Gold for August delivery climbed to $1,258 an ounce today, June 18, breaking the record set yesterday.
Yes, gold is being propelled to record after record by investors looking for a safe haven from worries about the euro and about global economic growth, and by traders who know a momentum play when they see one.
But central bank activity—or actually a lack of it—is playing a part too.
The latest figures from the World Gold Council show virtually no selling by European central banks in the last quarter—even though under the latest Central Bank Gold Agreement these banks are allowed to sell about 400 metric tons of gold. The only seller of significance so far in 2010 has been the IMF (International Monetary Fund), which has sold just 39 metric tons since mid-February.
A few central banks have been buying. Russia has bought 27 metric tons, taking its gold holdings up to 5.5% of its total reserves. The Philippines bought almost 10 metric tons in March. That took the country’s gold position to 13.7% of reserves.
In most years recently gold prices have had to climb in the face of central bank selling. The absence of that downward pressure is one reason that gold has pushed to new highs in 2010. While the world’s central banks have not been selling, SPDR Gold Shares, the largest gold ETF (exchange traded fund), has increased its gold holdings by 162 metric tons.
It always just comes down to supply and demand. Even for gold.
Honoring Jim is admirable, but I think the practice of claiming full disclosure among ordinary posters to Jim’s forum can have unintended consequences.
Since “full disclosure” is a device commonly used among columnists like Jim and other professional investment advisors, there is the subtle suggestion that anyone who uses FD is also a professional. At the very least, naive readers may tend to give more weight to the information in those posts, whether deserved or not.
Posters to Jim’s forum can certainly divulge their holdings or their investment strategies at any time for whatever reason. Readers can still judge the information in those posts on their merits without the “formality” of an FD claim.
Anyway, I hope no one is offended by my comments. It’s just something that sort of nags… even if I’m making too much of it.
dot,
I plan to continue to disclose my holdings. I feel I should let other readers know where my interests are aligned. It is in my interest to “cheerlead” for the stocks I hold. (That said, I wouldn’t hold those stocks if I didn’t believe in them.) Studies also show that owners tend to overvalue what they own (reference Predictably Irrational by Dan Ariely, among others). Thus, by knowing my holdings, you are tipped-off that I may be over-enthusiastic about the stock I’m describing, and that I have an interest in seeing that stock go up. You can then judge for yourself how to balance that with my advice, and decide if you want to bet with me or bet against me. Or stay neutral…
And Jim sets a terrific example that I feel I need to honor and emulate…
Soonerxii-
Anyone shorting gold will be able to sleep the deep and untroubled sleep of the totally, blissfully, ignorant.
Dot-
now you were posting as I was writing! Yep- we seem to remember alike…guess it helps to have been there.
I only add the FDs kind of as a small joke- small in that I don’t have much to disclose, really. But in another small way, to emulate Jim- let people know where I stand and where I’m coming from a bit, with my offthewall comments.
I should have added:
…run for cover- WITH some profits of course: you sell gold on the way up. Always.
Also- if you meet the Buddha on the road, and he claims to know how and why the gold market works..kill him.
And plus: no matter what happens with gold, don’t worry too much- it always gives you another chance!
Finally- then I shut up, promise- the higher the price of gold climbs, the more “unprofitable” reserves are opened up-world wide- and mining is resumed, or commenced. This adds to the overall supply…And, the stocks of mining companies are only stocks after all. But you could average down yer risk with GDX- long term probably best.
Full Disclosure: I’ve been in and out of this silly market since about 1973- currently out. I think I may have finally learned that there are lots of lots better investments- or gambles, for that matter. Rollem.
Very funny to see shorting characterized as an “investment”. Ha ha, think about it for a minute! (cjxland, you posted as I was writing this; guess we’re on the same wavelength here!)
Seriously, though, I’m old enough to remember the ’70’s and I’m definitely not shorting gold. My brother made a study of past gold bull markets (back to the civil war era, I believe), and found that there were none shorter than 15 years and the longest was about 23 years. Since the current gold bull market is less than 10 years, we probably still have a ways to go.
Now, to change the subject for a moment: I’m wondering if someone can explain to me why so many here feel compelled to add “disclosures” at the end of their posts? (Not just the couple of commenters on this particular column; LOTS of people do it.) Aren’t disclosures only necessary for those who are offering more-or-less professional advice, like Jim? Much as I value all the viewpoints offered here in Jim’s forum, aren’t these all just opinions? No disclosures necessary?
OK, I’ll go back to lurking now!
For once I agree with Ed almost completely- with the minor exception that I recommend looking at the 20-year or even the 30- or 40-year chart for gold. Just to get a little perspective, folks.
Shorting gold is NOT an investment- it is simply a short term gamble, and not a very smart one.
Gold does not play by any of your market rules- it isn’t a stock, or a bond, or a commodity or a currency- it is gold. People and industries and governments around the world trade it for reasons that are too unfathomable- or, maybe more simply, just for too many different reasons for anyone to really get a handle on it [check out some of the legit websites that are certain gold is manipulateed by someone or something unknown [eek!] always: lemetropolecafe for one]. When you get to shorting gold, you minnows are swimming with the really big ugly sharks.
