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Brace Yourself for the Coming Gold Shortage

madhedgefundtrader's picture




 

Brace yourself for the impending gold shortage. Gold shortage? Yup. With the launch of a flurry of ETF’s devoted to the barbaric relic recently, total ETF holdings have soared well past 60 million ounces worth $65 billion, more than total world production in 2009. The grand Daddy of them all, the SPDR Gold Shares (GLD), now has a staggering $42.7 billion of the yellow metal, making it the second largest ETF by market capitalization, and the fifth largest gold owner in the world.

When gold suffered a hair raising $150, 12% pull back from the all time high in December, I was deluged by traders asking if this was the peak, if it was the final blow off top, and if gold is finished as an asset class. My answers were no, never, and not on your life.

A tidal wave of fiat paper currencies is now flooding the world financial system at an increasingly alarming rate. Obama has not suddenly become a paragon of fiscal restraint. Bernanke has not morphed into a tightwad. When I pull a dollar bill out of my wallet, it’s as limp as ever.

In 2008, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce.

In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $1,150. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped, especially the Euro.

It all has the makings of a serious gold shortage for the future. The huge growth of the middle class will impact gold prices, as it has with other commodities. Linear growth in supply will get overwhelmed by a Malthusian, exponential growth in demand. Last year’s downturn is looking increasingly like a mere blip in the eight year bull market.

If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. We could be seeing a replay of 2008-2009, where the yellow metal traded in a sideways range for many months before blasting through to a new all time high and quickly tacking on 25%.
Start scaling in around $1,040. That’s where the Reserve Bank of India started the recent love fest for the barbaric relic with its 200 ton purchase in November.

If the institutional world devotes just 5% of their asset to a weighting to the yellow metal, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all time high, or higher.

ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP). Stock investors can entertain shares in Barrack Gold, the world’s largest gold producer. I would also be using the current bout of weakness to pick up the high beta, more volatile precious metal silver (SLV) and platinum (PPLT), which have their own long term fundamentals working in their favor.

For more iconoclastic, out of consensus analysis, visit www.madhedgefundtrader.com, where conventional wisdom is drawn and quartered daily. You can also hear me in person weekly by listening to Hedge Fund Radio by clicking here at http://www.madhedgefundtrader.com/Hedge_Fund_Radio.html

 

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Wed, 02/17/2010 - 10:51 | 233896 Anonymous
Mon, 02/01/2010 - 12:45 | 213303 Anonymous
Anonymous's picture

streets in heaven r gold so i like holding a lil piece of heaven

Sat, 01/30/2010 - 16:16 | 211986 Anonymous
Anonymous's picture

Nothing like a nice government man.

Sat, 01/30/2010 - 15:09 | 211932 Anonymous
Anonymous's picture

Lets just say they get the NWO kicked off, all currencies and gold will be worthless because they'll only accept the new fiat currency that they will install anyway. In this case you would've been better off investing in food, medicine, and other survival supplies. That is until they either confiscate your land, or tax it to oblivion. Then the only thing left is either let them roll over you, or use up whatever ammo you have left.

Sat, 01/30/2010 - 11:21 | 211825 Anonymous
Anonymous's picture

As a silver enthusiast, I have watched the see saw so long it is making me dizzy. To see the shorts come in and blast my metal is a sight to behold. With such an incredibly small market, it continuously amazes me that brokerages and ETF's are permitted to sell many multiples of actual silver in existence. Unlike gold, most silver is used for industrial purposes, thus t is no longer available to the market in bullion form, merely as a constituent component of some electronic doowidget or another.

It will be interesting indeed to watch this metal shoot through the stratosphere when the shortages hit.

Very interesting indeed.

Fri, 01/22/2010 - 06:54 | 202023 Crime of the Century
Crime of the Century's picture

The year that the Rothschild's abandoned the London Bullion Market is the year that GLD was launched.

Fri, 01/22/2010 - 02:28 | 201854 mchawe
mchawe's picture

Gold is insurance. Buy it and keep it in your possession. GLD is a fraud. The custodians who can not be audited as to their holdings, are the same entities heavily naked short on Comex and are unable to deliver on each and every contract they are short. Those entities are also given a free pass for margin. (Unlike you and I, they don't have to produce any.) If you want an honest ETF, CEF is open for inspection, so I prefer to trust that if you insist on buying an ETF. ETFs are at risk of government confiscation.

