The New Gold Floor

When two months ago we discussed the IMF's selling of one eighth of its gold reserves of which as most know by know half was recently acquired by India, we came to the conclusion that the IMF's proposed naive and subjective purpose for this disposition which was framed as "safeguarding against disruption in the gold market" would instead end up with "rioting in goldbugland." Based on gold price action over the past 3 days, we have been so far correct. And the concern for the IMF (and all Central Banks as well) is that India's example will be promptly followed by China, Russia and other sovereigns who are seeking to flee from their dollar holdings courtesy of continued madman-like behaviour out of the 3rd sub-basement at the Federal Reserve where all the Heidelberger Druckmaschinen are kept.

Because, as David Rosenberg points out, what India has done is it has established an effective floor in gold pricing:

Gold has broken out yet again and is up another 1% so far today as it begins to challenge the $1,100/oz mark (according to unofficial IMF estimates, the Reserve Bank of India bought gold at $1,045/oz. With the size of the purchase (8% of annual mined production) and at that price it certainly helps establish a floor! The fact that the yellow metal is accomplishing this with ongoing deflationary developments — Euroland PPI came out for September and showed a 0.4% MoM decline and a -7.7% YoY trend — suggests that other factors are driving bullion to new bullish heights. It’s called scarcity of supply relative to fiat currency.

Rosie has become much more vocal on gold lately, and it appears he now shares our view presented a month ago that the ever growing excess liquidity (read empty pieces of paper) are now directly translating into a ever rising bid for bullion, which has now detached from most (if not all) correlations with the DXY and the broader market. This means that unless the Fed is willing to see the next purchase of gold by a sovereign occur in the $1,100+ zone, and really activate gold's afterburners as it heads to $2,000, which would be monetary suicide for Central Banks everywhere, Bernanke will be forced to end his uber-liquidity scheme sooner rather than later.

Some more from Rosenberg on gold:

While the gold purchase by India’s central bank is widely viewed as the trigger point for the latest jump in the gold price, there are good reasons why bullion is in bull mode. It comes down to a fiscal policy in the U.S.A. that will stop at nothing to ensure that the economy embarks on an uptrend. Even with a fiscal deficit north of 10% of GDP, the article from yesterday’s WSJ that was titled Job-Creation Panel Leery of Spending really resonated. To wit: “So far, the White House and Congress have been weighing a range of short-term tax ideas to spur job growth, such as expanded refunds for big companies that suffered losses; extension of a first-time homebuyer tax credit; and a new tax credit for hiring.”

And this last tidbit:

Gold broke out to a new high yesterday of $1,084/oz (and continues to rally today). It did this despite the S&P 500 managing to tick up two points and despite the DXY index actually eking out an 8bps rise to 76.3. This is NOT just a U.S. dollar story — have a look at what bullion is doing in Euro terms. Very impressive. This is a broadly based breakout and that means a durable secular bull market.

Looking at the growth rates in fiat currency that central banks are creating to stimulate their economies and the amount of bullion that would be necessary to back up this massive global monetary infusion suggests that gold can at least double if not triple from here. If you missed the first 4x runup from the $250/oz lows a decade ago, don’t worry about it. It’s like worrying about how you would have missed the first half of the rally in the S&P 500 from 1982 to 1992 when the index was at 400 and still had 300% to go before finally peaking out and sputtering at the 1500+ highs eight years later. In other words, the cup is still half full — and still can be filled with gold eagle coins.

Looks like the gold bulls just acquired one more vocal member. Perhaps Rosenberg can now settle his bet with Joe Terranova in gold-indexed lunch futures.