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Bank Of America On Gold's Imminent Rise To $1,500
Earlier we presented one view on why gold is about to plunge. While that perspective was somewhat truncated, a report recently issued by Bank Of America's commodities team presents the case for gold at $1,500/ounce. As BACMLCFC observes, and agrees with other observations presented on Zero Hedge by both SocGen and by Jim Grant, "[d]uring the last decade we found that three variables alone could explain the fluctuations in the price of gold: risk, currency and commodity prices. In a nutshell, our analysis showed that gold is sometimes a currency, sometimes a commodity and sometimes a store of value. Of course, the elusive question will always be figuring out which market gold will track next." In essence, a detailed if longwinded report (get a cup of coffee now) to confirm that Paulson and Ackman will soon be much richer.
Gold Prices Continue To Move Towards $1,500/oz
The three stages of gold price appreciation
Departing from this analytic framework, we argued back in October 2008 that gold prices would move up to $1500/oz in three steps. The outburst of the credit crisis in August 2007 marked the start of the first stage where gold started to reflect the rising risk premia, rising from $650/oz to about $950/oz. The second stage of gold price appreciation, we argued well over a year ago, would primarily be about USD weakness and lack of confidence in fiat currencies. We argued that gold could break through $1200/oz in this second stage and strengthen against all currency crosses. The third and final stage will be driven, in our view, by a strong cyclical recovery in energy and commodity prices.
A weak dollar is now driving investors into gold
Our analysis shows that the recent rally in gold prices that started in April this year has mainly been about currency weakness, matching the second stage described in our October 2008 piece. Of course, many observers will argue that investor and central bank demand has been the main driver of gold prices for
some time (Chart 2). But this is the old traders’ truism: prices go up because there are more buyers than sellers. The more critical question to understand whether a trend is sustainable is what drives that investor demand. In that sense, gold prices have rallied this year on the back of a weaker trade-weighted
USD (Chart 3).
The 2nd stage of higher gold prices is about USD weakness
Why are investors piling into gold? First and foremost, money is flowing into gold as investors seek to protect themselves from USD currency risk. Looking at daily gold spot returns and decomposing them into factors, we find that USD depreciation and currency risk have been important contributors to higher gold
prices (Table 4). Secondly, our analysis also suggests that changes in gold prices have been leading indicators of changes in 5Y breakeven inflation rates and in the USD yield curve slope (10Y-2Y) since April, suggesting that gold is really moving ahead of inflation expectations.
Decomposing the FX driven gold rally of 2009
In the most recent rally, some currencies have shown high correlation and high beta relative to gold prices since April (Chart 4). More specifically, EUR and CAD have shown the highest beta and correlation to gold, while KRW and JPY show some of the lowest in the last 8 months. But even those currencies that have not
been correlated with gold have tended to be more correlated in the more recent period when using forward looking measures like implied volatility in the options markets (Chart 5).
When EURUSD drops, gold tends to hold its value
So what is driving the correlation between gold and the various currencies? Our analysis suggests that the correlation of gold returns to EURUSD is a lot higher on the upside that it is on the downside (Chart 6). This is a rather interesting development that it is also present in other currency crosses. The simple explanation, in our opinion, is that the supply of money in all currency areas is increasing a lot faster than the supply gold. So the weaker dollar is contributing to push gold prices higher in USD, but the increase in money supply in all countries is driving gold prices in every currency.
Compared to the expansion in the money supply …
In our view, the massive expansion in money supply observed in 2008 represents a competitive debasement of fiat currencies relative to gold (Chart 7). With the exception of the JPY, broad money in local currency expanded at rates between 8.5% for the EUR and nearly 25% for the TRY, compared to an expansion in the global stock of gold of 1.18%. For the time being, however, the rapid increase in real money has not been accompanied by a broad-based increase in consumer prices as the credit multiplier has remained rather muted in most countries.
…there is just not enough gold to go around
Top holders of currency reserves like China, Russia or India will likely need to increase their exposure to gold over the coming months and years (Chart 8) as the value of fiat currency reserve holdings like the USD or the EUR comes into question. The obvious problem with Emerging Market Central Bank (EM CB) diversification is that there is simply not enough gold to go round. Official sector holdings of gold have moved from 29.1 to 28.7 thousand tons from 2004 to 2008 (Chart 9) despite the higher prices. Net, gold held by the official sector has declined by 1.27% in the period, according to GFMS.