Few people realise gold always does better in Deflation and is a poor investment relative to other assets in Inflation. Check out the S&P Index valued in terms of gold. I don't see a change in trend. If ZIRP and QE can flip Deflation into hyper inflation, then you better own gold !

COMEX. The Chief Operational Officer is ex Goldman Sachs. Don't expect proper regulation !

When gold is ready to go, the banksters will be loaded up. I believe now they will do just that with all the terrified longs handing it to them. If you go short you can expect a rude awakening at any time the banksters decide to suddenly remove their cap. That will be the day your stop loss fails.

If Ron Rosen is right Gold will now go to $600. (He uses Weldes Wilder's Delta Turning Points and Elliott Wave). I don't care: I will be buying all the way down in ever increasing amounts. Thank you Cartel. Without you the price would be well over $1500.

I have no intention of selling what I have. There was already a shortage at $1200. The US Mint was unable to keep up with demand. By the time the price gets down to $600 (if it does) I believe the real stuff will be UNAVAILABLE...unless you buy GLD (where it will not exist except in the imagination of the public.)

My favorite stock is Seabridge Gold (SA. Ca:SEA). They have the gold in the ground (heading towards 40m oz) waiting for a humungous take over battle by the Majors. They have no intention of getting it out themselves. But what a way to own over 1oz currently costing $27 without paying for storage and insurance!  Do the math !  It is worth checking out their web site to see their mining presentation (10 minute video).  It was the only gold stock I saw yesterday that went against the trend. That alone should tell you something.

Thu, 01/21/2010 - 23:31 | 201783 simplegump
simplegump's picture

this is all so very confusing

Thu, 01/21/2010 - 21:55 | 201658 Anonymous
Anonymous's picture

I call this BS.
Where do you mine the gold for $500 an ounce?
Is this article a test on intelligence?
Kreso

Thu, 01/21/2010 - 21:51 | 201652 Anonymous
Anonymous's picture

I call this BS.
Where do you mine the gold for $500 an ounce?
Is this article a test on intelligence?
Kreso

Thu, 01/21/2010 - 19:35 | 201432 Anonymous
Anonymous's picture

Sell GLD and buy Sprotts new ETF when listed and buy it in Canada not the US. Those guys will check every bar coming in for Tungsten and GLD will be left with paper gold.

Thu, 01/21/2010 - 15:29 | 201036 Apocalypse Now
Apocalypse Now's picture

Paper with the word gold after it is not gold, it is merely paper pretending to be gold.

Gold is the ultimate hedge fund: http://www.fofoa.blogspot.com/

 

Thu, 01/21/2010 - 14:11 | 200897 jimmyjames
jimmyjames's picture

 

And, "Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce." means that the current price is more than double the production cost - hardly a supporting factor of the price.

***********************************

Gold is thought to be an anti-dollar/fiat trade--

Not really--it is more of an anti-political trade--

What else rises on fear and drops on greed?

Gold and the dollar have done and will again trade together--

Competing as safehavens--

The price of gold is really irrelevant--same as "how many" dollars you have--

What is important is what your dollar can buy--

Same for gold--no different--

In deflation--everything deflates against gold--

Check your CPI against the POG/dollar locked--in the 30's--

Gold/dollar buying power increased dramatically--

http://www.gold-eagle.com/editorials_08/images/amerman021209a.jpg

It will do so in this deflation as well--

As for political insanity-ie- currency collapse--

No shortage of that--

Thu, 01/21/2010 - 12:56 | 200767 Anonymous
Anonymous's picture

I am not a gold bear, but

"the SPDR Gold Shares (GLD), now has a staggering $42.7 billion of the yellow metal, making it the second largest ETF by market capitalization, and the fifth largest gold owner in the world." is a reason to be bearish on gold from here, not bullish. That represents past speculative accumulation, not future.

Also, pointing out SA's decline in production without mentioning China's growth in production is lop-sided.

And, "Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce." means that the current price is more than double the production cost - hardly a supporting factor of the price.

Finally, PALL is the palladium ETF, not the platinum ETF.

Thu, 01/21/2010 - 12:41 | 200751 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Peak Gold.  Bullshit GLD.  High demand.  Sounds like a catastrophe (or opportunity) in the making.

