Commodity Markets Update - Gold Remains Undervalued Despite Current Rally

By: Gold_Investments

Gold
Spot gold was trading at $705.20/705.70 an ounce as of 1215 GMT after yesterday's 1.5% price increase.

It has traded sideways in Asia and Europe but remains close to new 16 month highs and is not far away from 26 year highs at $730. We believe that given the speed of the recent price surge there may be some back filling and consolidation but that the 26 year high will be challenged and surpassed in the coming days and weeks. The wise old Wall Street saying to always have 10% of one's wealth in gold and hope it doesn't work becomes more appropriate by the day.

Yesterday's surge seems was largely due to record oil prices and the record low dollar price but Ben Bernanke's serious warnings regarding the current account and trade deficits. Bernake said that the large U.S. trade deficits were unsustainable. Bernanke said that if the current account deficits persist at the current level, international investors may stop buying U.S. dollar denominated assets. "The large U.S. current account deficit cannot persist indefinitely because the ability of the United States to make debt service payments and the willingness of foreigners to hold U.S. assets in their portfolios are both limited," he said in a speech at the Brandenburgische Akademie der Wissenschaften.

Wall Street and much of the financial media have continually played down the risks posed to the dollar, U.S. interest rates and the wider U.S. economy posed by the deficits but denial of fundamental economic realities can only last for so long, as seen in the unfolding housing, mortgage and credit crisis.

The dreadful payroll numbers have led both Paulson and Bernanke to acknowledge that the credit crisis is in its early stages. Paulson said overnight that this uncertainty would last longer than previous shocks such as the Russian default LTCM crisis, the Latin American debt crisis or the Asian crisis.

The USD has fallen overnight to a new record low against the EUR of 1.3883 and seems likely to challenge 1.40. A 25 basis point cut in interest rates is guaranteed at next Tuesday's meeting but it could yet be as much as 50 basis points. This at a time when the ECB is sounding more hawkish. Trichet said yesterday the risks to price stability remain on the upside and other ECB members were even more hawkish. This is not surprising with oil and wheat back at record highs and other commodities surging close to or surpassing record highs. Gold has surged in price not just in terms of the USD but in moving up in price of all paper currencies and has been very strong in EUR, GBP, CHF and JPY terms as well. Gold easily surpassed the strong resistance seen at the pschological €500 EUR mark. Gold in EUR terms is now trading at €514.02 and in GBP at £350.02, both near 16 month highs.

Historical Gold Prices and Gold's Record High in 1980

The above chart shows how cheap or undervalued gold remains despite gold's rally in recent years from multi year lows. Today gold has only reached levels it traded at in 1980. The Dow Jones was trading at around 1,000 in 1980 and has risen 13 fold or 1300% since then to over 13,000. If you adjust for the significant inflation of the last 27 years, gold will have to trade well over $2,000 per ounce in order to be at real record highs. We are confident this will happen in the coming years of this new secular bull market.

Silver
Spot silver is trading at $12.63/12.67 an ounce (1215 GMT).

PGMs
Platinum was trading at $1300/1306 (1215 GMT).
Spot palladium was trading at $332/338 an ounce (1215 GMT).

Oil
Crude oil prices continued above $78 a barrel this morning at all time record highs.

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