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Commentary on the Price of Gold – Buyer Beware

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Will Gold Reach $2,500 an Ounce
Common wisdom is a belief that gold is poised to rise in value, and that you had better buy gold for your security. Advertisements heard regularly on US and Canadian radio advertise how to buy gold for your portfolio. Gold Funds and Silver Funds, Gold and Silver ETF’s and all manner of other instruments backed by or related to the price of gold, abound.

Why then, if so many experts warn us that the value of gold is rising, why isn’t gold rising? Shouldn’t gold be rising?

The Price of Gold
When you examine a chart measuring the price of gold, gold sort of meanders around, without a clear movement in any direction. Gold hit $1,900 an ounce a year ago, in 2011. It was a new and exiting high.

Since then it has fallen off and remained in the $1,600 to $1,700 range. It has attempted a breakout 3 times in 2012, each time exceeding $1,700, each time to reach the same peak as the time before, but has not broken through this high of 2012, which high is lower than the high of 2011. Some technical analysts might interpret this as a triple peak, which gold is unable to break through, which is a very negative sign of where the future price is headed.

Other technicians might say that this is a time of gold gathering strength for the big breakout, and when that breakout comes, it will be powerful and drive gold to new heights. BUY GOLD NOW before the breakout, say the believers.

Expect the Unexpected
A recent blog examined how the unknown and unexpected event is often a determining factor in many things. In that blog, it was Hurricane Sandy that changed the scope of the US Presidential election. Similar unexpected events will determine the price of gold. To be absolutely sure that the price of gold will rise dramatically, is to bet on the future, which is always indeterminable.

We talked about Kyle Bass in a recent blog who is betting the bank that because Japan owes so much debt, it is bound to collapse. Yet Japan has not yet collapsed. It still may, but as time passes, the inevitable is often changed by the Unexpected Event. The continued passage of time, makes the inevitable less inevitable.

So it is with the price of gold. As time passes, the gamble that gold will escalate in value, becomes ever more of a gamble. Gold may very well rise to greater heights, but will it, or won’t it? No one knows, and the passage of time makes the event less certain.

Is Gold The Ending of the Last Great Cycle, or the Straddle Between Cycles?
The great unknown is whether all of the believers in gold are members of the last economic cycle, or whether gold will straddle the last cycle and the new cycle. From a technical basis, the high in the price of gold was in 2011, and one would expect that gold will again reach that high before it then fails and starts falling, or otherwise breaks through to new heights, and bring joy to the believers.

Why Are Believers in Gold so Fervent?
Gold buffs hold their fervor for the same reason that Kyle Bass insists that Japan will default – there is too much debt in the world. Either hyperinflation or deflation will occur, depending on which sub-camp you are a member of. Believers know for sure that gold is the only safe haven against this ever rising sea of debt. Let’s examine some of these underlying causes.

First The Belief That the Weak Sisters of the European Union Must Collapse – Really?
So far, although there is much pain in Europe, no country has financially collapsed. Greece has come close but was rescued, and strangely enough, it was rescued by issuing more debt. It may still collapse, but it hasn’t yet, in spite of all the naysayers.

Spain is next. It owes so much that surely it is next on the list to collapse. Yet it hasn’t. Actually, if you read the most recent headlines, the opposite is occurring. Spain gains strength in fight against bailout request. Spain’s central government budget deficit narrowed to 4.39% of GDP in January-September from 4.77% in January-August as revenue from sales tax (VAT) jumped 11% on year in September after an increase took effect. The fall in the deficit could help Spain resist calls for a bailout and achieve its target of reducing the overall public sector deficit to 6.3% this year.

Gold Holds It’s Value in Inflationary Times – or Does It?
This rational is flawed to say the least. In the 1980′s inflation raged. However gold did not hold its value. Rather it collapsed. Why” Because when you are paying an interest rate of 18% per annum to borrow money, and holding gold bears no interest or return, the real cost of holding gold is very, very expensive. Most holders soon realize the folly of their belief and sell their gold. The law of supply and demand kicks in , and the price of gold falls. Gold fell from $800 to $250 in that period.

The Demand for Gold is Ever Rising, – but not in this world
The Wall Street Journal April 17, 2012 By BIMAN MUKHERJI And DEBIPRASAD NAYAK
NEW DELHI – India’s gold demand is down around 50% from last year ahead of one of the most auspicious days for buying the precious metal because of high prices and a weak investment outlook.

So demand continues from China, but China also is slowing down. Let us again be reminded of the law of supply and demand.

The Great Gamble
So we return to deciding on whether to take the great gamble. We are jealous of those that bought golf prior to October 2011, and we don’t want to miss the next train upward. We think that gold at current values is priced high enough for gold miners and producers everywhere, to make a lot of money on the gold they pull out of the ground.

To us, that is not a gamble. Buy junior producers that are just starting to produce or near production

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

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