Gold could be a fine long-term investment- see Jim’s book- as a hedge, on a small scale. It can even be a good momentum investment [ylkes- did I say that?] for the short to intermediate term, if you must. But when the chart goes parabolic or hyperbolic or ballistic, it is time for us little guys to be running for cover.
how could anyone shorting gold sleep at night? Everyone with a printing press is running it non-stop. Forget shorting it, how could you sleep while not owning it.
I wouldn’t short gold, even as a short term play. If you do anything with gold, you buy it long. Just look at the 10 year chart for gold.
Having said that, if you buy GLD, I’d try to wait until it corrects, probably down to about $118-119.
arihalli,
To a certain extent, future inflation in the US dollar will simply be “paying the debt” for the inflation protection we’ve received from Chinese currency intervention and cheap, foreign-made goods. I’ve said it before – inflation doesn’t magically stop at arbitrary lines drawn on maps. The inflation being seen all over the world will eventually hit us.
From the perspective of managing our national debt and other obligations, perhaps inflation is good for the USA. That said, I don’t think there’s much our elected officials could do to stop it, even if they wanted to, without other economic consequences. We would have to pay for that intervention, somehow.
As far as supply and demand goes, keep in mind that S&D also caused the crazy 1000 point swing on the DJIA in early May. On the electronic markets, S&D is calculated second-by-second, so at any given time, if there is a large sell order or buy order placed, the price can swing wildly. That is why I always determine a fair value for my investments, to prevent me from “running with the herd”, either out of fear or greed.
USDA, thanks so much for taking the time for lengthy explanation. I have learned an awful lot by reading yours and other comments as much as Jim.
I just want to say 2 observations. I have watched gold for a period of time. And at first it seemed to link with the Euro. At one point gold moved up with the Euro as surely as night followed day. No more. Then Gold had some routine with the US dollar. I just don’t see it moving with anything – called decoupling? There are some (perhaps the fringe) that believe its becoming a currency move in its own right. Maybe it is or maybe just the soup of jour. I really don’t know but i do put some currency into it being looked on as a currency in its own right. I think there is hell to pay for the reckless abandonment of the dollars integrity. In fact, i think that there is a strong case to me made that our gov’t is intentionally ruining the dollar as the only avenue in which to pay its debts off. Their behavior can be construed as such. And, frankly, i don’t see any other way to pay the enormous debts of this gov’t off.
Also, when that gap up DOES occur – will it be because of supply and demand? I know it seems simplistic but if the fiat currency is worth so little then gold might just be moving in relation to that currency. And as that currency depreciates – gold on the other end of the seesaw appreciates.
Once it is serously acknowledged that the US Dollar is not worth much – and since no other currency can take its place – perhaps that is when gold will gap.
I know its sacrilege to think that the US dollar’s reign as the world currency is coming to an end but i do believe that. And if true – then it will hasten the rise of an alternative currency. Gold or whatever. I am used to reading that ‘our children will have to pay for all our debts’ and so forth. But i am 60yrs old and i am not so sure that i will not live to see the effects of the demise of the dollar.
airhalli,
If the dollar falls, then things priced in dollars rise. This inflation will tend to raise equity prices. It is a reason to own stocks, not a reason to sell. And I agree with you, inflation is coming. I suspect that the recent price action in gold is a manifestation of inflation expectations. And if the inflation expectations priced into the gold market turn out to be true, then we have significant upside in equities.
I also agree that we could see gold gap up so fast that nobody will catch it. And it could fall back just as quickly. That is the way I read Jim’s comment “It always just comes down to supply and demand. Even for gold.” Look at what happened to gold prices between 1978 and 1982. (Coincidentally, note that this spike took place before a 20-year bull market in equities, during which time gold prices never recovered. The main difference here is bond yields today are at the opposite end of the spectrum, so while we were entering a bull market in both bonds and stocks in 1982, now bonds offer no safe haven.) In today’s electronic markets, similar fluctuations could happen on a much shorter time scale.
Keep in mind that asset prices fluctuate independently of underlying value. That is the most important thing for investors to understand to separate themselves from “the herd” that so often underperforms benchmarks like the S&P500. Price action alone does not determine whether or not something is overvalued. Only price relative to some independent analysis of the value the asset brings its owner.
From a terminology perspective, if the price goes above your “fair value” estimate, then it is “overvalued”, though it may still be below your target sell price. Gapping-up doesn’t make it overvalued, if it is still below your fair value price.
Looking at gold as an inflation-protected currency, I don’t expect its fundamental value to increase much faster than worldwide inflation. Currently, that would be somewhere between the 1% inflation in USA / Europe and the 8-15% inflation in developing economies. A weighted average may be between 2-6%. (I haven’t run the numbers.) In a few years, that value may be closer to 10%.
For me, it is much easier to determine a fair value for a company. And there are many companies which I expect to provide greater long-to-medium term returns than gold.
