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Commodities / Gold & Silver Oct 03, 2008 - 09:25 AM GMT

By: Mark_OByrne

Commodities Best Financial Markets Analysis ArticleGold  fell sharply yesterday  on lower oil prices and the recently surging dollar, despite  unprecedented physical demand for coins and bars in the UK, US and internationally ( gold closed at $840.40  down $40.20 while silver  closed at $11.57 down $1.04 ).

As warned yesterday, anything is possible in the short term in these markets and leveraged trading in futures, CFDs and spread betting is an extremely high risk endeavour in the current markets and not advisable.


Movements in the gold market were very counter intuitive  yesterday .  Granted oil and the wider commodity complex fell sharply and the dollar continued it's sharp ascent and this may have led to profit taking in gold. However, the severity of the sell off (more than 3%) is unusual given the huge and unprecedented demand internationally for gold bullion as evidenced by vault staff throughout the world working overtime, queues outside bullion dealers in the UK (see front page of yesterday's Guardian in the UK http://www.goldassets.co.uk/ images/the_guardian_02-10-08. jpg  ) and in Asia and in shortages and rationing of small gold coins and bars  (Eagles, Philharmonics, Buffalos, Krugerrands and Sovereigns) in Europe and the U.S.

Short sellers pushed their advantage , aggressively selling  gold again  and pushing gold back below $850/oz , the nominal high in 1980 .

There has been a very determined seller above $900  in recent days and it would certainly seem like some large institution or institutions  did not want the gold price surging above $900/oz as contagion spreads throughout global money markets. Some contend that this may be  US government and  US Treasury motivated  (through proxy institutional sellers) others that it is to protect a very large short position and some such as  the Gold Anti Trust Action Committee ( GATA ) contend  that it is both.

However, this is likely to be another short term (paper)  futures market sell off and we would not be surprised if gold prices rallied sharply on the  Congress ' decision regarding the Paulson bailout plan. Congressional approval of the plan may be bearish for gold in the very short term but it is very bullish for gold in the medium to long term as the US' fiscal position deteriorates significantly. Should Congress vote against the plan again we are likely to again see stock markets plummet and gold surge.

The FT reports this morning 'Gold rush as investors pile into bars'. Bullion dealers are busier than at any time since 1980 as retail investors, concerned with the safety of bank deposits, rush to buy gold coins and bars. “Dealers are doing incredible business,” said Philip Olden, managing director for jewellery at the World Gold Council, an industry body. “Some are calling up and saying they have run out of stock.”

Similarly the Daily Telegraph reports 'Financial Crisis: Rush for gold as savers queue for bullion') that "savers have been queuing in the street to buy gold bars and coins, as they search for a safe place to invest their money."

With physical demand on  a par if not higher than 1979-80, gold will not languish at these levels for long and $1,000/oz shou l d be reached very soon after election day. Interestingly, the gold rush in 1979-1980 was after a period of deep recessions and stagflation internationally. Today, bullion shortages on par not seen in 1979-1980 are taking place before major economies have even slipped into recession which is extremely bullish.

Retail investment demand is unprecedented and there is an increasing likelihood that institutions and central banks are becoming net buyers again as per our market update yesterday.

Investors Trusting Gold More Than Banks and Governments
'You have to choose, as a voter, between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.'

It would seem that the above  quotation from Irish  philosopher and playwright, George Bernard Shaw, is ringing true during these uncertain and tumultuous financial  times. 

Given the unprecedented nature of the financial and economic uncertainty facing us, it is wise to step back and take a long term historical perspective of the current crisis. Throughout history, gold has been used as the safest form of money - a currency that cannot be debased or printed into oblivion by bankers and politicians. When experiments with paper money and massive creation of debt go wrong as unfortunately they inevitably have done throughout history, economic hardship has been the result.

This is why wise men throughout history have always appreciated the finite currency that is gold. From Aristotle to G. B. Shaw their thoughts help enlighten why one should save or invest in precious metals.

Aristotle,  the Greek philosopher and genius (384-322BC)  wrote " i n effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings."  In the same vein, Voltaire, the French poet, historian & philosopher ( 1694 - 1778) wrote "paper money goes down to its intrinsic value - zero."

More recently Hans Sennholz, author & economist of Austrian school wrote that "for more than two thousand years gold's natural qualities made it man's universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper. No other commodity enjoys as much universal acceptability and marketability as gold." 

And Lord Rees Mogg, economist & former editor of The Times & assistant editor of The Sunday Times said that "governments lie; bankers lie; even auditors sometimes lie: gold tells the truth." 

By Mark O'Byrne, Executive Director

Gold Investments
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Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

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Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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Comments


04 Oct 08, 10:39
Falling gold.

falling gold prices would mean less profit for speculative investors and rapidly falling prices would translate into losses.gold is losing its shine as with most commodities that have skyrocketed


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