Perspectives On Gold Demand

In today's letter, David Rosenberg, among other things, answers the question of where demand for gold is coming from. For many this is rhetorical: a mere glance at ETF gold accumulation, and PHYS' recent follow-on are sufficient. Today, GLD alone bought 8 tons of gold to hit a new all time record of 1,306 tonnes. Yet for some, like the author of the WSJ's ongoing hit piece on gold, this is not sufficient, so here is Rosie, patiently explaining to the cheap seats, that even at record prices, demand for gold is not going away.

DEMAND FOR GOLD … COMING FROM MANY SOURCES

It is no longer about investor demand through ETFs and the like that have been driving the gold price — physical demand for gold coins and bars has also been very strong. The U.S. mint has been busy supplying investors with 23,000 American Eagles so far in June after a run of 190,000 in May. The Rand refinery in South Africa, according to the Financial Times, is running at full capacity. The World Gold Council is projecting a new high for investor gold demand in 2010 (after the 1,910 tons in 2009, which also was a record).

Moreover, demand is not just coming from private investors — remember, central banks have very deep pockets as well. We see in the WSJ that Russia bolstered its gold reserves by $1.8 billion in May and there are also unconfirmed reports that Iran has also been in buying the yellow metal.

Yesterday, two articles really caught my eye: Stimulus Talk Yields to Calls to Cut Deficits on the front page of the NYT and Martin Wolf’s editorial on the FT titled Fear of the Markets Must Not Blind Us to Deflation’s Dangers (also see today’s NYT editorial on page A26 — The Wrong Message on Deficits). Mr. Wolf concludes that “premature fiscal tightening is, warns experience, as big a danger as delayed tightening would be.” Meanwhile, the public opinion polls in the United States are revealing a groundswell of support for budgetary restraint. Meanwhile, policy rates are at 0%. This really only leaves the Fed balance sheet as the primary source of stimulus for the economy, especially when the next downturn occurs. This may well be what the gold bugs are sniffing out.

It may simply be a pure coincidence, but since mid-2007, the Fed’s balance sheet has ballooned from $850 billion to $2.3 trillion and during that time, the gold price has risen from $650/oz to $1,230/oz. In other words, about two-thirds of the bull market in gold has occurred in just the past three years.

And for an off topic bonus, here is Rosie taking the Fed lunatic to task:

Ben Bernanke made a statement yesterday that cannot go unchallenged, with all deference to his IQ and brilliance as an (academic) economist. To wit: “it appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy towards a recovery being led more by private final demand.” What is he looking at? The chart below shows that this goes down as just about the weakest recovery ever in terms of real final sales growth, which has essentially been non-existent in per capita terms. Private payrolls grew in May at one-fifth the pace posted in April, it looks to us as if consumer spending stagnated for the second month in a row in May, and mortgage applications for new home purchases have sunk to a fresh 13-year low.


As for Mr. Bernanke’s notion that the economy is off life support, well, it’s time for him to climb down from his ivory tower. Food stamp usage just soared to a new record high — 40.2 million persons or 18.5 million households receive benefits. How is it possible that spending is going to drive the economy by any meaningful pace with so many people clearly in some stage of duress?

Mr. Bernanke, climb down from your ivory tower — the economy is not off life support

MARKET THOUGHTS


The critical 1,040 threshold on the S&P 500 has indeed held, but the question is for how much longer. Recall that the 1,0

65 flash-crash low was supposed to hold — we enjoyed a three-day rally that took the market up 5½% and that created a whole lot of renewed enthusiasm until the trap door opened again. Treat these intermittent recoveries very skeptically.


That the newswires could ascribe the market pickup to Ben Bernanke’s testimony to the House Budget Committee is almost laughable. Here is what the Fed Chairman said that supposedly got investors into a bit of a frenzy: “the economy — supported by stimulative monetary policy and the concerted efforts of policymakers to stabilize the financial system — appears to be on track to continue to expand through this year and next.” He added that “the effects of the [European] crisis on economic growth in the United States seem likely to be modest.” Talk about the proverbial kiss of death.


Back on March 28, 2007, he told Congress (the Joint Economic Committee) that “…the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” And his call on the economy, at the July 2007 semi-annual testimony to Congress was “the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy’s underlying trend.” Well, real GDP growth in the second half of the year was just a smidge below 3% so one would think that based on what he had to say back then, Mr. Bernanke’s view for 2008 would have been somewhere between 3% and 4%. Instead, we got 0.4% real growth in 2008 (and then -2.4% in 2009).

Sorry, David, when you put "economists" in charge of monetary policy, repeated historic collapses are guaranteed. You will have lots to write about over the next year as you are proven correct over and over.