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« Yamana gold Incorporated: Explanation of Current Performance! | Main | Portfolio Update 19 November 2008 »

Gold at $600.00?

Gold Bullion 10 June 2008

At a time when investors have got the jitters about just how far gold can go down we thought that you might be interested in this ‘take’ on the current environment for precious metals.

Gold in the Low $600s?
By David Galland, Editor, The Casey Report

Of late, I have read a number of analysts, Jim Rogers even, who have expressed the view that gold could dip to the mid- to low $600 level.

Could happen, but I think not. Already, buyers of physical gold are finding anything near $700 to be cheap and so are helping to build a floor under the monetary metal. On that topic, a friend sent this item along last week…

(Gulf News Nov 12) Riyadh: There has been an unprecedented demand for gold in the Saudi market recently, with over 13 billion Saudi riyals (Dh12.75 billion) being spent on the yellow metal during the last two weeks.

Demand is expected to rise still higher as more investors turn to gold as a safe haven in the midst of the global financial crisis, according to market sources.

Sami Al Mohna, an expert on the gold market, said the trend had resulted in a substantial rise in the gold reserves of Saudi investors.

Since soaring to an all-time high of $1,033.39 per ounce in March this year, gold has plummeted 30 per cent.

Gold for December delivery on Monday rose $8.60 to settle at $726.80, roughly the same level at which it traded a year ago.

"Many Saudi investors see this as the right time for making investments in gold as its price is the most reasonable one at present," said Al Mohna.

Needless to say, the Saudis have a lot of money. Not just a lot… but a really, really, big, stupendous mountain of the stuff.

Oh, and like you and me, they’re human.

Which means they can’t help but glance through the morning’s financial news, adjust the reading glasses, and think, “Blessed Mohammed! This is getting really, really serious. Maybe just a little extra gold under the tent right now wouldn’t be such a horrible idea.”

They aren’t alone. We are getting regular reports that at these prices, demand is soaring in India (where price inflation is now running around 11%), and brisk sales have pretty much wiped out physical supplies of small coins and bars in the U.S. and Europe… among other corners of the world.

On that score, a few days ago, correspondent Jim G. sent along the following…

Most of you are probably aware that there’s a shortage of gold bullion coins at the retail level.

What does that mean?

Today I decided to purchase some gold bullion coins. So I called the Northwest Territorial Mint, one of the larger operations in the country or at least the Northwest, so I’ve been told.

I called to see what the availability was. The operator put me through to sales, where I sat for 30 minutes. I finally got in my car and drove 40 minutes there, all the while still on hold. When I finally got there, a woman went in the back to see about bullion coin availability. She was told they were back ordered with 30,000. Not dollars, orders. If I placed an order today, they thought they could fill it in 16 weeks.

To sum, I’m buying… if you know a seller.

While we already know $750 is no magic number below which gold cannot fall or below which it cannot loiter, I take no small comfort in the fact that there is a clear increase in demand at that price. In time, as the dollar continues to participate in the fiat currency race to the bottom, that number will ratchet higher and higher still.

Maybe not overnight, but in the next six months to a year, certainly… or as certain as anyone can be about anything these days.

One thing that could get the show on the road pronto-like has to do with the continuing presence of the other 900-pound gorilla in the room, foreign dollar holders. Like the Saudis, the Chinese have at their fingertips a lot of greenbacks. Actually, not just a lot, but enough to remake the Great Wall.

And they, too, are humans.

And so, over their morning cup of tea, they finger the abacus while watching the daily financial news and say, “Holy Mao! This is getting really, really serious. Maybe just a little extra gold in the rice jar right now wouldn’t be such a horrible idea.”

On that front, here’s some news from Hong Kong…

(The Standard, Hong Kong. Nov 14) -- The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.

China's fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing's reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

In another article from Bloomberg, the head of China’s gold association commented that he thought China could triple its reserves.

And there was this quote from that same article.

China has the world's biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China's demand for gold jumped 23 percent in 2007, making it the world's second-largest consumer.

The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper in Hong Kong reported today, citing an unidentified person.

