Gold Bull Argues Gold Has Long Way To Go

In a Seeking Alpha article, John Lounsbury compares gold's present run-up to other assets whose bull markets ended in bubbles; he concludes that gold is nowhere near the performance of those other assets.

It is obvious that the current gold rally has a long way to go to equal the gold bubble of the 1970s. In real terms, the price of gold must more than double to equal the January, 1980 peak. In nominal future dollars the equivalent price could be much higher than the $2,700 shown on the graph with the effects of inflation added.

David Rosenberg, Chief Economist at Gluskin Sheff, wrote this week that gold is short-term overbought. He said the price could pull back to $1,130 without violating the trend lines of the bull market. Gold closed Friday at $1,229 after trading around $1,250 earlier.

Rosenberg predicts that gold could reach $3,000 an ounce in this bull market. He offers a number of different scenarios for gold to rise to anywhere from $2,300 all the way up to $5,700. Rosenberg says that many factors other than inflation are driving the price of gold higher and gold can continue to rally even if there is extended deflation.

Of course, a surge in inflation could drive the price rises into a parabolic climb, which is the traditional finish of a bubble. This is what we saw in 1980 as the price of gold collapsed, even as inflation made its final push. But that possibility is in the future. The price chart for gold is far from a parabolic blow-off top at present....

He ends by saying that he'd be really bullish should gold fall below $1,000.

Ron Paul Blames Fed For Surge In Gold Price

Consistently, Ron Paul says that the Federal Reserve's addition of liquidity is the cause of the gold rally:

..."This is the unwinding of a system," he said. "Until we replace it with something else you're going to continue to see this."

But Paul predicted that the system will be changed as more and more people begin to see its fundamental flaws.

"The gold surge recently has people discovering they're really printing money," Paul said. "They're just kidding themselves and kidding the American people that the Fed can keep doing what they're doing, because the economic laws will bring this to an end and probably in the not-too-distant future."

He may be right...

Gold-Backed Loans Spreading In India

As reported by the Economic Times, gold loans are becoming more popular in the north of the country.

“There is clearly an awareness among people that gold loan is a smart loan and that it can unleash value which can be used for productive activities including improving one’s lifestyle. It is being looked upon as a cheaper, faster and a smarter option. This is in sharp contrast to the earlier perception that gold loans are taken during crisis by those economically deprived,” said Mr George Alexander Muthoot, managing director, Muthoot group.

He claims that the interest rates being offered by NBFCs are comparable to those being offered by nationalised banks....

Typically, gold loans are taken for three-to-six months and the average ticket size is in the Rs 20,000- 25,000 range. Industry sources claim that only 2 % default in their payments. “Nearly 80 to 90% of their customers are repeat customers as they have no reasons to worry about safety of their pledged gold kept in our safe deposit vaults,” a source said.

Indiabulls Financial Services is looking to introduce a scheme where a physical market player of gold and silver would be provided with funds for a short term. Indian Commodity Exchange CEO Sanjay Chandel said, “It would be a temporary funding arrangement and might be akin to what other institutions are offering.”

It's interesting to see the trend grow and spread, as similar loans might make inroads into North America some day.

A Good Point

In a letter objecting to Financial Times columnist "Lex"'s panning of gold, a Mr. Michael Coulson writes:

Sir, Lex continues to bang on negatively about the rise in the gold price as it has done intermittently since gold began its current run eight years ago (“Fool’s gold”, May 14).

The problem is that he compares gold with equities. I have been covering gold for more than 30 years and though the metal is an asset class, many of us “crazy” gold followers also see it as money....


I would have thought that the signal for the end of gold’s bull run would be a bullish article from Lex, not another bearish rant!

As for the last paragraph, I couldn't have said it better myself.

Peter Morici Explains Gold's Rise

I'm not the only one who's written about gold at Enter Stage Right. Prof. Peter Morici has penned an explanation of why gold has risen, with themes that'll ring familiar to any goldbug:

Gold prices are soaring because of growing inflation fears--both the European Central Bank and the Federal Reserve seem to be on the path to permanently easy money with the Greek bailout and huge U.S. budget deficits.

Neither the reforms attached to the Greek bailout nor banking legislation in Congress get at the structural problems that caused failures in Athens and on Wall Street.

Soft reform is no reform--investors are fearful too much money will undermine the value of euro bonds and U.S. Treasuries--even if those bonds don't outright default....

[L]arge deficits and more bailouts are likely over the next decade, and that will ultimately drive up interest rates on long U.S. bonds, and drive down, five years from now, the prices of 20- and 30-year Treasuries purchased today.

Overall, neither euro denominated assets nor U.S. Treasuries are a good investment in such a potentially explosive inflationary environment.

Investors, fearing the worst, are hedging by putting more of their portfolios into gold, and the price of gold rises.

Cautionary Article About Gold Investing At Suite101.Com

Cautiuonary, not skeptical. Recent gold prices have called up a lot of skittishness, including at Suite101.com:

Gold and silver seem to be all the rage lately. Many investors, however, are skeptical about it because they fear that they may be getting in at the height of the bubble....

The reason gold and silver are going strong is not only because people still want it for diversity and security in their portfolios, but because it is measured against a nation's currency.

As a bank like the US Federal Reserve uses its printing press for dollars the same as the Wall Street Journal does for newspapers, the supply of currency creates a weakening dollar that is accurately measured in the prices of commodities like gold and silver.

So long as there is no regulation or audit of the Central Bank, gold and silver should continue to do very well against the US dollar, which looks like a strong possibility since the US Senate recently voted against seeking transparency via audit of the Fed.

The article also points out that the rich [with the notable exceptions of Paulson, Einhorn, Soros, and at least one other] seem to be buying distressed real estate; Warren Buffet is buying stricken financial companies.

Akshaya Tritiya Festival Demand Disappointing

Now that Akshaya Tritiya is over, the festival fell short of expectations in the gold buying area. According to a report in the Business Standard:

High prices of the yellow metal are stated to have deterred many buyers from purchasing gold on this occasion.

Akshaya Tritiya is considered as an auspicious day on the Hindu calendar for purchasing gold and usually, people make a beeline to the jewellery shops to buy ornaments. It is believed that investing on gold on this auspicious day heralds a lifetime of prosperity.

However, jewellers had to cope up with lukewarm response from the buyers due to the prohibitive price of gold. The current price of 22-carat gold is Rs 17,500 per 10 grams, while the price of the 24-carat has zoomed to Rs 18,750 in Berhampur town. “The sales have been steady, but not stunning,” said a jewellery shop owner.

“Going by the response from the buyers, we don't feel that it is the auspicious day of Akshaya Tritiya. It is just another day for us,” said P Satya Narayan Senapati, president, Berhampur Jewellers Association (BJA).

Senapati also added that the only time gold buying gets in an uptrend is during the wedding season.