Ride The Tide
One day, gold will be sold off and given up
for dead. Analysts will warn that longs are
cashing in, soon to be followed by a mass
liquidation that will send gold back down to the
And yet the next day, gold rallies back
upward as investors somewhere, for various
reasons, pile back into the yellow metal.
If it sometimes seems as if gold is simply
bouncing around like a cork amidst the waves,
it’s understandable. Many investors feel the
But it’s a mistake. Because -- just
as those who focus too closely on the bobbing
cork can overlook the rising tide -- investors
who see only gold’s daily gyrations can miss
seeing the rising ocean of money that is lifting
the metal ever higher.
Buyers Still Stepping Up
Frankly, the recent surges
in gold demand seem to be physical in origin, as
a growing number of investors/savers appear to
view the metal at current prices as a relative
bargain. Premiums in India, for example, show
that buying there has been fairly robust on the
recent price dips.
In addition, some of the dramatic rebounds
we’ve seen recently have come even while the
dollar has been rising. These price surges,
which point toward big, deep-pocketed buyers
rushing into the market, appear to represent
both a large degree of short covering, as well
as hedge buy-backs by major gold producers.
In fact, Buenaventura has announced that it
closed out its entire hedge book with a payment
of US$434 million to release 782,000 ounces
committed for years 2010 to 2012. The news
release gave no indication of the timing of the
transaction, but a reference to a smaller hedge
closeout announced in a filing on January 24
would indicate that this last, very large
transaction occurred early in February.
It may have been an
important factor behind the latest rebound, but
it wouldn’t have been the only one.
The escalating credit crisis, the growing
evidence of a U.S. recession, the Federal
Reserve’s apparent willingness to lower rates
and open monetary floodgates at Wall Street’s
beck and call -- all this and more make a very
compelling argument for gold investment right
As if that weren’t enough, these economic
arguments are boosting gold demand at the
precise time than new supply constraints are
limiting gold supplies from both mines and
central bank coffers.
crisis in South Africa is dramatically reducing
gold production, and there is no quick solution
in sight. After a brief shutdown
of major African gold mines, most importantly
those of AngloGold Ashanti, Gold Fields and
Harmony, the crisis was thought to have passed
as Eskom, the South African power monopoly,
promised 90% of normal operating power.
But hopes of maintaining near-normal gold
production were quickly dashed. Rolling
blackouts have led some mines to shutter
operations entirely, rather than risk stranding
miners far underground. Gold Fields states that
even at 90% power, they would lose 20% of their
production. AngloGold Ashanti reports that the
power crisis has already cost 400,000 ounces of
production, and going forward at 90% would cost
200,000 ounces annually.
With South Africa also a
primary supplier of the world’s platinum and
palladium, it’s not surprising that the reaction
to this crisis has been most acute in the
platinum group metals.
In short, a buying frenzy has been spawned by
auto manufacturers desperate to secure supplies
of platinum and palladium for catalytic
converters. This demand, combined with tight PGM
physical supplies and rampant speculation in
futures, options and ETFs, has sent platinum and
palladium prices soaring.
Of course, while supplies are not quite as
tight in gold, the same power supply problems
are hampering gold production, and helping to
drive the metal higher as well. Plus, other
problems -- ranging from escalating construction
and production costs (Newmont just announced a
huge cost increase at its Boddington Mine) to
blizzards in China forcing power outages --
continue to plague gold production.
And there is a yet another primary supply
constraint that is likely fueling this rally....
• Central banks are running low
on ammunition with which to attack the gold
market. It was 10 years ago that
we published The Gold Book, a stunning
compendium of research and analysis by Frank
Veneroso that revealed how years of gold sales
and loans by central banks, spurred by a gold
carry trade, had led to a huge accumulated
“short position” in gold that could never be
In addition, Frank concluded that this
continued trend of gold loans would, in about 10
years time, reduce central bank gold holdings to
the point where they would no longer be able to
provide enough metal to the market to restrain
the gold price.
The result, he said, would be an explosion in
the gold price to a level that would far
overshoot the equilibrium price.
It’s been 10 years, and judging from the
reduced level of official gold sales under the
Central Bank Gold Agreement in recent months, we
may have reached the turning point Frank
Importantly, as I alluded to in my “rising
tide” analogy, these factors are all coming into
play just as the global money supply is rapidly
For years now, I’ve been
warning you about the ramifications of
competitive currency devaluations, as trade
currencies around the world race for the bottom
of the hill in a beggar-thy-neighbor attempt to
gain even the slightest advantage over other
Other nations began the race, but the U.S.
finally joined in. And then the sub prime crisis
hit, throwing the interconnected global
economies into peril...and forcing the
devaluations into overdrive.
Even Europe, home of the last remaining
staunch anti-inflationists, has now signaled
monetary easing ahead.
But beyond accommodative interest rate
policies, finance ministers are flooding their
economies with new fiat currency, created either
directly through the printing press or via
credit creation. Ben Bernanke has dropped $114
billion in new money from his helicopter so far,
and the European Central Bank has already
provided an amazing $500 billion in credit to
bail out its troubled financial institutions.
As the old saying goes, “A
billion here and a billion there, and pretty
soon you’re talking about real money.”
Of course, the “real money” people the world
over are now talking about is gold.
That’s the primary factor driving the metal’s
relative value right now -- as the tide of paper
money rises ever higher, it will continue to
lift the ultimate currency to greater heights.
And this is why we need to ignore
the waves that drive gold up and down so
violently these days, and concentrate on the
tide that is continually rising underneath.