Gold supply trails the expansion in global nominal GDP
In effect, the increase in the global stock of gold is roughly equivalent to the increased mined output every year. In 2009 and 2010 we estimate this figure to be 2,350 and 2,300 tons, or roughly 1.5% of the current global above-ground stock of gold. With governments around the world loosening up monetary policy
to stimulate the economy, not enough gold is mined out of the ground relative to other goods in the economy (Chart 10).
The risk of waves of competitive G10 FX depreciation…
In the meantime, with G10 fiat currencies suffering from a credibility problem, a move towards hard assets like gold by investors and CBs appears likely. If the US prints money to fight off deflation and a soaring public sector deficit, Europe will have to follow or suffer from a USD competitive depreciation. Political and central bank discomfort over USD weakness is mounting within G10. Few, if any, G10 nations are willing to embrace further currency appreciation given the current valuation levels. The problem is that every country with a floating currency is in the same situation, creating a vicious cycle, where a USD competitive depreciation leads to a GBP competitive depreciation, which in turn leads to a EUR competitive depreciation and so on. Because the public finances of the US, Japan, Britain and the Eurozone are in such dire straits (Chart 11), it is hard to envision how these countries will return to trend economic growth without robust
foreign demand, suggesting that this dynamic could go on for a while.
…is forcing EM CBs to turn to gold instead of G-7 bonds
Any given EM CB cannot hedge against further USD weakness by buying EUR or GBP. This is because there is a significant probability that the ECB and the BOE will have to follow any monetary policy moves by the Fed, as it became apparent during the financial crisis. Then again, if EM CBs come to the conclusion that gold
is better value than EUR, the problem of reserve diversification becomes one of game theory. In recent weeks, India made a first move by snapping up half of the IMF gold for sale in one go. With 203 tons of IMF gold still up for sale this year, every other EM central bank must be wondering who will move next and how fast . In the light of the experience of the last 10 years, more diversification out of G10 currency accumulation into gold seems like an attractive proposition.
Simply, beggar-thy-neighbour policies have natural limits…
Effectively, as the USD or the GBP weaken against the AUD, the NOK, the JPY or the EUR, these currency areas also lose competitiveness against Britain and the United States. In turn, this means that the diversification benefit for a nation’s FX reserves from buying EUR or GBP rather than USD is limited. A point that we have made over and over is that monetary policy is contagious (Chart 12). Large economies like the
Eurozone, the US or Britain may have different objectives when it comes to inflation or economic growth, but their central banks cannot operate independently of each other because their economic cycles are closely interlinked (Chart 13). More importantly, with the EURUSD touching 1.50 it is hard to argue for further dollar weakness against the European currency purely on fundamental grounds.
…because further USD weakness requires a CNY revaluation
Because there are natural limits to floating G10 currency appreciation against the USD, our EM Fixed Income and FX Strategy team has been arguing for EM FX appreciation against G10 currencies (and against the USD). But most floating EM FX currencies have already surged tremendously in recent months. In the case of
the commodity exporters, the risk of catching the “Dutch disease” is increasing very rapidly1. In our view, further weakness in the trade-weighted dollar would require a CNY revaluation. In turn, as EM CBs can not accumulate CNY, the only practical way to avoid adding EUR at these levels to EM CB portfolios is to buy gold.
The point of fiat currencies is to debase them as needed
While some investors remain concerned that lax monetary policy could end up resulting in inflation sometime down the road, we would argue instead that the whole point of having a fiat currency is to be able to debase it when the economic conditions require it (Chart 14). As the combination of monetary and fiscal policy measures help create an upswing in economic activity over the next two years, cyclical pressures will come back into the system, likely resulting in a lot more money chasing the same oil barrels. As we expect gold to maintain its long-run relationship with other commodities, we see a third stage of gold price appreciation where prices push above $1500/oz on the back of higher oil and commodity prices (Chart 15).
Our view is, as always, not without risks
There is a clear case to be made for stronger gold prices, but our view is not without risk. Our positive gold view could come under pressure if EM central banks decide to shun gold in favour or USD or EUR denominated bonds (Chart 16). A move to diversify away from all G-10 currencies at the same time would
hurt the USD most given the higher USD weight in FX reserves. Meanwhile, a more aggressive shift out of fresh USD inflows into both EUR and gold by CBs could bring about the dynamic observed in recent months (Chart 17), but the valuation and performance of the EUR during the crisis argues against this and we believe the share of gold will likely continue to increase.
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wow.
Wow, in the real world.
