What is the Real Price of Gold and Who's Buying?


...The key to understanding the $, oil and the gold markets is to keep one’s eyes on the future, not on the past. This is a very different world to any we have ever seen before!...

It’s become a knee-jerk reaction to look at the gold price in the U.S. $ and to comment on its moves in that currency. And there is good reason to do so, for the U.S.$ is the global reserve currency at present even if it is beginning to look of dubious value. Why don’t we measure it in a strong currency such as the Euro? Although that is an ‘up and coming’ reserve currency, it has not taken a sufficient hold of the world’s monetary system to be accepted as the U.S. $’s equal.

But gauging the gold price in the $ is misleading because it is losing value against its peer in the paper money world and so is not measuring the real rise or fall of gold. To see if we really are watching it go too far too fast in real terms it we need to get a perspective by looking at gold through the € and look at the oil price.

So we went back to the beginning of the year to compare gold prices in the two main global currencies so that we could get a better balance on what is actually happening in this market. It is a sobering exercise and one that emphasizes the correctness of the approach we have taken to gold in our publication to date

In our January 5th Issue we recorded the Gold price as follows:

In the U.S.$ it was $620. On the 9th Nov it was $840.65 [+35.59%]

In the Euro it was €475.29. On the 9th Nov it was €573.04 [+20.57%]

Oil was $55 a barrel. On the 9th Nov it was .$95 a barrel [+72.72%]

Oil in the Euro was €42.01 a barrel. On the 9th Nov it was €64.76 a barrel [+54%]

Many commentators are stressing at the rise and backing off their positions, with some having sold half their positions one to two weeks ago. However, a look at these moves helps us to keep our balance. In the € as you see gold has had a healthy rise, but not one to get overly excited about and certainly not one to prompt an exit from gold.

What we see in clear perspective is the fall in the value of the $. It’s weakness moves to center stage not the rise of the gold price so much. The same applies to pricing oil in the $. It also looks more bearable in the €? Indeed, most of the drama dissipates when we look at oil and gold prices in the €. Perhaps the rise in the oil price tempts us to think it has gone too far too fast, until we look at the fundamental picture.

We should be asking, “what is the price of the $?” Is it 1/840.65 of an ounce of gold? The rise in the price of gold reflects the extent of the damage done to the confidence in it. The world’s main reserve currency just should not show a 15% decline in 10 months, if it is to continue to hold its position. So many factors have made the $ hemorrhage this year and they are structural problems confirming that the $ may bounce but certainly not recover. It is only a matter of time before this is realized and the dark future seen as damage control measures are put in place to protect each individual part of the global money system. When the Chairman of the Fed tells us that we should by American goods and the fall of the $ won’t affect you, he is waving the flag only. If the U.S. were self-sufficient in all goods and resources, he would be right, but the U.S. is not; for two reasons - oil and cheap Asian imports. These ensure that the U.S. economy is to some extent dependent on outside supplies for its own well-being. So in the U.S. it is correct to price gold and the $ in the $ because that is the local price, but outside the U.S. other local currencies reflect the price of gold. The lower the price rise, the healthier the economy of that particular country.

Looked at in the € we are just beginning to see gold rise, a rise that despite its hitting historic highs, has a great deal of distance to go, which is precisely why we follow the Oil: Gold ratio in Peter’s work. A 20% rise is good but far from spectacular. The oil price rise is spectacular, but it is sobering to be told that the oil price is unlikely to fall below $80 a 45% rise on the year. Hey, gold has a lot of catching up to do in comparison to the price of oil. We do believe that gold will break out against oil and take the ratio well into two figures again, so be ready for a real rise in the gold price taking it far closer to oil’s performance than we are seeing yet.

Oil meanwhile is being called ‘toppy’ as it reaches out for $100, then falls to $92 but with O.P.E.C. making it clear that no more increases in oil supply are on the table three figure oil prices lie ahead. Again, fundamentals kick in with supply problems and a tipping of the demand / supply balance tells us we should get used to a world of $80 to $100 oil with ‘spikes’ to higher levels.

The key to understanding the $, oil and the gold markets is to keep one’s eyes on the future, not on the past. This is a very different world to any we have ever seen before!

Where’s demand for gold coming from?

As in India until last week, high gold prices weighed on Dubai's gold sales in October. In the U.A.E. capital Abu Dhabi, a much smaller market than Dubai, gold sale volumes dropped by 15% in October, while the sales value rose 10% on high prices and we believe so far in November, the same is happening as prices went through the roof, depressing their value by 6% from a year earlier. They had expected a 30% rise in gold sales value. The Muslim holy fasting month of Ramadan ended in mid-October with a feast, during which many couples marry. Ramadan helped the sales at the beginning of October, but then sales dropped sharply with the recent price hikes. On the developed side of the world, a glance at the gold exchange Traded Funds shows that demand has not been that strong in the last couple of weeks [it fell 6+ tonnes]. The funds have not bought so much that they are driving gold prices higher either, so who is actually doing the buying that is driving prices so high? In fact the biggest part of the latest pullback has come from fund selling on COMEX. So where did the demand come from that took the price of gold to such a high level?

We got a clue from the timing of the price rises. The bulk of strong gains happened before either London or New York opened. This tells us the buying did come from the Middle and Far East [or by developed world buyers placing their orders outside their own time zones?]. If it was not at retail level then could it have been at Central Bank level? We know that the Japanese Investors took a signal that the time to buy was now, according to certain technical data they concocted for themselves. Then we heard that Sovereign Wealth Funds have are and will be buyers of gold. Some of these are so large that just a small portion of their money could swamp the gold market.

And demand need not be huge in the gold market at the moment because there are almost no long-term sellers even after the gold price turned down. With gold down below $800 and with Indian gold prices now back down below Rs.10,000 for 10 grams, the market for long-term buyers is looking a lot healthier and attractive than last week.

But if Central Banks such as China or Russia [and Russia has confirmed it was a buyer this year] are also buyers, their dealers are fully aware of the impact they will have on the gold price, so expect the trend to continue us as the market struggles to find the more than the small quantities of gold the European banks are selling at the moment?

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