Is Record High Gold Cheap?
Commodities / Gold & Silver 2009 Nov 18, 2009 - 07:24 AM GMTBy: Adrian_Ash
THE PRICE OF GOLD leapt in the professional market to yet another all-time Dollar high early in London on Wednesday, coming within 50¢ of $1150 an ounce as global stocks held flat on the MSCI World Index.
Crude oil ticked back up towards $80 per barrel, while long-dated government bonds crept lower, pushing the yield offered to new buyers marginally higher.
The price of gold in both Euros and Sterling hit its best level since Feb. 25th, recording a London AM Gold Fix within 2.0% and 1.3% respectively of the all-time highs set one week earlier.
"Gold feels frothy today," writes Société Générale analyst Dylan Grice in a detailed report, "but [last month's] Indian purchase of IMF Gold eerily parallels the French purchases of the late 1960s. And ill policy winds are blowing in gold's favor."
Claiming that "There is a case for gold being 'cheap' at current prices" thanks to what he calls the "market displacement" of huge monetary expansion worldwide, Grice believes the gold price has yet to undergo four further stages of a "Minskian mania" – boom, euphoria, crisis and finally revulsion.
Encouraged by India's decision, "We've had the displacement and are only now entering into the boom phase," says SocGen's behavioral analyst, who replaced James Montier at the French bank's London strategy team in Sept.
"The mania phase lies well ahead. But that is a long way off."
After Tuesday's UK consumer-price data surprised the City by rising on the back of strong oil prices, Wednesday saw the Pound Sterling whip on the currency markets after the Bank of England said it was split over this month's decision to increase its quantitative easing by £25 billion ($42bn).
Of the nine policy-makers voting at the November meeting, one wanted a £40bn increase; another wanted none. The Monetary Policy Committee also discussed cutting the rate of interest paid on commercial bank reserves – echoing the sub-zero rates now paid by Sweden's Riksbank.
Today's US Consumer Price Index is expected to show a rise of 0.2% last month from Sept., with energy and food prices acting to depress the headline rate of inflation.
Back in the professional gold market, "Central banks to the rescue as dehedging draws to a close?" asks this month's Fortis Financial Gold & Hedging Report from the VM Group in London.
"On average in the eight years since 2002, gold dehedging" – the reduction by gold mining companies of those forward sales they made when prices fell during the 1990s – "has meant an additional 374 tonnes of gold demand [per year]...more than South African gold production or US jewelry demand over the same period."
Now cut to barely 300 tonnes of outstanding forwards – and down by 90% from the peak of 2001 – the global hedge book of gold mining companies is as good as closed, says VM. That suggests the gold market has to find a new source of demand (or lose a source of supply) to remain stable.
But "Central banks are a key player in gold hedging," the consultancy goes on, "as their [lending] gold makes it possible. Hedging equals gold flowing out of central banks; dehedging equals gold flowing back in...similar to when central banks sell or purchase gold.
"Importantly, although dehedging is now declining, net central bank gold sales have fallen even faster. In fact 2009 is likely to see net central-bank purchases, meaning central banks continue to be net takers of gold off the market."
Noting India's official purchase of 200 tonnes of IMF gold in Oct. – plus news that the central banks of Sri Lanka and now Mauritius are adding to their gold reserves – "It is the sentiment that matters" and not the size, says VM analyst Gary Mead in the latest BNP Paribas Fortis Metals Monthly.
"The bottom line is that the gold price rally has got everything going for it right now: Few official sector sellers, some official sector buyers, a low-interest rate environment, and a weak US currency.
"It's a perfect storm."
Over in the Indian gold market – formerly the world's No.1 private buyer, but overtaken by Chinese households at the start of 2009 – gold prices reached new all-time highs vs. the Rupee on Wednesday morning, with December futures hitting R17,163 per 10 grams.
"On Monday and Tuesday, we did a few deals, though volumes were thin, but today it is quiet," said one Bullion dealer in Mumbai to Reuters.
"My sheet contains some orders at $1090-1100 per ounce," said another.
Peaking with last month's Diwali festival, India's gold-buying season typically continues towards year-end as parents buy gold as dowries and gifts for newly-wed couples.
Perhaps 0.15 tonnes of gold jewelry was sold back to scrap dealers in Mumbai's Zaveri Bazaar last week, however, but now "[People] are simply not ready to sell," says one buyer.
"They feel that these prices are too low. They now want 17,500 Rupees."
By Adrian Ash
BullionVault.com
Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2009
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