"Fleets of armored trucks piled with gold bars and coins have been streaming out of midtown Manhattan in one unexpected consequence of the gold craze."
http://online.wsj.com/article/SB125902295608261455.html#articleTabs%3Dar...
This is Daddy Blankfien here, just bring it over to 85 broad street for FREE safe keeping.
The Right Reverand Blankfien. Just doing God's work.
jeez.
well at least they told the people with small holdings to get their stuff out. It sounds like they've got the reserves for the large holdings...unless the 'fleet' is just for show.
Lloyd here, just bring your Gold over to 85 broad st for FREE safe keeping. MUAHAHAHAHA
I wonder if HSBC is a commercial short. LoL. Getting killed by the retail physical crowd.
arent they aggressively shorting gold with jpm ?
Wouldn't that be fitting?
The reports like this are piling up too fast. Logic tells me that gold has to go up, but I hate when it turns into a consensus forcing you to be contrarian or logical but not both.
For now gold is below the radar but when I see it on the cover of TIME magazine, selling time will have arrived.
Strange isn't it? I'm waiting for JPM to release a similar statement about silver so they can blow my mind!
What I'm waiting for is what people do when there is a pullback in the gold price. I agree that logically gold has to go up, if only by virtue of currency debasement. However I still expect a least a temporary decline in the price at some point. Depending on how far they can dive the price down and long they can keep a lid on it they might be able to talk people into backing off it and sell into the market.
And my sell indicator is when I start hearing waitresses and other service industry people talk about it. That has always been a great sign of a market top.
Fed MBS purchases through 2011 = Gold to $5000 by 2011.
Simple equation.
MBS, CMBS.
And other Government support to corporations are being funneled through http://www.recalls.gov
Nick-knacks, car, boat, food, medicine, cosmetics, 'green products'.
Bring back the junk and we'll buy it back. Americans can pay twice for the shit they bought!
This is going to be a very interesting ride. Lot's of money will be made and lost in Gold over the next 3 years.
Having not been convinced on the various Golden possibilities, when the very crooks on Wall St.
start pumping it. Time to get out of Gold.
What does this tell you?
Do you think they know nothing about your thinking process?
Keep buying it's not going down. Sovereign wealth funds are buying from the IMF for christsakes. The IMF gold sale proceeds are being used to buy Treasuries!!
http://www.zerohedge.com/article/thats-cutting-it-awfully-close-tim
Are you paying attention here!?
Buying from the IMF? Really?
If you do have many gold oz, please sell them. Therefore, I can buy them.
They are still in control buckaroos...
Maybe that's how Ben is going to mop up all those excess $$ floating around the world. He's going to use a tungsten compound to get all his frn's back from all the Goldsuckers.
I remember the days (not too long ago) that the stock market will rally and gold will fall. That correlation has inversed over the last months. But for how long?
Maybe as long as the dollar keeps falling. But a dollar reversal (Afghanistan decision?) could bring the old correlation back into play
admin
http://invetrics.com
Call me sceptical, but as soon as I hear one of the big boys (BoA) calling for any commodity to go a certain direction, I automatically assume a pump and dump is in progress (even if it's for the short term). I wouldn't be surprised to see gold tank in a couple of days, as some newly "undisclosed" information comes to light.
I share your paranoid views :)
...or...double reverse psychology.
Exactly... They know that holders of Physical gold are selected for by paranoid tendencies already.
...but then maybe they know that we know that they know...TRIPLE REVERSE.
"the whole point of having a fiat currency is to be able to debase it when the economic conditions require it"
Let's clean this up:
The whole point of having a citizenry is to squeeze them like apricots.
no, let's try again:
The whole point of having a gulag system is to obtain free labor until we harvest your organs.
hmm, too obvious. One more try:
The whole point of central banking is to crush savers and turn them out in the street to die after being stripped of every vestige of wealth at the end of their working usefulness.
Much better.
95%of all the silver ever mined, has been used up. there is not enough silver for every person on earth to have 1 oz.
production has been in decline for years. we've used more than we mine, for 40 years. silver will go up more than gold IMO. buying silver, will topple the comex easier, and cheaper than gold. look at the ratio of JPM shorts, silver to gold. It's much more intense. when it's discovered, that they can't deliver the silver, thats when a consensus, that they can't deliver the gold will be reached. one of the few events I look forward to in the future. come on ZHers, lets corner the silver market.
...Shh!
Isn't that what the Hunt brothers tried to do way back when?
Liberty or Totalitarianism -- The choice of his money always leads man to either liberty or totalitarianism. Gold is abolsute reasoned truth manifested in man's rekindled reliance upon his own senses. FIAT teaches him not to trust what he observes with his own two eyes.
