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November 29, 2009
Issue 72  -  Is Gold in a Bubble?
 
Is gold in a bubble?  I am seeing more and more commercials for gold.  I am watching CNBC talk more about gold.  I see a lot of things showing increased interest in the yellow metal, so this is a fair question.  The short answer is no, this is not a bubble.  In fact, not even close to being a bubble.  Will it eventually become a bubble?  Absolutely.  That time is not at hand.  We have years before it is. 
 
First things first, what is a bubble?  A great example of a bubble is the internet tech stock rise of late 1999. 
 
 
This is what a bubble looks like.  Notice the near vertical rise before the fall.  You need this to have a bubble.  I heard one commentator this past week remark that gold was in a parabolic rise.  Huh?  We're only up about 25% year to date.  For this to be a bubble, the price must at least double in a very short time.  Look:
 
 
 
This is not a parabola.  If this was a stock, no one would be calling this a bubble.  Part of the reason is that gold is a direct competitor to fiat money.  Fiat money loathes real money.  Real money can't be printed endlessly and put into existence with a key stroke.
 
The second thing a bubble needs is a mania type excitement.  During the real estate craze people were talking about making money on holes in the ground and on properties that weren't even built.  There just isn't that type of excitement over gold.  In fact here's a video showing how far away we actually are:
 
 
 
    
 Now I'll admit that there were actually some people who knew what gold was worth here and that I'd be hesitant to buy something off a complete stranger.  However, keep in mind that there was a camera there and it would be unlikely that a crook would be filming his flim flam.  The most striking point to me in the video is that most people just have no clue what gold is or even what it looks like.  Do you think most people knew what yahoo or amazon was in 1999?  Remember this commercial:
 
 
 
This is the type of thing that I want to see before I call gold in a bubble.  Right now, even though there are a lot of commercials selling gold there are just as many offering to buy gold.  The average person doesn't sell in a bubble.  The Gartman Letter, a $5000 dollar a year advisory service, says this:
 

Choosing to doubt the concept that gold is overbought, The Gartman Letter remarks this morning:

"…as an anecdote denoting the public’s rather strange non-involvement on the

bullish side we note that we’ve actually bought gold coins offered to us by acquaintances who are not involved in the markets but who wish to sell coins

they’ve owned for years. Rather than buying, they are selling, and until the public is buying in panic mode the end of the bull market is not upon us…"

Dennis Gartman paying four-digit prices for gold coins…times have changed. He appears to have, globally, the company one would want at present.

 
In 1980, the last bubble in gold there were lines coming out of the gold shops and the large majority of people were buying.  No, this is not a bubble.  If this was a bubble, you wouldn't see headlines like this:
 

Central Bank Buying Spurs a Gold Rush

India's and Russia's central banks helped push gold to nearly $1,200 an ounce, although their buys amount to minor diversification. Is this a gold bubble?

By David Bogoslaw

It's typical in India for gold demand to escalate during the country's festive holiday season, which extends from September into January. But it's not only gift-givers that are scooping up the precious metal this year. India's central bank is also buying gold, a factor in the yellow metal's recent surge to nearly $1,200 an ounce.

That development worries some people: Since central banks typically buy U.S. dollars to store their foreign exchange reserves, the growing taste for gold can be seen as the latest sign that the greenback's status as the world's sole reserve currency is in jeopardy.

The yellow metal has been on a tear since the end of August, but the rally gained added momentum starting on Nov. 4, the day after the Reserve Bank of India announced that it had bought 200 metric tons of gold from the International Monetary Fund in October. The deal boosted the central bank's gold reserves by nearly 56%. This may sound substantial, but gold accounted for just 4% of the RBI's total foreign exchange reserves in September.

Marc Chandler, chief currency strategist at Brown Brothers Harriman, calculates that the value of India's total foreign exchange reserves has grown by twice that of its gold reserves this year, so the central bank's holdings haven't diversified at all.

