The Goldwatcher

 

 Time to bet the ranch on gold?

$ Gold Price Chart 2008 courtesy Kitco

The 25 industry analysts contributing to the 2009 London Bullion Market Association survey are upbeat - but not euphoric.  Last year the most bullish among them forecast that gold would pass $1000 - which it did for  few days in March. This year, 75% of forecasters expect gold to hit record highs again, with a predicted average high of $1073.54 and overall average of $862. However, as in 2008, prices are also expected to  reach an average low of $721.46.    There are, of course, caveats. Some analysts warn that with the amount of money being created by the Fed and other central banks we could see a re-run of the 1970s when the gold price went parabolic. 

 Time to bet on another miracle?

A  miracle is  ‘a visible interruption of the laws of nature that can only be explained by divine intervention’. But in everyday speech we also call exceptional  statistically improbable outcomes miracles. Last week,  when all 155 passengers and crew emerged without any serious injury from the aircraft ditched in the freezing Hudson River  (illustrated above),   the passengers all thanked the pilot for a miraculous outcome. It’s a safe bet they all also thanked God. In flight emergencies no one is an atheist. And, to be sure,  the benign outcome achieved  last week was heavily against the odds.  Yet, as the pilot said, he was trained for such an emergency and followed prescribed procedures. (Note added 05.02.09 audio of pilot and airport control  reveals the dire emergency the pilot faced.)

But what can President Obama do to repair the unholy financial mess the US economy and global financial system are in ?  There is no pilot’s manual, no experience and a slim  chance of avoiding a crash -  or at best a hard landing. A miracle of some kind may be needed to resolve the unholy mess menacing the US and world economies.

Betting on President Obama ? 

President Obama’s ‘Yes We Can” campaign mantra won over electors and attracted world wide support for his administration.  The Goldwatcher has nothing but praise for him, his achievements, his brilliant victory and generally what he stands for. 

The toxic shadow banking establishment and the causes of the economic mayhem brewed up in President George W. Bush’s days are core content in the book.  At the end of 2007 Goldbugs were urging investors to bet the ranch on gold. The Goldwatcher suggested  that would be unwise. A new President would be elected and, ‘in the past daunting challenges have been overcome in countries with strong economies, resolve and committed leadership.’

In a situation where we can no longer bank on the banks (excuse the pun) the goldbug case is at its most compelling.  In the UK,  following the collapse of sterling,  gold has been better than anything else and, at 613 Pounds,  is at or near an all time post 1980 high.   A year ago it was 453 Pounds - up almost 50% - while many markets are down more than 50%.  If the dollar falls again in 2009 gold prices above $1000 dollars are likely to follow. (+ Note added 23rd January - Gold a.m. London Price 644 Pounds) + Note added 26th January    Gold priced in euros reached an all-time high of 701.55 an ounce, and in sterling of 661.55 pounds).

Key issues as seen by the LBMA contributing analysts:

Ross Norman and Dr Martin Murenbeeld have been  prescient forecasters of gold prices.  The following notes to their LBMA forecasts highlight the issues:   Ross Norman: ‘Debt aside, at the heart of the financial crisis is the massive monetary expansion of the Federal Reserve’s Monetary Base (essentially liquid dollar supply) growing at a mammoth annual rate of 75%. Currently most of this cash is inert and vaulted - and therefore not inflationary. There remains the risk that in the second half of 2009 that this cash is mobilised as markets bottom out and we swing rapidly from a deflationary environment to an inflationary one. This could potentially see a re-run of the 1970’s with gold moving much higher. In short, gold is likely to be binary in 2009 – either travelling sideways give or take $100 as redemptions kill the prospective rallies to fund losses elsewhere – or doing that in H1 before moving much higher in H2 as an inflation hedge and on risk aversion. We favour the latter view, which will be good for gold.

Martin Murenbeeld: ‘At least two factors suggest that 2009 could be an explosive year for gold: policy reflation and geopolitical crisis. The latter cannot be predicted with any degree of accuracy, but difficult economic times often go hand in hand with geopolitical crises. Policy reflation had been predicted last year in this space to buttress the gold price against the downdraft of economic recession, and it is predicted to continue doing so in 2009. Since all major countries are/will be “reflating” their economies in hopes of stabilizing asset prices (the deflation thereof has crippled the international financial sector) it is our view that gold will likely set a new high again in 2009 – despite the broadly disinflationary/deflationary macro-environment. This means that gold demand will continue to be driven by investment demand, by way of diversification out of currencies and other “paper” assets. Jewellery demand, being driven by wealth and price factors, will be weak in 2009.The US dollar will also remain a key determinant of the US dollar price of gold, of course. Unfortunately the market continues to trade gold in sync with the US dollar’s euro cross-rate, meaning that (as in 2008) any rise of the dollar against the euro will hurt the dollar price of gold. This won’t always be so; Asia is becoming a more dominant gold player and hence Asian currencies will one day eclipse the euro in this regard. We remain broadly bearish on the dollar, but periodic bouts of strength against the euro will dampen the gold price.We’ve allowed for some increased central bank purchases in our forecast, because central bankers might discover in 2009 that the “plain vanilla” investments of T-bills and gold favoured by their predecessors are better investments than the “toxic paper” (and the equities of issuers thereof) which they seemed to have preferred as of late. (Banking is becoming more traditional again!)Inflation is unlikely to be an issue in 2009; indeed, the key negative in the outlook is rampant deflation – which could upset our forecast. Yet money velocity could rise in 2009, which will set the stage for more inflation in 2010 and beyond. We assume central bankers will be slow to counter any initial signs of inflation because they won’t want to risk aborting the economic recovery. (It is safe to say central bankers are, and will be for the time being, “lusting” for signs of inflation; their collective desire to generate higher asset prices is a boon to gold!)’

The  Goldwatcher  adds:   

   Zero bound interest rates are very  good for gold.