Well, i am just giving my amateur observation of course. But i don’t think gold is overvalued. I think that the American stock market is. And when their fiat currency is realized as worth less and less (maybe worthless) because of all the debt its holdiing up – then we shall see the DOW passing 8k on the way down. I think that gold goes up in fits and starts slowly but surely but the real move in gold will be a gap up so fast NO ONE will catch it. It will hit 2k in one day. That is what i think and that is when i think it will be overvalued. Full disclosure: (15% gold, 15% long equities, 70% cash that i use frequently on DRV, TZA, etc). TBT sounds like a good buy too at some point soon.
My take is as follows:
Based upon Jim’s post stating that central banks are still buying, and on the number of bearish comments here about shorting gold, I suspect there is still more upside potential in gold prices.
That said, it is very hard for me to determine a fair value for gold. It is much easier for me to determine if a gold mining company is overvalued or undervalued based on a range of expected gold prices. Gold may be overvalued right now. But that doesn’t mean it won’t go much higher. Markets tend to overshoot in both directions, and it’s very hard to time the tops and bottoms. I would like to participate in any future price escalation, but I would also like to minimize my downside risk if the price declines from here.
My strategy to participate in the continuing rally in gold and minimize my downside risk is to own gold stocks in my portfolio, in an underweight allocation. Full disclosure: I do.
Gold could indeed have a big pullback at any time. And although I’ve got a large position in gold, I have a hard time believing that a little gold coin is worth that much. (A 1 oz gold coin is nice, thick and heavy, but it’s not *that* big doesn’t really seem worth $1250).
On the other hand, people still have tremendous faith in the value of money. US$1250 seems like a lot still. It will be a huge deal if a fear of devaluation and inflation of currencies ever really takes hold, which I personally don’t think has happened yet. Those of us who remember the 1970’s may have an inkling, but most investors don’t have a fresh recollection of that kind of world.
It’s kind of like the stock market recently. One day the sky’s the limit and you feel like you’re missing the rally of a lifetime if you aren’t all in stocks. Then suddenly, everyone deeply questions what will happen to the value of the stocks they hold if the economy really slows down and the market looks into the abyss. The shifts are driven by emotion – but emotion is also driven by recognition that the world can change radically and it may price things completely differently based on what happens. To me, as Jim notes in the discussion of central bank purchases, it seems gold is just being recognized once again as what it always has been – one store of value that can’t be debased. Since the world clearly has almost irresistible motivation going forward to debase currencies due to debt problems, it makes sense to have some gold in addition to cash or bonds as a long term way of trying to hold value. Doesn’t it seem correct that governments (as representatives of the wistful thinking of their citizens) will keep putting out their two very cheap commodities – hot air and paper – to deal with crises until the market correctly prices those two things at their true, and ultimately tanking value, vs gold or anything else people want or need? Seems like a reasonable bet to me.
I too would like a suggestion on a gold fund to “short.” I was thinking GLD. Any ideas?
reading this post i thought someone would surly ask for effect on GG, i guess i should do it.
i know Goldcorp is gold mining (among others) but is it good time to sell. lately it has been a quit rollercoaster,,
Seaturtllady….
He means he wants to invest in the price of gold declining.
MK
Chapmane…
What do you mean by “shorting” gold???
Well, if the factors that elevated gold in the past prevail – a weakend global economy due to debt, debt and more debt – then gold should shine for quite a bit longer. I dont think the world have really begun dealing with the debt crisis in Europe and the USA at least. As those currencies further get debased – especially the US Dollar – where are people gonna put their money? I believe those who say gold will go to 2k.
I will be shorting gold as soon as I see the next headline of “Gold momentum doesn’t slow… heading to $1,400 an ounce… don’t get left out”
As soon as gold starts to drop it will be ugly as funds like GLD have to sell gold for redemptions.
What is a good gold short fund?
donselion,
I think that the reason it makes no sense is because unlike most people would like to believe, the stock market isn’t always driven by logic, and is not always “correctly” priced.
Gold is popular as a safe haven over platinum, because of the fact that platinum is a relatively “new” metal and as such has not had the chance to endure itself to people for ages like gold has. It is emotion not logic, driving the price. As a matter of fact one could say the most of the logic with gold being a safe haven is emotion not logic or supply and demand. Even gold has the value only equal to what people are willing to pay for it, and that changes over time, and people are certainly paying more for it then the simple value it has for its practically uses. So a good part of the price of gold is speculation not much different then if some one buys Greece bonds on the speculation that Greece won’t default before the bond and interest is due.
Either (a) Gold is too high, or (b) Platinum is too low. I’m glad I exited IMPUY right after Jim did, saving myself another down spurt today, but honestly, the psychology that loves a shiny yellow metal v. a shiny silvery metal makes no sense whatsoever to me.
haha…I said the same thing about AMZN at 42 bucks once.
I agree DJ. The historical gold chart is lookin’ very, very steep!
This is going to make one heck of a short…. The question is when….