Russia added gold from its own mines

Before buying from the IMF, India held 357.7 metric tons of gold, which was only 4% of its total bank reserves, while China's 1,054 tons of gold represented 1.9% of its total reserves, according to the World Gold Council's September count. Meanwhile, the 8,133 tons held by the Federal Reserve equaled 77.4% of its total reserves in September.

The price of gold futures on the Chicago Mercantile Exchange reached $1,186 an ounce on Nov. 25 before settling at $1,192.

On Nov. 23, Russia's central bank announced that it had bought 15.6 metric tons of gold in October to add to its monetary assets. But unlike its Indian counterpart, Russia's central bank bought gold produced by the country's own gold mines. The additional gold was only 2.7% of the 568.4 metric tons it owned in September, which represented 4.3% of its total reserves.

Leo Larkin, equity metals analyst at Standard & Poor's, says he wouldn't be surprised to see other central banks start to show more interest in accumulating gold, and "instead of selling gold, actually start to buy it and keep it as a monetary asset, as part of their reserves."

The IMF, under its program to raise money to lend to low-income countries, has another 203.3 tons of gold to sell.

 
There will be no one asking if gold is in a bubble when it IS in a bubble.  The article dismisses central bank buying because it is so small in comparison to their reserves.  This is the EXACT reason why it is so important.  They MUST increase their amount of gold because the paper assets are too much of their net worth.  This is a huge positive for gold and hardly indicates a "bubble."
 
Another thing that is needed for a bubble is an over supply.  We obviously had a over supply of internet stocks in 1999 and houses were being built at a crazy pace in 2006.  How about gold?
 

Miners say they're running out of gold

Submitted by cpowell on 07:57PM ET Tuesday, November 24, 2009. Section: Daily Dispatches

From Agence France-Presse
Brisbane, Australia
Wednesday, November 25, 2009

Gold production will continue to fall, despite a brief boost in 2009 and soaring prices, as deposits are exhausted and new discoveries remain elusive, say miners.

In terms of production, "2009 is the outlier as far as the trend," Omar Jabara, spokesman for US-based Newmont Mining, the second-largest gold producer in the world, told AFP.

Overall, "It's a fact that gold production from mines has been in decline since 2001 and has gone roughly from 85 million ounces to about 75 million ounces a year," said Vincent Borg, spokesman for No. 1 producer Barrick Gold. "It sort of goes down about 1 million ounces every year and our forecast is that it will continue to decline despite the higher price" for gold nowadays, he said.

Almost everywhere, mineral deposits are being exhausted and new deposits are not being found fast enough to replace them, these experts explain.

South Africa, which was once at the vanguard of world production, saw a 9.3-percent drop in production year over year in the second quarter, according to its Chamber of Mines.

Globally, "it's just that the assets are not there anymore," Tonya Todd, a spokeswoman for Goldcorp, Canada's second biggest gold mining firm.

"Just because gold reached a new high today doesn't mean we can send a message to our 26 mines saying produce as much gold as you can today because they are already," said Borg. "It's not like a water tap you can turn on and it comes right away."

Barrick and Newmont expect nevertheless to continue increasing production next year by 7 percent and five to 10 percent, respectively. But long-term, it's downhill.

Omar Jabara explained that it takes from seven to 10 years to start production of a mine after finding an economically viable gold deposit.

And "no significant new discoveries have been found in recent years, despite the higher gold prices and despite higher exploration budgets," said Borg.

What is already happening and is likely to continue is that the grade or quality of deposits industry-wide will be "on average lower than deposits discovered in the past," opined Jabara.

The global gold mine production is forecast to rise by 3.7 percent in 2009 to about 2,500 tonnes, but will satisfy only two-thirds of demand, which soared this year amid the global financial crisis to 3,800 tonnes, according to the World Gold Council.

Historically, gold recycling or the sale of central bank stockpiles made up for supply shortages.

But during the latest financial crisis, banks have been buying up gold in large quantities to protect monetary reserves against weakness in the US dollar.

