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Another Thing to Watch This YearEnd

Published on December 30, 2009

Another Thing to Watch This YearEnd

December 30, 2009

Gold Prices Last 2 Trading days of year 2009! I have been writing about gold ever since 2007, then we watched Gold closed higher vs 2006. Again, we watched it closing for a new high in 2008; and closed at $880/ounce. As of this writing Gold is trading at $1,095/ounce and unless something dramatic happen, Gold is going to close 2009 at a fresh yearly high, rising year after year for almost a decade, talk about the uptrend.

Have you heard of “Brown Bottom“? According to wikipedia

The period takes its name from the decision of Gordon Brown, then the UK’s Chancellor of the Exchequer and later to become Prime Minister, to sell approximately half of the UK’s gold reserves in a series of auctions. At the time, the UK’s gold reserves were worth about US$6.5 billion, accounting for about half of the UK’s US$13 billion foreign currency net reserves. The UK government’s intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce. The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting, gold reached a low point of US$252.80 on 20 July. The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.

You may read more about the sale in this pdf document. One may call it, The Hindsight Bias; But this does express one thing.

Even the “Best of the Best” can make mistakes when it comes to financial markets, trading and timing. Mr Brown would have never thought that he is going to see the prices soar roughly 5 times in the coming decade and not to mention the eroding value of the fiat currencies where these reserves were invested (I don’t know the details where was that invested, but this is rather a generic comment as almost all the currencies have declined with respect to Gold).

However, the times have changed. According to Wall Street Journal

Three-quarters of the Asia’s $5 trillion in foreign-exchange holdings are parked in U.S. dollars. A desire to diversify away from the greenback, though, has become evident. The dollar’s share in reserve accumulation dropped to less than 30% in the third quarter, Barclays Capital estimates….

…Recently, gold has turned up as a second alternative. The Reserve Bank of India stirred markets when it revealed it purchased 200 tons of gold from the International Monetary Fund in October, increasing gold’s share of central bank reserves to 6.4% from 3.6%…

…A shift in portfolios, like India’s, would only add to this, and there is scope for this to happen. Gold accounts for around 2% of reserves in emerging markets, Merrill Lynch calculates. That compares with a 10% average globally, and more than half of all holdings in the case of the U.S. Federal Reserve, and France’s and Germany’s central banks….

There is one more point that I have been thinking recently i.e. What are other factors that could make USD stronger? and one of the hypothesis was “what if the US change official change the price of its gold reserves”? I was excited to see similar comment By Richard Russell of Dow Theory today.

And I have to wonder — is the following what Bernanke is thinking? After all, in 1932 Roosevelt raised the price of gold from 20.67 to 35 dollars an ounce. He did this in the fight against the deadly deflation that was so prevalent during the Great Depression. Could Bernanke be thinking, “If I unilaterally raise the price of the US’s vast hoard of gold to $5000 or more an ounce, it would be inflationary, and we’d get out of this deflationary mess. And, after all, who’d object if I raised the price of gold? And if I backed the dollar with gold, the dollar would continue to be the world’s reserve currency. If the dollar was backed by the world’s largest hoard of gold, what fool would be able to talk down the safety of the dollar?”

So I did a quick check. According to wikipedia, US has 8,133 tons of gold and prices that Gold at US$42.2 (roughly)! Yes, you read it right.  Now you change that to $1,000/ounces (10% lower than current market price), that is a whopping $260billions! Not that all the problems will go away but it does offer more credibility to the existence of dollar.

The possibility of $5,000 an ounce? I can’t comment if Gold will reach that level soon (we have seen Oil go from $2.7 in 1950 to $147 last year), but at some point, probably history will repeat.  Pls look at the historical chart attached (from 1900 to 2006)-

dowgold1900

At least half of the time gold traded in Dow/Gold ratio <5; currently this ratio is 9.6; there are 3 possibilities (this excludes total mad-rush for either gold or Dow).

  1. If we Dow is on its way to scale 14,000, then Gold might trend upto 2,000 to $2,800
  2. Dow being range bound around 10,000, meaning gold in the range of 2,000
  3. Assuming Dow retesting Mar lows, then Gold either current prices or moving toward 1,300

I don’t know if any of those scenarios will come into force or a totally new scenario will be generated (most likely).

My personal philosophy, I am a long term believer in gold and I trade in and out via Paper gold based on good opportunities like this one, for a +24% gains for a few days holding.

Let’s watch Gold action during the new year eve, and possibly long term Gold bulls will shower a few more firecrackers in the name of Gold.

Profitable Trading, OP

2 Comments

  • Avatar csunesq says:

    Bravo. I have been thinking the same thing since the beginning of the year with all the talk about the falling US dollar. No one ever mentioned that the US government is the #1 gold holder of the world.

  • Avatar OptionPundit says:

    Gold closed @ $1096.5; 24.4% higher than 2008. A shining asset class and the gold rush has not yet started.

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