The argument is, in effect, that a loss in the dollar's value relative to oil is BULLISH for the dollar, which implies that the faster the dollar loses its purchasing power the more bullish it will be. This is, of course, ridiculous. The fact is that the world could make do with almost any quantity of US dollars; the purchasing power of the US$ would simply adjust based on the dollar's supply relative to its demand. Obviously, if the global supply of dollars were to suddenly contract then this could cause big problems because today's price levels for assets, debt, commodities, and everything else are based on the current dollar supply. However, if dollar inflation had been consistently lower over the past 20 years such that the total supply of dollars was now half its current level there would be no dollar shortage; instead, each dollar would buy, on average, twice as much as it currently buys. We are in full agreement with the notion that a contraction in the US current account deficit would be accompanied by a global economic downturn, but implying that the reduction in the current account deficit was the root cause of the subsequent economic downturn would be akin to saying that a lack of drugs was the root cause of the sickness felt by a drug addict who was trying to 'kick the habit'. The financial system has become addicted to a high level of inflation and the solution, according to many others, is to continue 'feeding the habit'. On a side note, there will be no danger of the gold bull market coming to an end as long as continuing to 'feed the habit' is widely believed to be the right economic remedy. From trade deficits to budget deficits to GDP-growth differences to the absurd "massive dollar short position" theory, we never cease to be impressed by the large number of irrelevant factors that are regularly put forward to explain and forecast currency exchange rates. In our opinion, the only things that matter over long time periods (periods exceeding 5 years) are inflation rate differentials. Specifically, if Currency A is inflated at a faster rate than Currency B over a long period, causing it to lose its purchasing power at a faster rate, then Currency A will be in a long-term downward trend relative to Currency B. End of story. Over shorter time periods (periods of 6 months to 2 years) the only things that matter are real interest rates and interest rate spreads, where the real interest rate is calculated by subtracting the EXPECTED rate of currency depreciation from the nominal interest rate. Another Point of View I think most analysts hit the nail on the head when they referred to the way money is sloshing around looking for a haven. Certainly, I am utterly opposed to the currency debasement that is occurring. There is also too close a relation between the FRB and the banks and At some point, the FRB will be forced to deal with inflation. When that happens, it will convulse commodity markets and the spasms will be measured in nano-seconds.
  6. 6. Money needs a haven to get parked, with hedge fund managers finding the financial market treacherous, found a life line with strong commodity prices… Higher prices attract more investors…virtuous cycle, till the marginal cost of liquidity far exceeds the expected marginal return…The same thing is being played here… we need to watch more technical factors to ascertain when that tipping point shall come via……..Open Interest, volume, backwardation, oscillators… Of course in our mind, perhaps the really big questions center on whether the Banking System will survive and whether or not the Dollar will collapse. At present, we believe that a huge Banking System crisis will be seen in the next 18 to 20 months, and that several large ‘mainstream’ banks may end up failing. We also believe that the risk of a Dollar collapse is extremely high, and that an Argentina style Devaluation is brewing up like an afternoon thunderstorm in the tropics. Whether or not a deep recession evolves into a full out Depression may ultimately hinge on how much damage is inflicted on the Dollar as the falling dollar has been pushing up commodity prices over time, and in so doing, pushing down real consumer spending. A historical analogy is that during the Civil War the US government printed fiat money (US notes, i.e., Greenbacks) and cut back on coinage, particularly, silver coinage. This coincided with a huge expansion in the production of silver (the Comstock Lode, Tombstone, etc.). After the war, the government continued to limit the issue of silver coinage and silver certificates. Mines continued to increase production of the stuff during that period. Up to the time of Woodrow Wilson and World War 1 the issue of what to do with silver was a paramount issue in US politics. The Republicans wanted sound money, i.e., gold; the Democrats wanted to expand use of silver coinage and certificates, which would have been inflationary. After the Federal Reserve Board was established in 1913 the whole issue became moot due to that change. I think that also coincided with an increase in industrial demand for silver and mine closures either because they played out or became too costly to exploit, hence the increase in price during and after WWI, which caused a mini boom in mine deliveries of silver, which caused prices to collapse. Then the depression came after 1929 and the rest, so to speak, is the sad history of currency debasement (silver certificates were taken out of circulation during the 60s when a silver $ became worth more than a $; the Treasury refused to redeem silver certificates in 1964 and they became collectors’ items worth more than silver $). Will we see a repeat of this in certain Western – East European or South American Countries, wherein currency debasement and lack of faith internationally in that countries fiat paper money shall lead to gold or silver < directly or indirectly >once again as de-facto money Phones 0091-33-30512100 Fax 009133-30512020