Gold – It’s a Bull market Stupid!
by Eric Hommelberg
September 12, 2006
In case you’ve missed it, the gold price crashed by almost $60 in less than three trading sessions thereby cutting through multiple support levels like a knife through butter.. Sure enough it scared the hell out of many gold investors and many questions came my way of what to do next.. Many gold advisors are declaring the bull market now for dead referring to the broken 5 year uptrend in the CRB index.. To the market players gearing themselves up for shorting the gold market these days at current levels I would say ‘good luck’, not me! Why not?
Simple, shorting could be a prudent thing to do at severe overbought levels, not at current oversold levels. In contrary, we’re approaching here a major buy opportunity.
Please let me explain.
First of all, the primary trend of the gold market is up, not down. Wouldn’t you be glad if someone told you one year ago when gold was trading at $475 it would be trading now at almost $600? Well, I would have signed for it immediately!
Gold, bull or bear market?
rGold chart indicates major buying opportunity approaching
Gold – Bull or Bear?
The primary trend is up since all critical drivers for gold are still pointing towards much higher gold prices the years ahead.. It goes far beyond the scope of this small update to explain in detail but the key-points are:
· US$
· Demand/Supply
· Oil
US$:
To maintain the dollar at current levels a foreign inflow of almost three billion dollars each working is required. At one point the world will say, enough is enough, the dollar will tank. A declining dollar translates itself into rising gold prices..
Headlines like these certainly won’t boost confidence in the dollar:
U.S. trade gap widens to record $68.0 bln in July
By Greg Robb
Last Update: 9:21 AM ET Sep 12, 2006
WASHINGTON (MarketWatch) -- The U.S. trade deficit widened by 5.0% in July to a record $68.0 billion, the Commerce Department said Tuesday. The July deficit surpasses the previous monthly record of $66.6 billion set in October.END.
Well, ever soaring deficits, were will this end? Bankruptcy?
Please don’t think these ideas are weird. According to Prof. Laurence Kotlikoff (a former senior economist at the President’s Council of Economic Advisors (CEA) during the first Reagan administration) the US is heading towards bankruptcy indeed. Kotlikoff was quoted recently by the Daily Telegraph:
“A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.
Prof Kotlikoff said that, by some measures, the US is already bankrupt. “To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors,” he asked. According to his central analysis, “the US government is, indeed,bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds’’. END.
You don’t have to be a rocket-scientist in order to understand that a world reserve currency backed by a country heading into bankruptcy won’t generate that much confidence therefore a massive exodus out of the dollar can be expected coming years and is in fact already taking place. So out of the dollar but where to invest next? When paper money looses its credibility gold is the only alternative.
That’s why you hear continued talk about Russia, China, Argentina, Korea, etc.. increasing (or planning to) their gold reserves.. Yes, Gold is a currency and is slowly crawling back into the monetary system again. George Kapasakis, a senior foreign exchange trader at Mizuho
Corporate Bank in Sydney recently said:
“Central banks will use gold as a fourth currency instead of the dollar, euro
and yen” to hedge exchange-rate risk, Gold will be underpinned.”
Well, hard to argue with that statement when you see headlines like
these over and over again lately:
China Should Buy Gold, Central Bank Adviser Says
China should use its foreign-currency reserves, the world’s largest, to buy gold and oil as a hedge to guard against the risk of a sudden drop in the U.S. dollar, said an adviser on the central
bank’s 13-member policy board. END.
A flight out of the dollar causes the dollar to fall, it’s as simple at that! A dropping dollar is gold (and base metals) friendly.. Therefore just based on a further dollar decline it ain’t likely at all that gold has seen its ultimate top already.
Demand/Supply:
Gold demand is growing each year. India, world’s biggest gold consumer is expected to grow its demand from its current levels of 800 tons to 981 tons by 2010 and 1,153 tons by 2015 according to the Associated Chambers of Commerce and Industry of India. Where is the supply coming from coming years? Who is going to meet the ever increasing supply/demand deficit exceeding 1500 tons a year?
Well, it certainly ain’t the gold producers since mine supply will be flat to down for the next several years. Headlines like these speaks for themselves:
SA gold output falls 7.2% y/y
12/09/2006 12:34
Johannesburg - South African gold output fell 7.2% in volume terms in July while overall minerals production declined 0.8% compared with the same month the previous year, official data showed on Tuesday. END.
Aussie annual gold production sinks 5% Sunday Sep 3 13:12 AEST Australia's annual gold production fell five per cent last financial year, according to a new research report. END.
DRDGold chief executive officer Mark Wellesley-Wood
“Global gold production is set to decline dramatically over the next
four years and this is set to generate a scramble for gold ounces.
END.”
Newmont President Pierre Lassonde:
“The decline in output will continue for at least another couple of
years simply because the industry didn’t put money back into the
ground when the gold price was very low”. END.
OIL:
Many analysts declared the end of the oil bull market this week. Well, isn’t that wonderful? All we have to do in order to avoid ‘PEAK-OIL’ is to throw some derivatives at the market, painting the tape into a ‘bear-market’ and voila, problem solved! Again, it goes far beyond the scope in order to explain why oil-prices aren’t likely to come down coming years but readers interested can take a peek at the Gold & Oil chapter of the Gold Drivers Report. Even if oil prices were to stay flat from here on (what I don’t believe), still then the price of gold should be around $1000 according to the historical Gold/Oil average.. Please take a peak at Gold & Historical Norm for further explanation.
The bottom line is:
If you don’t believe the primary trend for gold is up then you shouldn’t be investing in the gold shares anyhow. However if you’re convinced that the uptrend in gold will last for many years to come (as I do) then it’s just a matter of spotting major BUY opportunities. We’ve had about 6 major BUY opportunities since 2001 and it’s my strong believe we’re approaching another one.
rGold chart indicates major ‘buy’ opportunity
Conclusion;
Investors should be on high alert from here on since these opportunities are a gift and don’t occur that often (6 times so far in 4 years)
Ok you’ll say, so should I buy shares like crazy now? No, it ain’t that easy since gold itself still finds itself in a downtrend which started in May this year. So a confirmation of gold breaking out of its down-trend would be a something to watch for. We will notify our members on relevant break-outs of gold, HUI and our Discovery TOP 10 stocks.
Eric Hommelberg
The Gold Discovery Letter,
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