Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Go for the Gold: Metal to Rise as Financial Tactics Fail

Commodities / Gold and Silver 2011 Nov 19, 2011 - 12:23 PM GMT

By: Barry_Elias


Best Financial Markets Analysis ArticleTwelve years ago, Goldman Sachs converted from a private partnership to a publicly traded company.

This enabled them to take more extreme risk at the expense of others (e.g., clients, taxpayers). Co-CEO Jon Corzine was instrumental in consummating this conversion, receiving roughly $400 million from the initial public offering (IPO).

Following his departure in 1999, he served as New Jersey Senator (2000-2005) and New Jersey Governor (2006-2010). Beginning in 2002, Goldman Sachs assisted Greece with cross-currency swap derivatives that camouflaged their true debt and deficit beyond that required by the Maastricht Treaty of 1992, the basis for the European Union. By using fictitious exchange rates, Goldman was able to secure an additional $1 billion credit line for Greece.

Less than a decade later, these real liabilities have become more visible and have metastasized globally.

In 2010, Jon Corzine became CEO of MF Global, a derivatives trading firm. Recently, he resigned as the firm declared bankruptcy with $6 billion of European sovereign debt exposure. In addition $600 million of client funds are not available for withdrawal. This failure points to the instability of fiat currencies, where undercapitalized derivatives are easily created and propagated with severe global repercussions.

This financial asset explosion and wealth destruction has further exacerbated geoeconomic and geopolitical uncertainties. The European sovereign debt dilemma has escalated into a global contagion. The ills that affected Greece now impact Australia and the United States. The values of sovereign fiat currencies, which can be readily manipulated, have declined, while the value of a more stable medium, such as gold reserves, has risen.

The destabilized global environment has enabled gold to become a favorable bastion of wealth preservation and diversification, a reliable collateral pledge, and a monetary exchange asset. It now represents economic sustainability, auspiciousness, and saving.

Moreover, its value is less dependent on other asset classes (more positive correlation). In the past, gold would typically rise as equity and bond prices fell during inflationary time periods (negative correlation).

Today, it appreciates based on dynamics less dependent on these asset classes.

The demand and supply of gold over the past four decades have changed significantly. Demand has shifted from west (North America and Europe) to East (India, China) as economic liberalization has increased.

Demand for gold has been exercised more readily due to a more stable environment: greater market access, more flexible products, enhanced transparency, forward hedging with a well-capitalized real asset, and the Central Bank Gold Agreement (CBGA) that limit annual sales of gold by global central banks. These stability measures have provided the gold market with increased liquidity and lower volatility.

According to the World Gold Council, total gold demand by the west decreased from 47 percent in 1970 to 27 percent in 2010. During this period, gold demand by the east increased from 35 percent to 58 percent. These figures exclude central bank purchases and OTC (Over-the-Counter) transactions.

A major component of demand is jewelry. From 1980 through 2010, demand for jewelry by the west, as a percentage of the total, fell from 56 percent to 14 percent. That for the east rose from 22 percent to 66 percent.

Central banks of the emerging eastern countries possess much lower gold reserves as a percentage of total foreign exchange reserves than the western countries: China: 1.7 percent; India: 8.1 percent; Russia: 6.7 percent; Brazil: 0.5 percent. By contrast, this figure for the United States is 74.7 percent. In addition, the eastern countries are actively attempting to increase their gold reserve percentage.

The dynamics surrounding the supply of gold have also resulted in a more stable (less volatile) environment. Supply is less dependent on fluctuations due to business cycles, external events, and idiosyncratic behavior.

The global supply has been more evenly dispersed where no single sovereignty possesses more than 14 percent of the total global supply.

China is the largest producer with 13 percent of the total. This is followed by: Australia: 10 percent; US: 9 percent; Russia: 8 percent; and South Africa: 8 percent.

Moreover, recycled gold, as a percentage of the total, has increased from 22 percent in 1970 to 38 percent in 2010. Bringing this supply to market is more cost effective and timely. This increases liquidity and reduces price volatility.

In 1944, the 44 Allied nations from WWII signed the Bretton Woods Agreement in New Hampshire, setting the price of gold at $35 per ounce. President Nixon removed this standard in 1971. Since then, the real rate of return (after inflation) for gold was positive, despite the widely held view that it functioned primarily as a hedge against inflation. The price rose every year during the first decade of this millennium, the first such run since the 1970s.

The Metal Economy Group (MEG) indicates that gold finds fell 90 percent (from 10 to 1) since 2003. During this time, the price doubled from $700 to $1,400 per ounce. This dynamic is atypical. When price is rising, exploration is usually strong, leading to greater finds. This data suggest supply may be limited it the near future, adding more upward pressure to price.

As financial derivatives inevitably decline and explode, gold will continue to rise.

By Barry Elias,

Barry Elias provides economic analysis to Dick Morris, a former political adviser to President Clinton.

He was cited and acknowledged in two recent best-sellers co-authored by Mr. Morris: “Catastrophe” and “2010: Take Back America - a Battle Plan.” Mr. Elias graduated Phi Beta Kappa from Binghamton University with a degree in economics.

He has consulted with various high-profile financial institutions in New York City.

© 2011 Copyright Barry Elias - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules