The Casey Report
Of late, I have read a number of analysts, Jim Rogers even, who have expressed the view that gold could dip to the mid- to low $600 level.
It could happen, but I think not. Already, buyers of physical gold are finding anything near $700 to be cheap and are helping to build a floor under the monetary metal. On that topic, a friend sent this item along recently:
(Gulf News, Nov. 12) Riyadh: There has been an unprecedented demand for gold in the Saudi market recently, with over 13 billion Saudi riyals ($3.47 billion) being spent on the yellow metal during the prior two weeks.
Demand is expected to rise still higher as more investors turn to gold as a safe haven in the midst of the global financial crisis, according to market sources.
Sami Al Mohna, an expert on the gold market, said the trend had resulted in a substantial rise in the gold reserves of Saudi investors.
Since soaring to an all-time high of $1,033.39 per ounce in March this year, gold has plummeted 30%.
Gold for December delivery on Monday rose $8.60 to settle at $726.80, roughly the same level at which it traded a year ago.
"Many Saudi investors see this as the right time for making investments in gold as its price is the most reasonable one at present," said Al Mohna.
Needless to say, the Saudis have a lot of money. Not just a lot… but a really, really, big, stupendous mountain of the stuff.
And like you and me, they’re human. The urge to buy gold this cheap is a pining all gold bugs around the world are feeling.
We are getting regular reports that, at these prices, demand is soaring in India (where price inflation is now running around 11%), and brisk sales have pretty much wiped out physical supplies of small coins and bars in the United States and Europe – among other corners of the world.
On that score, a few days ago, correspondent Jim G. sent along the following:
Most of you are probably aware that there’s a shortage of gold bullion coins at the retail level.
What does that mean?
Today I decided to purchase some gold bullion coins. So I called the Northwest Territorial Mint, one of the larger operations in the country, or at least the Northwest, so I’ve been told.
I called to see what the availability was. The operator put me through to sales, where I sat for 30 minutes. I finally got in my car and drove 40 minutes there, all the while still on hold. When I finally got there, a woman went in the back to see about bullion coin availability. She was told they were back-ordered with 30,000. Not dollars, orders. If I placed an order today, they thought they could fill it in 16 weeks.
To sum it up, I’m buying – if you happen to know a seller.
While we already know $750 is no magic number below which gold cannot fall or below which it cannot loiter, I take no small comfort in the fact that there is a clear increase in demand at that price. In time, as the dollar continues to participate in the fiat currency race to the bottom, that number will ratchet higher and higher still.
Maybe not overnight, but in the next six months to a year, certainly… or as certain as anyone can be about anything these days.
One thing that could get the show on the road – pronto-like – has to do with the continuing presence of the other 900-pound gorilla in the room: Foreign dollar holders.
[A Money Morning investigative analysis back in September demonstrated the muscle these overseas-dollar holders have, by showing how they forced the U.S. government to step in and take control of foundering mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).]
Those foreign-dollar holders are at work in the gold market, as well. For proof, just look at China. Like their Saudi counterparts, Chinese investors have at their disposal a lot of greenbacks. Actually, not just a lot, but enough to remake the Great Wall, for China’s currency reserves are currently estimated at $2 trillion.
China’s investors face the same worries that we face. They’re watching the daily financial news and are realizing that this crisis is getting much, much worse. With that realization comes the desire to add gold their holdings.
On that front, here’s some news from Hong Kong…
(The Standard, Hong Kong. Nov. 14): The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.
Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.
China's fears about the long-term viability of parking most of its reserves in U.S. government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$5.46 trillion) bailout plan, which may make the U.S. budget deficit balloon to well over US$1 trillion this fiscal year.
The U.S. government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.
The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.
Beijing's reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.
In another article from Bloomberg News, the head of China’s gold association commented that he thought China could triple its reserves. The Bloomberg report featured this quote.
China has the world's biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China's demand for gold jumped 23% in 2007, making it the world's second-largest consumer.
The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, The Standard newspaper in Hong Kong reported today, citing an unidentified person.
In the final analysis, we can’t say with certainty what path gold will take between now and the time this crisis is over. But until I can see some tangible evidence that it has lost its value as money, I’m a happy holder and – at less than $750 an ounce – a buyer.
[Editor’s Note: David Galland is the managing director of Casey Research LLC., and the editor of The Casey Report, a monthly letter that helps its readers get profitably positioned in powerful long-term trends. In recent months, subscribers have made big profits shorting bank, real estate, and financial stocks through easy-to-buy, easy-to-sell exchange-traded funds (ETFs). To allow new subscribers to see for themselves if The Casey Report is right for them, a two-month trial offer is available. Learn more now.]
News and Related Story Links:
- Money Morning Market Commentary:
Don’t Give Up on Gold.
- Money Morning Economic Outlook 2009 Series (Part V):
Five Ways to Play Gold’s Rebound to $1,500 an Ounce.
- Money Morning Investigative Analysis:
Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout.
- Money Morning Market Analysis:
Gold is Experiencing Record Demand: So Why Have Prices Fallen?