Since the start of November, for example, India's central bank has scooped up 200 tonnes of gold from the International Monetary Fund, at market value for about 6.7 billion dollars.

Amid uncertainty in the stock market, small investors and hedge funds are also coveting gold, driving up demand for the precious metal.

With mine production sloping downwards, an increasing supply of gold must come from existing supplies -- such as coins, bullion, or jewelry -- but it will be very limited.

"All the gold ever produced through history amounts to about 165,000 tonnes, which would barely fill two Olympic-size swimming pools," said Jabara.

The price of gold, after reaching new highs over the past year, on Monday hit 1.174 dollars per ounce.

 
 
So the gold supply is dwindling and we are in a bubble?  I don't think so.  There is also a one thing that gold is a very good barometer of:  international turmoil.  Could this be one reason gold is rising:
 
 
French bank tells clients how to prepare for 'global collapse'


By Ambrose Evans-Pritchard
The Telegraph, London


Societe Generale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

In a report entitled "Worst-Case Debt Scenario," the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350 percent in the US), whether public or private. It must be reduced by the hard slog of "deleveraging." for years.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank's "Bear Case" scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105 percent of GDP in the UK, 125 percent in the US and the eurozone, and 270 percent in Japan. Worldwide state debt would reach $45 trillion, up 2 1/2 times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130 percent of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," the report said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7 percent and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.

SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral." Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31 percent of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40 percent. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.

SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.
 
 
So hedge funds are worried.  That is very bullish for gold.  In fact there is a very smart investor who is starting a gold hedge fund in January:
 
John Paulson Hedge Fund Manager to Invest $250m in New Gold Fund
by Scott Wu
gold coins | Photo 02 John Paulson, the hedge fund manager who made a fortune from the collapse of the US sub-prime mortgage, is betting on gold. John Paulson plans to invest as much as $250 million of his own money in his new gold fund, estimated to worth about $6 billion.

John Paulson already hold 10% of his $30 billion asset under management in gold-related investments. According to his investors, the new gold fund will be more aggressive, as it will include investments more volatile than the gold price itself. John Pualson believes that the price of gold, now close to $1,150 an ounce, is only beginning to take off.
 
 
So a guy who predicted the subprime mortgage bust is now JUST starting to invest in gold.  Does a guy who predicted a bubble and then profited off of it sound like someone who would be buying gold if it was in a bubble now?  No way.  We've go a long way to go.   There is one last piece of evidence I'd like to bring up.  This is from Gata: 

All year Adrian and I have been touting a coming Commercial Signal Failure in which the commercial shorts get so buried by the price rise, they are forced to cover. Well, it is at hand. The gold open interest fell a stunning 28,254 contracts to 521,253. This means that commercial shorts, other than The Gold Cartel, are throwing in the towel. However, for gold to come off its highs like it did yesterday, it means The Gold Cartel was selling even more, further isolating their position.

I REPEAT… there is a massive physical SHORT position out there. Those shorts, outside of the bums, are trying to cover and attempting to do so with physical demand surging by the big boy investment crowd. A Commercial Signal Failure is not a one day event. Today was the beginning of one.

That notion is confirmed by the silver action. Its open interest fell a steep 8,343 contracts to 136,162, which is the largest drop I can recall and it occurred on a modest down day. Morgan must have been selling like crazy, while other commercial shorts covered. It certainly wasn’t spec longs getting out.

 

This may sound complicated to you but the bottom line is that there are people betting that gold will go down.  In the past these entities have been able to get the price down.  Then they would cover a large portion of their shorts.  Last week they covered shorts during a RISING price.  This is a first.  I believe that we are just getting started in this bull market.  Can the price go down?  Absolutely.  But we are not in a bubble and the price is headed much, much higher in the future.  If you need any help, let me know.  703-791-6066 or currymagic@gmail.com
 
One last thing.  Please click on this link and then click on the map to start the animation.  It's the progressive unemployment rate in the U.S. county by county.  The darker a county gets, the more unemployment.  Scary stuff.  (thanks to Craig)  Have a great week!