Thu, 01/21/2010 - 12:39 | 200749 thegreatsatan
thegreatsatan's picture

I would say if the shit really hit the fan, whiskey, ammunition, and medicines would be more valuable than gold

Thu, 01/21/2010 - 22:58 | 201734 Johnny G.
Johnny G.'s picture

+1

Thu, 01/21/2010 - 16:00 | 201088 Anonymous
Anonymous's picture

cigarettes, whiskey, and wild, wild women

Thu, 01/21/2010 - 12:32 | 200736 jimmyjames
jimmyjames's picture
by Leo Kolivakis
on Thu, 01/21/2010 - 10:09
#200708

I never was a gold bug. I have gotten burned on other manias (Nortel fraud really hurt me) and learned the hard way about not falling in love with any company. Gold seems to be a religion among many here. Good for you. I wish you all the best. If I thought inflation was a certainty, I'd be buying gold too

*********************************

Goes to show--just how f*ked up ya got it--

If i thought inflation was a certainty--I would sell gold and buy real-estate--

Have you even bothered to look at at a gold chart from 1980-2000/

Gold sucked--inflation all the way--

You simply don't understand gold and what it reacts to--negative or positive--

 

 

Thu, 01/21/2010 - 13:35 | 200848 Leo Kolivakis
Leo Kolivakis's picture

Another way of thinking about gold is that it a safe harbor when financial markets get rattled. I don't see this happening in 2010. Doesn't mean I will be right, but I'm shunning gold. If you "gold experts" are so convinced, all power to you! Hope you make money but I remain skeptical.

Thu, 01/21/2010 - 15:41 | 201062 El Hosel
El Hosel's picture

Leo,

Why is gold up 300% ( at least ) over the S&P 500 the last 10 years? We have not had "rattled" financial market during the whole period.... just corrupt and fraudulent financial markets.

Thu, 01/21/2010 - 17:22 | 201218 Herd Redirectio...
Herd Redirection Committee's picture

I don't own gold so I can see it increase its worth in fiat currency, and then convert it into fiat.

Gold ownership is a vote AGAINST the financial oligarchs,  and there is nothing I am driven more strongly to do, than oppose them.

I will own gold until 'sound money' returns,  even if that means holding gold until death (I figure I have 50-55 years to see that happen).

I will NOT own the Syndicate's proxy for sound money, Precious Metal ETFs! 

What a misdirection you are running here, my 'good' sir,  it is like you are knowingly leading people off the path...

Thu, 01/21/2010 - 12:30 | 200732 Anonymous
Anonymous's picture

Gold to a ZILLION dollar soon.

Reminds me of AOL to $100 by Christmas.

-----------

Banking crises has been around for 2 years.
Gold can not get above $1200
Plenty of sellers of gold.

Im more worried about deflation.

Housing has not hit a bottom
Wages are falling

Everyone know the USA is in massive debt.

Gold was a good buy at $300
At $1100 ? ? ? ?

We will know in 5 or 10 years.

Thu, 01/21/2010 - 12:26 | 200727 Anonymous
Anonymous's picture

Paul Volker is coming and he is going to vaporize gold. We will break back below 850.00 and who knows from there. Sinclair, Puplava, and Turk don't and won't see it coming.

Thu, 01/21/2010 - 16:38 | 201161 jimmyjames
jimmyjames's picture

by Anonymous
on Thu, 01/21/2010 - 10:26
#200727


Paul Volker is coming and he is going to vaporize gold.

Wild--what's he gonna do--raise rates to 20%?

USD to the moon--trade collapsed--fully unemployed country--

Don't think so--not this time--

Volcker prevented deflation--caused by gold--last time--by severing the $ link--he "saved"the $ by raising rates--

Those cards were dealt 40 years ago--

They're simply--not in the deck this time--

Thu, 01/21/2010 - 13:40 | 200856 SWRichmond
SWRichmond's picture

Maybe you can tell me where the money (revenues) will come from for paying government debt, when interest rates go up?

Maybe you can tell me how this is made possible politically?

Maybe you can tell me what happens to the growing dependency class(es) when government cuts expenditures enough to balance the budget, and raises rates into a rising unemployment rate?

These are not idle questions, I'd really like to hear your answers.

