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The Fear Premium of Gold
By Dian L. Chu, Economic Forecasts & Opinions
Gold prices were hitting record highs as gold's appeal as a safe haven asset exploded. June gold was down 1.1% to settle at $1,229.20 an ounce on Thursday after hitting a record high of $1,250 in previous session.
The metal’s surge was driven primarily by concern that an almost $1 trillion loan package in Europe will slow the region’s growth and debase its currency. Adjusted for inflation, gold is near its highest since April 1981, based on data at Bloomberg.
Record Investment Boosted by ETFs
Global investors, led by the US, last year bought a record 228.5 tons of gold in the form of bullion coins, up from 77.4 tons in 2000, according to GFMS, the London-based precious metals consultancy.
Exchange-traded funds (ETFs) also have made it convenient for retail investors to get in on gold. Holdings in physically backed gold exchange traded funds are at record highs after some ETFs last week experienced their biggest inflows in over a year.
The largest gold ETF--the SPDR Gold Trust (GLD)--recorded its highest daily inflow since early 2009 last week with total holdings hitting a record 1,185.78 tons.
Pattern Change – Gold & Stocks
Gold tends to rise when investors are uneasy about risky investments, so gold often gains as stocks fall. However, stocks continued to recover from last week's big drop, while gold also broke new highs. (Chart 1)
Meanwhile, the euro broke through the 14-month low reached against the dollar last week touching $1.2516. Some analysts say a test of the euro's 2008 low of $1.2330 looks likely in coming sessions. These are clear signals that investors' anxiety is with the euro.
Pattern Change – Gold, Dollar & Euro
Furthermore, gold prices usually go down when the dollar strengthens. But that inverse relationship gold previously has with the dollar has now been switched to the euro since late last year due to the sovereign debt crisis in Greece and Europe (Chart 1).
The lack of faith in the sustainability of the euro has been driving investors to flee the euro and go into gold, stocks and the U.S. dollar. Nevertheless, this is not indicative of any fundamental strength in the U.S. currency. Rather, it's “relatively stronger” against the embattled euro.
Similar to Crude - Gold Has a High “P/E Ratio”
Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten or twelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economic fundamentals for gold are "completely upside down." Demand from jewelry has been weak, and that much of gold's recent strength has been speculative in nature.
However, similar to crude oil, gold also has become an asset class in itself and trades beyond market fundamentals. Gold has long been a safe haven when world markets are gripped by fear. Those fear factors---outlined below--if prolonged, will most likely drive investors to gold and send gold’s P/E ratio soaring far beyond the demand/supply fundamentals.
Fear Factor #1 – Inflation
Analysts say there’s a lot of fear on the part of the Europeans that moves to mitigate debt crisis will only lead to more problems. FT.com reported that traders and coin dealers said buying was exceptionally strong from German and Swiss investors.
The spike appears to reflect concerns in Germany about the potential inflationary impact of the European Central Bank’s decision to buy up euro zone government bonds in the wake of the Greek debt crisis. Outside the euro zone, dealers said that demand was also strong in North America.
Fear Factor #2 - Fiat Currencies Debase
The potential for other countries to be overwhelmed by debt also has investors rethinking paper currencies in general. Gold is vastly appealing as it has become the only reserve currency not backed by debt.
It is this fear that has fueled the price of gold rising against every major currency, not just the thrashed euro. (Chart 2)
Fear Factor #3 – Mountainous Sovereign Debt
The European Monetary Union (EMU) collectively is facing €965 billion of debt redemption this year. Among them, three of the most heavily indebted PIIGS countries, Spain has to redeem €81 billion of debt this year, Italy at €267 billion, and Portugal with €19 billion. (Chart 3)
The Greek contagion may seem to be partially contained at the moment, but investors are still concerned widespread fiscal tightening could derail the already weak European economic recovery. Continued fears over the stability of the euro zone should further depress the euro and buoy gold prices.
The sheer scale of fiscal deficits facing numerous countries, including the United States, will likely prompt further diversification from fiat currencies and could ultimately propel gold to fresh highs.
