Gold Price at $2000 an ounce or higher by 2009?

The scenarios described in this article are exactly what we have predicted and been talking about for several years now.

Its amazing to me how powerful this opportunity is.

The fundamentals have been extremely strong. For over a decade, global mining supply has been roughly 2500 tonnes of gold. Recycled scrap added another roughly 700 tonnes. But global demand has consistently been 4000 tonnes a year or more.

With a simple equation like that, it doesnt take a neruosurgeon to recognize the price of gold should have been rising.

But it didnt. (well it did…it has been the best performing asset class for the last 8 years..but it should really be higher)

Why not?

Because Central Banks have been net sellers of gold. The amount of gold the Central banks have dishoarding has met the demand, and price has only drifted up.

This has been predicted to change for some time now, and it is known among bullion industry insiders that when the Central banks reverse course and start buying, the river will change its direction, as all of that supply will then become demand.

Gold is no where near its top, measured by many different factors including:

1. Adjusted for current inflation gold would have to pass $2000 an ounce to reach its last high in 1980
2. The worlds governments are continuing to pump trillions of $ into the financial system trying to prevent a massive deflationary spiral…if they succeed this will become wildly inflationary, which is bullish for gold
3. The Dow/Gold ratio, which has been historically very accurate, has not come anywhere near 1:1 again

And finally, my favorite indicator…common sentiment.

I was at a dinner party celebrating the Thanksgiving Holiday and one fellow I was sitting next to told me he was into Forex Trading, and didnt think Gold would go any higher.

Makes sense..I thought…if you believe in Forex. I am not slamming on trading Forex here, some are doing quite well in it…what I am saying is that it does not behoove a Forex Trader to admit that Gold is a currency….because at some point it blows their castle out of the water when gold performs the role for which it has been so perfectly suited for over 5000 years of history: Just Weights and Measures…bringing balance back to the monetary system.

Citigroup says gold could rise above $2,000 next year as world unravels

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

By Ambrose Evans-Pritchard
Last Updated: 7:29AM GMT 27 Nov 2008

Citigroup says gold could rise above $2,000 next year as world unravels

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.

“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. “People have started to question the value of government debt,” he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

Friday, November 28, 2008
Zijin to spend RMB1 billion on stakes in other miners

The stock price of Zijin Mining Group Co.(2899,HK), China’s largest gold producer, advanced four percent today alongside the news that it has set aside RMB1 billion ($146 million) for buying stakes in listed mining companies at home and overseas. Sino Gold Mining (1862,HK) rose 6.9 percent, while Shandong Gold (600647,SH) dropped 4.76 percent.

Zijin Chairman, Chen Jinghe, said earlier this month that Zijin may spend as much as 20 billion yuan on acquisitions, taking advantage of the global plunge in equities and asset values. The company will mainly target on gold mines with deposits of over 100 tons and to a lesser extent, copper mines with deposits of more than a million tons, according to vice chairman Lan Fusheng. He added that although there are opportunities to buy overseas assets this year, the opportunities will better next year.

Wellington suspects China buying Gold, demand up 179% for Third Quarter 2008

Interesting how more analysts are piling onto the China is buying bandwagon.

2009 Is shaping up to be an interesting year for gold.

WELLINGTON WEST CAPITAL MARKETS
‘Structural deficit’ in gold supply could send prices higher

Wellington West Capital Markets analysts suggest that investors “revisit investing in the junior and intermediate gold producers.”
Author: Dorothy Kosich
Posted:  Thursday , 27 Nov 2008

RENO, NV -

Based on the assumption that current strong physical gold demand highlights an existing supply deficit, Toronto’s Wellington West Capital Markets forecasts that, “if the increased structural deficit in gold supply continues, gold prices should adjust higher.”

Wellington metals analysts also advised, “Given the potential change in market fundamentals, we believe it is time investors revisit investing in the junior and intermediate gold producers.”

The analysts said their data indicates that a Central Bank Gold Agreement (CBGA) signatory “has become a gold buyer, putting further pressure on the existing supply deficit in the bullion market.” In their analysis, Wellington suggests that China is building a strategic gold reserve.

Meanwhile, possible Russian, Ecuadorian and Iranian gold liquidation in the face of internal credit woes “has not fazed the market,” the analysts advised.

Analysts Catherine Gignac, Paolo Lostritto, John Miniotis, and Ryan Walker also noted that investment demand for physical gold increased by 179% in the third quarter of this year.

“Severe stock shortages of bars and coins were reported among bullion dealers in many parts of the world. A continuation of strong gold investment demand has been seen so far in Q4/08, leading to the Perth Mint being forced to suspend orders until January,” they said.

Wellington also urged precious metals investors, who “are expected to initially focus on large, capitalized liquid producers” to consider coming down the food chain. “If the market starts to regain confidence and applies higher future gold prices, we would expect more speculative funds to invest in intermediate and junior gold producers.”

“Funds should continue to focus on well-managed senior producers but we believe it prudent to start considering the junior and intermediate gold space,” the analysts advised.

In their research for the third quarter of this year, Wellington’s analysis found that, despite a 19% increase in gold average gold price, gold mining production fell 2%, costs rose 37%, and margins declined by 13%, resulting in operating cash flows declining an average 29% for the group. “We note that debt levels are rising for most of the companies, in comparison to previous years when equity financing was more common.”