Fri, 01/22/2010 - 06:48 | 202022 Crime of the Century
Crime of the Century's picture

+1 The math was on Volcker's side last time. Now? Not even close.

Thu, 01/21/2010 - 13:18 | 200818 DoChenRollingBearing
DoChenRollingBearing's picture

Happened before, may happen again.

But I don't think so.  Our .gov has essentially gone completely CRAZY.  The other .govs of the world inspire little confidence with me either.  When the Euro or Yen devalues (assuming we don'r beat them to it), the so will everyone else.

Thu, 01/21/2010 - 12:08 | 200707 Anonymous
Anonymous's picture

When it comes to gold and gold demand the only area you need to watch is the central banks. Not that shares in the miners, GLD, etc are not factors in short term demand and prices are heading but central banks are the true barometer. Central banks continue to be buyers of physical gold and they are holding. Of late there are no real sellers of significance. As long as the CB's are buyers day to day or even month to month bumps are moot. To find the end of the rainbow just follow the big sovereign money pools.

Thu, 01/21/2010 - 12:07 | 200705 Anonymous
Anonymous's picture

My advice to everybody is to flee gold like the plague. Get out of gold now! Gold is going to 20/oz. Gold is worthless.
Gold has no intrinsic value. Depart from it's presence and give thanks for the salvation of your soul.

Gold. It's worthless.

-MobBarley

heeheehehehehechortlesnickerheh

Thu, 01/21/2010 - 13:14 | 200807 DoChenRollingBearing
DoChenRollingBearing's picture

MobB, I'll buy your gold for $100 then, heeheehee!  Chortlesnicker!

I'll even take my chance that your Eagles are painted tungsten...

Thu, 01/21/2010 - 11:59 | 200699 jimmyjames
jimmyjames's picture
by Leo Kolivakis
on Thu, 01/21/2010 - 09:47
#200687

 

U.S. Leading Economic Index jumps 1.1% in December. Quick, buy gold...the world is ending! LOL! Let's see how well gold performs in Q1 2010.

************************************

sounds to me like someone who missed out on a ten year bull--

bet you said the same words in 01--

love you guys--cuz--you let me know everyday--that i'm in the right trade--

the 1st quarter of 2010--means squat--

Thu, 01/21/2010 - 12:09 | 200708 Leo Kolivakis
Leo Kolivakis's picture

I never was a gold bug. I have gotten burned on other manias (Nortel fraud really hurt me) and learned the hard way about not falling in love with any company. Gold seems to be a religion among many here. Good for you. I wish you all the best. If I thought inflation was a certainty, I'd be buying gold too. But I see a gradual recovery in the US with low inflation. Nothing exceptional, but not very "gold friendly" environment.

Thu, 01/21/2010 - 11:50 | 200690 Anonymous
Anonymous's picture

"Stock investors can entertain shares in Barrack Gold"

Barrack Gold? Do you mean 'Barrick Gold'? Geesh.

Thu, 01/21/2010 - 11:47 | 200687 Leo Kolivakis
Leo Kolivakis's picture

U.S. Leading Economic Index jumps 1.1% in December. Quick, buy gold...the world is ending! LOL! Let's see how well gold performs in Q1 2010.

Thu, 01/21/2010 - 11:19 | 200656 Anubis
Anubis's picture

Madhedgefundtrader dude,

 

PALL is the Palladium ETF and not Platinum which is PPLT. Looks better if you fix the typo as the prices and metals are quite different. 

 

 

Thu, 01/21/2010 - 11:15 | 200652 10044
10044's picture

When will the fcking crimex go broke

Thu, 01/21/2010 - 11:05 | 200642 Anonymous
Anonymous's picture

Original post is well below Zero Hedge's standards. It has no marginal value--100% speculation, 0% analysis, 1% facts (already known or all findable in a generic article).

Thu, 01/21/2010 - 11:01 | 200635 RockyRacoon
RockyRacoon's picture

Sidenote to address one of my pet peeves:  Gold was not referred to as "the barbarous relic".  It was the gold standard. 

This gold pejorative is readily attributed to Keynes.  But here is what he really wrote in 1923 in A Tract on Monetary Reform: “…the gold standard is already a barbarous relic.”