Dissimilar to Crude – Not a Real Commodity
As noted earlier, gold is similar to crude oil with a built-in premium due to psychological factors. However, unlike crude oil, which is an essential energy source that the world cannot function without, gold has no real fundamental demand except for the use in jewelry.
Indeed, much of gold's recent run-up has been driven by speculators, which means the correction(s) could be just as ferocious as the climb-up once investors' fear subsides.
Short to Medium Term - Hinges on The Euro
Gold has risen 40% since the beginning of 2009, which suggests the market could be due for a correction. A dip in gold prices within the next 10 to 20 months is certainly possible as European and U.S. markets stabilize.
For now, the general trend over short term basis is still to the upside. But at this juncture, gold looks over-priced from a risk/reward standpoint. Retail/individual investors looking to invest in gold are best to stay on the sideline until a significant pullback, possibly at round $1,130. (Chart 4)
In the mean time, the 1,000-point drop in the Dow on May 6, although still under investigation, is a grim reminder that markets will likely be volatile going forward. Volatility breeds chaos and fear, and gold certainly has a proven record of thriving on both.
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Why are you not Shorting the PIIGS?
Just kidding, good laugh and you my friend seem to be a good sport!
Have a great weekend... Monday looks good Thanks to France!
Thanks.
Have a great weekend as well JW.
See you around.
I agree with you, although I do note that there are rather more (and more active) posters here who are trying to argue that gold can ONLY fall from here, and who attack any advocates of holding gold against fiat currency depreciation and financial unrest, than there are those who argue that gold can only rise on a perfectly straight trajectory from here.
hi akak
I certainly didn't have you in mind when I wrote that.
And I basically agree with the arguments pro-precious metals (cannot understand why silver can't rally - perhaps someone inherited the Bunker Hunt stash from 1980 and is getting rid of it now).
As you quite rightly point out, these things do not move in straight lines. I wish they did. It would make life so much simpler.
Another thing: in the last 300 years the gold/silver ratio has traded between 100:1 and 10:1.
We are currently at about 62:1.
If I had missed the gold train I would look to silver now - as a futures spread buying silver v. gold looks attractive to me. Invest the proceeds in physical metal :))
Have a good weekend.
Maddeafandblind,
I did not think you were directing your comment at me, and no offense taken.
I agree with you on silver, and if GATA and Ted Butler are correct in their accusations of rampant and long-term manipulationin the silver market, I expect that we will see a significant narrowing of that ratio in the years ahead.
I think Gold is high... and it is a risk vs. reward thing for me... but I bought at $980... after being in and out once before... so in 3 years, Gold has been great for me and I do think having some physical as a hedge is a great idea... but the Gold Salesmen that push anyone and everyone into a purchase thru fear... without mentioning buying ammo and food first... is un-fair. The Cheering for Gold is so loud sometimes here that it does drown out common sense.
Gold is worth $5k an oz. says everyone with a brain using 8th grade math, right?
But the Governments of the World have maintained downward price pressure for a long time with GREAT! Effect!! on maintaining a lower than it should be price.
If we are using all time highs as a bench mark for what physical delivery pressures look like then we are half way there, to getting back to the amount of pressure the system faced at the all time highs in the 1980's.
So, a balanced and accurate or truthful approach to the subject that is Gold may be the problem some have with me, but fuck it.. I have the facts, honesty and the well being of others on my side. So I really don’t feel bad about the people who are pissed off.
The curve looks like its getting closer to the historic highs to me? Maybe I need glasses and that’s the problem..
http://goldprice.org/30-year-gold-price-history.html
Inflation adjusted dollars… well maybe someone can give me a different view, once again maybe I have miss typed a number or something.. I have been wrong before and I am sure I will be wrong again.
http://www.westegg.com/inflation/
Think of the premise behind the people using the "eighth grade math" though. (actually, it seems more like third grade math to me.)
There's this many dollars, and there's this much gold! Gold is worth X an ounce because of this!
Yeah, but there are many more things than gold backing dollars. Not all the gold is meant to purchase dollars.