Robert K. Landis, partner of Reginald H. Howe in Golden Sextant Advisors, gave the keynote speech at last week's FINews.ch gold conference in Zurich. Landis addressed the most basic but seldom acknowledged financial question, the question of what money is or should be, and how the choice inevitably leads humanity toward liberty or totalitarianism. Landis' address was titled "Viva la Restoration" and you can find it at the top of the "Recent Commentaries" section of the Golden Sextant home page here: http://www.goldensextant.com/
I believe that in a realistic world, and if the economic theories together with history that gold will rise because of simple monetary rules.
In history this was always about the purity of gold and silver in the coinage.
On the other hand: I've seen a lot of unlogic things happen during this depression so it is very well possible gold could crash.
So the best way to make your decission is: RED or BLACK and "Rien va plus"!
Who cares what the exchange rate is when the dollar going to die...
Smells of capitulation. Going long gold scares the bejeezus out of me right now.
Oh Noez! Oh Noez! The guys that bought ML and Countrywide made a gold 1500 call?
Oh Noez!!
Word.
I see a massive dollar squeeze on the horizon, and da boyz dumping gold into it.
BUT...
IMO that will just provide an opportunity to buy at suppressed prices.
Well, it could be this given that it might not be that, but it may be that if this is not going to happen, but knowing what we knew about that there is a chance that this will be that.
Tune in tomorrow when this will be that.
Pass the THC
Well said, waterdog. Can I quote you on that?
I think you hit the nail on the head. In support, I would like add these words of wisdom:"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know." (D.Rumsfeld)
Gold? Does that come with fries?
To make every theory go crazy:
The Prince of my country Prince Philip (Belgium) is one of the chairman of the Bildenberg group in Europe. And as he once put it :
"freedom of speech is only reserved to people who got something to say and are raised to do so"
the day after he said that, he said sorry about it, but he said it he?
that will be our future king...
and with who did our new European president (also from belgium) organise a meeting to talk about policies? BEFORE HE WAS APPOINTED?!
http://www.prisonplanet.com/bilderberg-appointee-van-rompuy-is-first-eu-...
After that, Van Rompuy was warned, because what is told on these meetings should never be told in public. Let alone admit that you where there.
I used to think bilderberg was only a paranoid mambo jambo, but during this depression, that name keeps comming up over and over again.
And gold: THAT IS THERE BUSINESS
I hope they can do something about the Waffle situation here in the US.
We have a government waffle recall:
http://foodpoisoning.pritzkerlaw.com/archives/listeria-eggo-waffle-recal...
and a very dangerous waffle shortage:
http://www.dentonrc.com/sharedcontent/dws/bus/stories/DN-p2eggo_22bus.AR...
USD falling back down to 75 again...watch for it...get ready...here we go...BOING!
However the mere mention of tightening in the FOMC minutes would cause an impressive short squeeze.
I think it could be pretty funny if the FED demonstrates actual commitment to a strong dollar policy.
It would have the effect of burning the world's carry traders.
Then they can repeat the POMOs!
Or at least, I think that's their plan. They will probably get the first, but not the second.
Tim Geithner continuously stating that we have a "strong dollar policy" certainly isn't causing a dollar short squeeze. Shoot, if that was my buzzword bingo phrase, I'd be really, really drunk. By the time they get around to saying it in the FOMC, will anyone take it seriously? Didn't Chinese university students laugh at TTT when he uttered his strong dollar doublespeak?
Could it be they see the freight train coming right at them and they have no choice but to call the trend before it runs them over. This way they can claim to their clients that it was a good call.
I think the Comex has very big problems making good delivery and the shorts are going to be decimated.
I agree.
The banks probably played their part suppressing the gold price on the run up from 275 but they would now be long. my broker told me the small specs were decimated in these actions and by not understanding the anti-gold crowd and their unlimited resources to pound the price down when the momentum slowed. GLD the scumbags sold heavily at these times.
"I think the Comex has very big problems making good delivery and the shorts are going to be decimated" coming to a theater near you
Gang, the collapse of the USD is not years in the future, it is occurring right now.
You mean Paulson and Einhorn. Ackman was the one who said Einhorn's bet was a greater fools wager.
Well,kinda late to join the wagon for the geniuses at bac,who as far as I remeber,still support their living with the generosity of tax payers. I also remeber reading about other geniuses who created something of value,and generated with their creation a huge tax payers base(Gate,Eddison,to name a few),from which the current geniuses are living. Three trillion more of savings will be looted in a couple of years,when finally we will be able to get rid of the current geniuses................