The analysts also discovered that the relationship with the price of gold relative to the price of oil began to break down in October, resulting in the price of gold only decreasing by 8.1% since the end of September while the price of WTI crude oil decreased 51%.

Interesting article from Jim Sinclair on hyperinflation.

I wont make any predictions here…Jim certainly seems concerned though.

Just Another Trillion…
Posted: Nov 24 2008     By: Jim Sinclair      Post Edited: November 24, 2008 at 1:52 pm

Filed under: General Editorial

Dear Friends,

I am repeating this small missive because with the trillion dollars worth of more funds promised to financial institutions this morning by the Fed (which means the Obama Administration) plus the upcoming huge Fiscal Stimulation to create jobs, hyperinflation cannot and will not be avoided.

The spin is that in order to transmute hyper liquidity into hyperinflation you must have an improvement in business conditions. This is totally FALSE. History declares that hyper inflation comes from a loss of confidence followed by a sequence of events as outlined at the close of the missive.

Prior Article:

1. Hyperinflation takes birth and is currency-visible during major economic upheavals. There is NO historical truth that business recovery is a necessary criterion to transmute massive increases in money supply into hyperinflation.

2. What has been the major cause of the transmutation of massive liquidity into hyperinflation has been one form or another of Quantitative Easing combined with a loss of confidence in the inflator.

Quantitative Easing does not sterilize its offspring - violent inflation. We will see this offspring not in the far future but in 2009, 2010, 2011 and maybe much further.

It is akin to the Japanese Sci-Fi out of the 70s titled “The Green Blob That Ate the Earth.” It just grew and grew until it consumed everything.

For the moron financial TV hosts claiming that major inflation is well down the road because inflation requires a business recovery to occur, tell them to review:

Angola 1991-1999
Argentina 1981 – 1992
Belarus 1993 – 2008
Bolivia 1984 – 1986
Bosnia – Herzegovina 1992 – 1993
Brazil 1986 -1994
Chile 1971 – 1981
China 1948 – 1955
Georgia 1993 -1995
Germany 1919 -1923
Greece 1943 – 1953 At the high point prices doubled every 28 hours. Greek inflation reached a rate of 8.5 billion percent per month.
Hungry 1944 – 1946
Israel 1971 – 1985 (price controls instituted)
Japan 1934 – 1951
Nicaragua 1987 – 1990
Peru 1987 – 1991
Poland 1990 – 1994
Romania 1998 – 2006
Turkey 1990 – 2001
Ukraine 1992 – 1995
USA 1773 – not worth a Continental
Yugoslavia 1989 – 1994
Zaire 1989 – present (now the Congo)
Zimbabwe – 2000 to present. November of 2008 – inflation rate of 516 quintillion percent

From http://en.wikipedia.org/wiki/Weimar Republic

Interesting article. This seems to reflect thoughts I have had, and written about, for quite some time.

We are living in interesting times. There stands a very good chance we will be alive to witness an event that occurs rarely:

The cycle from fiat to disciplined money.

This is nothing new, its been happening to thousands of years.

Many “economists” who have become so smart that they think they can now mathematically cheat the laws of nature still claim economic engineering as the pinnacle of intelligence.

I am of the opinion that history will simply repeat itself.

Humans have this amazing ability to become so egocentric that we think we have finally figured out how to defy universal laws, like supply and demand.

In the end, fiat money is a supply/demand equation. A fiat based economy MUST grow at roughly 3% a year to remain stable, or face massive debt deflationary occurrences (hmm…kind of like whats happening RIGHT NOW eh?)

The problem with this, is that as this “engineered economy” grows, the magical effect of compounding kicks in. It has been said that Albert Einstein called compounding “the most powerful force in the universe”.

To understand why compounding 3% growth is simply delusional, and more importantly a mathematical impossibility in pragmatic terms with earths economy, see this short video series:
Crash Course, Compounding

Now history shows us, that right around the 35 year mark, all fiat currencies tend to hit the “hockey stick” part of a compounding graph.

Interestingly, we are now in our 37th year of being on a global fiat monetary system since the dollar was severed from gold in 1971, and we are seeing massive problems.

Coincidence? I dont think so.

The Fed Is Out of Ammunition
A discredited dollar is a likely outcome of the current crisis.
By CHRISTOPHER WOOD

With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.
[Commentary] Chad Crowe

Those who want to understand the mechanism might ponder Irving Fisher’s comment in 1933: When it comes to booms gone bust, “over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.”

The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.

The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s — persistent deflationary malaise unresponsive to near zero-percent interest rates — shows that it is not so easy to inflate one’s way out of a debt bust.

In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.

True, this will change one day. But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.

It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks’ total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.

Monetarist Bernanke and others blame Japan’s postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR’s New Deal did not end the Great Depression.

There are no easy policy answers to the current credit convulsion and intensifying financial panic — not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.

Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.

The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.

Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.

Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of “pushing on a string” — i.e., the banks can make credit available but cannot force people to borrow.

What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke’s speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.

It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.

In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism — and with it the fiat paper-money system in general — as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.

The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the “barbarous relic” scorned by most modern central bankers, may well play a part.

Mr. Wood, equity strategist for CLSA Ltd. in Hong Kong, is the author of “The Bubble Economy: Japan’s Extraordinary Speculative Boom of the ’80s and the Dramatic Bust of the ’90s” (Solstice Publishing, 2005).