In the final analysis, we can’t say with certainty what path gold will take between now and the time this crisis is over. But until I can see some tangible evidence that it has lost its value as money, I’m a happy holder and, at under $750, a buyer.

David Galland is the managing director of Casey Research, LLC., and the editor of The Casey Report, a monthly letter focused on helping readers get profitably positioned in powerful long-term trends. In recent months, subscribers have made big profits shorting bank, real estate, and financial stocks through easy-to-buy, easy-to-sell ETFs. To allow new subscribers to see for themselves if The Casey Report is right for them, a two month trial offer is available. Learn more now.

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Reader Comments (5)

Finally a positive note. I wonder why the Casey research team named their topic; Gold at $600, if the rest of the piece is like a familiar story of tulips from Holland in the 17th century...

Ok, I leave the scepticism on the sidelines. ;)
There is indeed some positive news to be dealt with. For instance: Sign of a bottom?

Confidence in Warren Buffet is dropping, at least as you look at reported numbers of buying insurance against Berkshire Hathaway. Berkshire credit default swaps (CDS) are priced higher than companies like Goldman Sachs, Citigroup, BoA, Allstate and JP Morgan.
As you know, Berkshire is a triple-A holding company. Prices of comparable swaps are usually rated as Baa3 or something like junk-level.
This is just insane, as Berkshire has a buffer of more than $30 billion. Reasons for the increase in insurance are rumored to be a put that Berkshire would have sold on the S&P 500 that matures in 10 years.
That is Fear at its top, which could indicate a bottom... Unless things are really going 1930's depression-like.

As for Caseys request for coins, there is probably some smart individual that has been buying them all as a hedge against his long gold position. And let's them grade by PCGS trough second parties before selling them with a nice premium. Do I sense some Arab capital involvement here? Some Dubai-based sjeikh or something aiming at a Trillion dollars ROI just for fun. :)

But for real; The IMF maybe selling a heap of gold-tons soon, if it shows difficult to receive another $100 billion within 6 months from now. That may deliver some bullion/coins for Casey Research. Keeps our gold price level stable hopefully.
The miners are not helped by this transaction.

November 19, 2008 | Unregistered Commenterde Graaf

The Omaha Oracle - Warren Buffet - is writing down $16.3 billion dollars in losses with Berkshire according to Vanity Fair.

Reports or should I say rumours are going round that Warren has sold a $40 billion put option into the market. Whether its true, I can't tell. My sources are normally trustworthy...

If so, the world is going nuts.

November 20, 2008 | Unregistered Commenterde Graaf

And people tried to pulverise me last week, adamant that there was no demand for gold internationally... Hang in there with your delusions anti gold bugs - I suspect you are all US citizens and not one of you wants to reconcile with the fact that foreign countries are now looking to find ways to distance themselves from your currency and financial mess...

I doubt we will return to a gold standard, but I think we are beginning to see the signs where countries want to see currencies backed up with some solid assets which is something American can't provide. The US is just lucky China isn't demanding repayment of their debts to China at this point!

I'm still reckoning gold will hover for now and once investor money starts moving again and moves out of cash/treasury positions in the $US, gold will be one of the benefactors. All good... all good...

November 20, 2008 | Unregistered CommenterGillies

If you are seeking PM, Jason Hommel mentioned Miles Franklin a while back as a very reliable source of PM. He is right. I have had no problems with them keeping promises and projections of shipping dates. Ask for Bob Sichel who is a very knowledgeable of the these markets and is a very congenial type guy.

November 20, 2008 | Unregistered CommenterSimpsomi

I totally agree with your long term outlook Gillies. There comes a day that China starts thinking about their own interests and lets the dollar for what its really worth.

I think the moments that happens, will be the moment when growth figures of China stay low at the 5 percent level. When they see, that consumer demand from the US won't improve to levels they once were.
China will stimulate its domestic economy and gradually decrease the US treasury bonds positions. China's growth after this depression will become much more moderate for China, depending on its consistent decline in exports to America. A shift in export focus is imminent.

Easy money days are over.

Say Gillies; who are those people you talk about, that say there was no demand for gold bullion coins internationally?

They probably live in another world than ours...

November 20, 2008 | Unregistered Commenterde Graaf

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