Last Updated : 26 January 2011 at 10:50 IST
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With technical indicators today suggesting gold could dip as low as US$1,322 an ounce in the current corrective phase, bears and bugs are deploying opinions in-line with their interests. The drop by nearly $100 in ten weeks is nothing new, nor is the strident tone growing in both camps. Its all consistent with the bull market in gold and silver that has been underway for the last decade.
In a pattern that is as clear as the four seasons, the tone in the media presages market sentiment, which segues into market action, then market re-action, classically followed by market price adjustments for over-reaction, which itself engenders a reversal of market sentiment, and a subsequent reversal in media tone. Metaphysical economic ping pong at its finest.
To detail and exact example would render this an unreadable article, because the micro-focus on step by step events could cause migraines. Far better to recognize the pattern from a 10,000 foot viewpoint without zeroing too closely on the details – you risk missing the core message and opportunity.
That is the classic problem with the mainstream financial press, which can only report what is happening right now. Drawing conclusions about future performance from current data departs the realm of journalism and enters that of opinion, and we know how common those are.
That being said, it is nothing short of remarkable how vast the quantity of high paid experts in vaunted positions yielding astronomical pay are so consistently wrong, and yet retain their overpaid posts.
In an article published by Bloomberg on October 23, 2006, after gold had lost 20% of its value after touching what at that point was a 26-year high of $732 an ounce. John Reade, a UBS analyst and one of the generally most incorrect predictors of metals prices in the last ten years stated then, “There seems little sign of investors and speculators wanting to rebuild long positions.”
Another analyst quoted, David Thurtell from BNP Paribas said, “`The inflation outlook is fairly benign. Investor demand will not be as strong as it has been.''
CIBC World Markets analyst Stephen Bonnyman said at the time that it expected metals prices to remain volatile. "Barring a major contraction in global economic growth, we see little risk of collapse in metals prices but expect a gradual decline from existing levels," said analyst in a note to investors.
CIBC revised its price outlook for gold for 2006 to $580 an ounce from $675 an ounce, while the price for silver was unchanged at $12 an ounce.
Gold has corrected in price in excess of 20% no less than 46 times since the onset of the bull market in 2001. Each time, the analysts and money managers come marching out of the woodwork to proclaim and end to the bull market, only to be sent slinking back in silence as the price of gold powers to new highs.
What is most important in understanding the long term price direction of gold is not listening to analysts at banks whose opinion is a reflection, in general, of what has already happened as opposed to a thoughtful analysis of what is unfolding. It is the fundamental realities in the global economy that instigated the bull market in gold, and continues to drive it higher, in the macro sense.
The number one catalyst in the birth of the gold market was the broad perception that the U.S. was printing too much money relative to its GDP and tax base in order to finance its military and political ambitions in the middle east, where it has historically had a vested interest in maintaining instability thanks to that jurisdiction being the primary source of energy for the United States.
After World War 2, the U.S. learned that the most strategic resource in maintaining military superiority was control over fuel supply. From that point forward, it set about covertly destabilizing regimes in jurisdictions where the political climate was not conducive to its own interests, i.e. continuous supply of relatively inexpensive oil. Venezuela, Saudi Arabia, Iran, Iraq and Egypt have all seen the history of their political leadership influenced by the machinations of the CIA.
What the U.S. discovered subsequent to that period was that it could not afford to finance a mult-faceted military presence without going deep into debt, which it then proceeded to do with the blessing of economists of the era who espoused deficit spending as the path to economic prosperity.
The fast-forward result is $14.7 trillion U.S. dollars in debt held by the rest of the world who can now ill afford to either buy more or sell any lest they cause a panic for the exits. The only reliable hedge against the U.S. dollar devaluation strategy now underway by the Americans is the monetary metals.
China, the biggest holder of U.S. debt, is acutely aware of this, and this is one of the reasons why it has become the biggest producer of gold in the world. It will foil America’s attempts to dominate the world with the dollar by replacing it with the yuan backed by gold and silver, platinum and palladium.
This fundamental reality has not altered one iota since manifesting itself in the early part of the last decade. If anything, the willingness of the U.S. to debase the value of its currency and impoverish its general population is seen to be increasing, as it purchases an average of $75 Billion of its own treasurys with its own checkbook, i.e. the Federal Reserve.
These corrective windows are opportunities for those seeking to preserve net worth to buy gold, and for speculators to accumulate gold, silver, platinum and palladium producers and explorers.
The only global fundamental change that will alter the direction decisively of the price of monetary metals is a revaluation of the U.S. dollar on an official basis – a move for which the political power and moral integrity are both thoroughly absent.
I am not a gold bug. If the U.S. dollar were to be a correctly valued and unencumbered monetary unit, there would be no need to own gold and silver. But that is not the case, and so, in gold in silver we have no choice but to place our trust. For the long term, that will not change.
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