Also, there is more than just dollars to purchase gold.
The premise of the people using math like (dollars in circulation/gold = gold price) shows a lack of understanding of anything involving elementary economics.
Repeat after me, Winston Smith:
2 (fiatscos) + 2 (fiatscos) = 5 (fiatscos)
God, I love that Keynesian magic!
Well, it looks like London colluded with NY yet again with their token manipulation job to finish off their week. Desperate Gold perma bears will soon be 'creeching 'double top! double top!' at the top of their lungs with their eyes squeezed shut and their fingers buried deep in their ears. Its one of their many favourite, yet so far completely ineffective, mantras; it looks like the East has been woken up though and sent back to work, "No weekend yet for you!"
Pullbacks are inevitable naturally, orchestrated or not; opportunities every one. Enjoy. A retreat to $800USD/oz though? Is the author certain that the reference is to a sell off of Au and not to a buying frenzy of Ag? Or mb Go-Nad-ler is referring to Paul Van Eeden's horribly incorrect valuation of POG over a year ago?
'Cuz I don't know of 'many' analysts (credible ones anyway) saying anything of the sort. I am certainly not saying $100/oz swings are impossible, or even unlikely, just that the snap backs will give the thickest neck whiplash, IMO.
Regards
I would say that there are two targets for a technical pullback. The first is from the rising wedge that has been occuring from 2008-2010. This 61.8 fib level is 900ish.
The second rising wedge worth considering can be seen on the monthly chart. The first wedge I talked about was just an overthrow of this, longer wedge.
The longer wedge started in 1999 and continues. It has a 61.8 fib of 611. This is near gold's proper fundamental valuation of 625-650 an ounce.
Either way, I think it'll be up slightly more before it crashes. It WILL crash eventually.
Gold will be 600 before it is 6000. I'll bet anybody my entire portfolio.
You are just slightly delusional.
Off by merely one decimal point.
Pity.
Yah JB, how much Lehman paper you holding? hardy har har....
Buried canned ham biatchies!
What a generous offer. I could use some more Bear Stearns and Lehman stock certificates ---- I just had brown rice and beans last night, and am running out of toilet paper.
I'd like to look at the collateral first
"However, unlike crude oil, which is an essential energy source that the world cannot function without, gold has no real fundamental demand except for the use in jewelry."
I dont' even think I can put into words all the problems I have with that statement. It's like saying that the metric (or english or whatever) measurement system isn't essential to science. Like saying you can build a house on the ocean. All mathematical and scientific bases systems need standardization. They need that rock to stand on.
Long after oil is unattainable to most, there will still be gold jewelry. Gold jewelry (and other rare metals and stones) is to humans like a tail is to peacock.
I agree with the shit out of this statement. Oil is the thing I'd most love to stockpile, however I don't have a fucking tank farm.
Platinum has an industrial usage...why is it not $5000/oz? Rhodium is rarer than either of them...it trades high. Things trade according to supply versus demand, it's as simple as fucking that.
and gold will have an increasingly high demand as industrial society crumbles. Long after oil is unaffordable. Stockpiling oil is going to get you deemed an enemy of the state at some point after $200/barrel
In lieu of stockpiling oil on site, I have bought some high yield domestic oil and gas MLPs. To me it's the next best thing.
I'm drunk as fuck too, and also agree.
Drunk at 3:18 in the afternoon??
Cool!
Are we taking a poll, I am running on two days and I still come back to ZH!
Travis... You are a Genius... with a kick ass avatar!
Apparently it was just some panic and trade unwind by individuals who may have gotten margin calls?? Who knows, but both gold and silver are on the way back up.
Remember, pm's are a volatile market anyway, expect this sort of volatility and perhaps worse, in the coming months as sovereigns have more problems and bailouts fail.
$1,227.00?
is not up...
very easy:
http://www.kitco.com/ind/Chaize/may112010.html
Just read this.
Review most importantly the trends in developed countries versus backwaters.
You see a CLEAR match between the production behavior of gold with respect to geographics as you see in oil.