Bet 1: Bull market is full of Crap
Bet 2: Gold will see $1,500
Bet 3: UST with Fall Hard
Anyone else like these three positions. 90% of Wall Street is on the other side of two of these bets. Just because they finally like number 2 doesn't mean they agree with 1 and 3. Hence true hedging.
All we need now is a Cramer gold $2000 call.
stick a tungsten fork in it.
Cramer won't make that call until $2,001
Strike that, within two weeks I bet Cramer will have his followers in ABX, the only Anti-Gold Hedged Gold Miner around.
Gold is in the process of decoupling as all fiat currencies naturally make their way to zero. What scares me, is the solution they have ready to go once "they" decide its time to reset the game.
i second that
I've been trying hard to figure out what that solution might be. Any ideas? Cui bono if we are all miserable?
Try to find G. Soros recent Budapest lectures that were posted on FT. He outlines the whole thing. It is the IMF "basket of currencies" that he sees as taking over after all the world's currencies are 'balanced'. "The SDR is an international reserve asset, created by the IMF in 1969 to supplement ... Its value is based on a basket of four key international currencies, ...
"
Oh, you guys are on the right track. Gold derivatives will collapse, bank on it. Buy on the dips, buy on the doodle. It don't befront me none. The only thing that matters is "watcha got in your hand there?"
Any discussion on gold pricing that fails to mention central banks' suppression schemes and lack thereof is absurd. The naked shorters have been able to suppress the price of gold for decades but suddenly there is real money on the other side of the trade. Gold will now find its true market price instead of the manipulated price desired by the Fed and the US Treasury. Meanwhile the quantitative easing will continue to debase currencies and drive gold prices even higher. How high? I wish I knew, then I'd know when to get out but that will be years from now.
Well,there could be an explation for this report. You see,in general,I see these analysis by IBs as pandering to an in house trade. So what could be a viable explanation for that?. It could be that IBs were short gold untill recently(when Barrick announced it is unwinding their shorts). In the process,they have generated some losses,and now they want to recoupe their losses,so they reverse the trade,go long and start pimping(or pumping their trade).But,the report ususally has to come from the leader. So we still waiting for GS to opine on gold(obviously they still have some paper to redistribute since now they are in 22:1 principle to ageny mode as zh mentioned recently.
Finally some real data coming out of BOA! Nice report thanks ZH! Did I mention that I got protection from the swine flu about 2 weeks ago? Have a great night guys and gals!
The powers that be must be mystified to the degree that they can pull off this ruse. Imagine people believing that gold has any more value than it's utility.
Money is THE greatest scam ever invented, as it plays right into nearly every human's obsession of attempting to figure out ways of getting 'something for nothing.'
People are truly fools.
i second that
Money is the greatest ruse every foisted upon the human race. People's obsession with getting 'something for nothing' feeds this insatiable hunger to the point where they lose all sense of reality and trade their valuable labor-value for metal or paper or whatever some clown tells them.
Switzerland has already intervened a few times to prevent the frank dropping below 1.5 per euro and 1 per $. The race to the bottom is just getting started, and as each currency block fights against all the others to get lower (as the US and Britain did by devaluing their currencies in GD1) gold will get squeezed upwards. This will provide the CB's the added benefit of increasing the value of each currency block's gold reserves, so at some point the CB's will give up trying to prove that they are maintaining their currencies value vis-a-vis gold, and will instead focus public opinion on maintaining employment.
The paradym is shifting, and gold will come out on top of the currency pile.
Gold this minute: $1174. Was $1176.
Backwardian, here we come...
Gold Krugerrands Run Out: http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=8590
Again a classic example....when the sell side researcher form an opinion the party is over....internet 1999/2000....commodities 2007/2008....gold 2009....they never learn..
These people deal in disinformation and misdirection, and so you are going to use their 'Gold call' as a contrarian indicator, that now is the time to sell gold.
Yes, very well done! Now wait a second. What if these people knew smart money would go against their calls, then what would happen?
Those of you with gold, better get guns and bullets too.
It is so predictable it is scary.
When is something really surprising going to happen, you know, a 500 point move?
If the bull market is so strong... The short dollar, long equities is too easy, the time is right to shear the sheep. Right?!
WHAT'S ALL THE FUSS........WERE STILL SCREWED, OUR FEINDISH LEADERS CONTROL EVERYTHING ANYWAY.