 

....the barbarous relic is central banking.

http://news.goldseek.com/JamesTurk/1126711755.php

Thu, 01/21/2010 - 10:52 | 200630 Anonymous
Anonymous's picture

The US MINT ran out of blanks for the coins. It wasn't a gold shortage that prompted the hold on sales. Yes demand is up, but based on the question of what GLD is holding, what the US is holding and a possible shake out of speculators if we see a bigger dip in gold, I'm not too concerned. I will still buy only physical Ag and Au and continue to buy, but refuse to be caught up in 'to the moon' scenarios and scare tactics.

India's purchase was from a central bank, which is what central banks do, shift gold around among themselves. It didn't remove 200 tonnes from what you or I could purchase.

Thu, 01/21/2010 - 10:25 | 200591 BigBagHolder
BigBagHolder's picture

MFT - Were we supposed to "brace yourself" for the pullback in stocks last summer?

The problem with all gold and commodities theses - is that at their core they are just "weak dollar" stories.  If you look at the moves 2000-08 in EUR or a basket of foreign currency, they are not very interesting.

So why not just focus on the core driver -- USD?  Right now that looks pretty strong and EUR, JPY look structurally a little weaker on balance.

Thu, 01/21/2010 - 11:31 | 200667 Jean Valjean
Jean Valjean's picture

Yes but you are talking in relative terms.  The US$ is stronger than other fiat currencies and Gold won't shine until the world figures out that the ultimate backer of the ultimate currency is untrustworthy.  When that happens look out.  But it happens slowly.

There are other things working against gold.  The velocity of money is very slow now so no one sees how much the dollar has been diluted reciently.  Also, as GG states, paper golf vehicles give many gold investors a false sense that they are fully invested when actually GLD is probably best compared to a fractional reserve bank of the 1930s.

Thu, 01/21/2010 - 10:51 | 200626 Gordon_Gekko
Gordon_Gekko's picture

This dollar rally is bullshit. The dollar has barely budged against certain Asian currencies.

Thu, 01/21/2010 - 10:20 | 200586 Anonymous
Anonymous's picture

Gold in a bubble? The average selling price in 1980 was about $660. If I did the math right, and who knows there, that puts the average annual gain at 1.7% over 30 years. And I've discarded the blow off top of $850 as it lasted for about a day and a half.

If that were the stock market I don't think anyone would be calling it a bubble.

Thu, 01/21/2010 - 10:13 | 200577 Anonymous
Anonymous's picture

"(GLD), now has a staggering $42.7 billion of the yellow metal"

Are there any publicly available independent third party certifications available confirming that they actually hold this amount of physical gold as opposed to bookkeeping entries?

Thu, 01/21/2010 - 12:09 | 200709 trav7777
trav7777's picture

It's all in GLD's prospectus.

They have beneficial ownership of that many ounces.  But, their ownership is a paper claim on physical ostensibly somewhere else.  If GLD and the other ETFs *really* did have their own physical possession of THAT MUCH GOLD, seriously, a larger stash than most countries, we would know precisely where their warehouse was; it'd look like Fort Knox.

If that were the case, hell, probably get robbed or somethin

Thu, 01/21/2010 - 10:34 | 200602 Gordon_Gekko
Gordon_Gekko's picture

Most likely $42.7 billion of HOT AIR. Another Madoff in the making. I have no sympathy for GLD buyers. They deserve what's coming their way.

Thu, 01/21/2010 - 13:10 | 200800 DoChenRollingBearing
DoChenRollingBearing's picture

Physical possesion is the way to go, as GG, the Chumba, and others of us have been preaching.

Dow now down 200.

I am NOT Chumbawamba, but I would spring for a beer with him!

Thu, 01/21/2010 - 10:12 | 200575 SWRichmond
SWRichmond's picture

I agree there's a shortage of physical on the horizon.  I disagree on how to play it.  I wouldn't touch GLD with someone else's money, having looked closely at their prospectus and found it lacking in the areas of accountability, auditability, and others.  I wouldn't touch Barrick, either; given their history as a confessed agent of the central banks, and their lack of business acumen in having, until recently, one of the largest short gold hedges on the planet, I consider giving money to them akin to investing with the devil himself.

I find your choices surprising.  Why not CEF, GTU, NEM?

Thu, 01/21/2010 - 10:10 | 200573 Leo Kolivakis
Leo Kolivakis's picture

Gold sucks, the more I see the hysteria, the more I am convinced it will go down in 2010.

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