The MAJOR producers are past-peak and in terminal decline. The stable countries were exploited first, the weaker countries with lesser, harder deposits after that.
Those countries are still rising in production but they will NEVER be even remotely close to the major producers due to the ease of the latters' deposits to access and the size of the resources. The big whales are in decline.
Gold peaked in 2000. This is the cause of the rise in price over most of the last decade. Standard, classic supply/demand metrics.
At $800/oz, I would wager that most of the backwaters production would be uneconomical. The same is true with oil. At $30/bbl all nonconventionals are money-losers. They have to shut in production. Supply falls, price rises. We're just seesawing around a declining production curve against rising real costs of development.
Industry average production cost for an oz of gold is around $450. by the time it is minted, commissions, etc... $500. This is a reference point only. This cost has risen from about $200. in 2000. So, in roughly a decade the cost of production of an oz of gold is up 250%.
Electronic Fiatscos cost of production remains at $0., printing a $100. bill about 4 cents.
That's funny, because the price of so many other things has been up roughly 250%. Gasoline, milk, healthcare, etc.
Yet, gold is up 500%.
If gold inflated at the same rate as everything else, it would be fairly valued at 650ish an ounce.
This is precisely why gold is overvalued, save for the speculative aspects in price.
1) In 2000, the gold price-suppression machinations of central banksters and their bullion bank henchmen was at its peak, holding the price of gold well below where it would have been in a truly free market,
2) In 2000, we were not dealing with the current unprecedented governmental deficits and spending, nor were we facing the serious threat (or inevitability) of a meltdown of the worldwide financial and fiat currency systems as we are today ---- or are you saying that the financial risk factor today is no different than it was ten years ago?
To say that "gold is overvalued" today is to say that everything dire that has happened in the financial and economic spheres over the last three years is meaningless, and should be ignored.
Please, be my guest.
See, I told you days before, Gold will be crashed following Oil.
I wouldn't call a 20 dollar drop a crash...
What just happened to spot gold? It took a severe drop.
I would expect gold to readjust severely, both up and down as the outside forces tug it higher and lower.
By the way, nice cow there - Butler/WR cross?
Wish my TLH's would appreciate as much as gold has ober the last few years!
Down $28/oz in the last hour or so and it's continuing.
Look at how PHYS held up
Looks like it's all going into USD. When is somebody going to write a column about the dollar going parabolic LOL.
Is it safe to cheer the dollar...in that case woo-hoo
Just a wild guess, but I don't think the central banks like the idea of gold moving with such force. Can we please have a little intervention?
He has been saying this for the last 8 years... Nadler makes our Harry look like a rank amateur in comparison.
Nadler is a complete idiot, who has been talking gold down since it was $300.
He's been sooo right all along!! NOT. He has been completely erroneous for the last ten years.
And that's why he is continually interviewed, he is the perfect shill for the MSM viewpoint.
The fractional gold is disappearing. Even if gold gets slammed, the higher premiums on the high end gold will still be in place. Who knows, the sellers may even raise the premiums. They are not stupid. Buy now so you will not have to worry later. Buy Physical!49
I generally agree with the conclusions of this article, I think the gold stocks are going to be manipulated down. This really has nothing to do with physical gold, continue buying as normal and enjoy any discounts that potentially come our way.
JayBayBaker?
Wrong
Yes, and the liabilities of the USA are... ? Care to give me a number?
I think the Euro will be pretty much destroyed. But the real fireworks will start when the UK is attacked. And the grand finale will be the destruction of the US$.
All in all, it's going to be an interesting decade. Got Gold?
Start maybe, but the semi final is Japan.
Edmund Conway's column in today's Telegraph gives the IMF's take on US's fiscal situation. Read it and view the charts, not his, the IMF's, and there is just no way gold is going to be less valuable in the coming years.
The sun will come out tomorrow, my friends...
It can't rain all the time.
Not during a (financial) nuclear winter it won't!
Eventually, yes. Tomorrow, no.
This is the worst article I've read on Zerohedge.
paper ,, just fill stuff ,for the copy deadline
BOO