Opportunity Knox

If you don't trust gold, do you trust the logic of taking a pine tree worth $4000 to $5000, cutting it up, turning it into pulp, putting some ink on it and then calling it one billion dollars?" says gold sage  Kenneth Gerbino.

Last week, Barack Obama got the Nobel Peace Prize, less than a year into office - he hasn't actually achieved any peace, but it is the thought that counts - and the price of gold hit a record high. Whatever Obama has or hasn't achieved, these are not peaceful times.

The price of gold reflects that, as it also reflects the demise of the dollar, the spectre of inflation and markets' belief in respective governments' abilities to solve the problems of the day.  Gold is a barometer of sorts. Stare into its reflection and take a reading of modern times, good or bad.

At the start of this decade, gold was trading at $284 an ounce. By January, 2005, that price had risen to about $415. Last week, gold broke through $1060. (Interestingly for those of you non-Brits who enjoy schadenfreude, British Prime Minister Gordon Brown sold 400 tons of British gold back in 1999 when the price was about $250. The move is estimated to have cost Britain about $3bn. Brown is, as I type, selling off many other national assets, such as the Channel Tunnel and the national stake in URENCO, in the hope of easing soaring national debt. (Haggle better this time, please, Gordon).

Wars in Iraq and Afghanistan, and now tensions with Iran, have all played a major part in gold's gains. But then so have concerns over US's national debt, which stands at about $13 trillion, and shows no signs of shrinking. Recent international debate about the dollar's suitability as the global reserve currency also hasn't helped cool buying interest in gold.

 And then there is all the money that has been printed in America and much of Europe for the bailouts. US Fed chief Ben Bernanke says he knows how to make sure it won't cause massive inflation, but judging from the current gold price, it appears the markets are not convinced that he has the answers.

One of the startling anomalies of the gold price is that supply and demand have little effect upon it. This is because stocks above ground are said to be about 158,000 tons. That is 60 times more than is mined each year, worldwide.

In fact, many people feel that placing value in gold - which is far from the most useful of metals - today is an absurd anachronism. Hitler did.

He said: "Gold is not necessary. I have no interest in gold. We'll build a solid state, without an ounce of gold behind it. Anyone who sells above the stated price, let him be marched off to the concentration camp. That's the bastion of money." Gold, obviously, is still going strong. The Third Reich, meant to last one thousand years, is not.

In 1980, (when oil prices were high, Iran was on the brink of war with the US, and there was a drawn out and unsuccessful war going on in Afghanistan,  sound familiar?) gold hit $845 an ounce (the equivalent of $2500 an ounce today). The difference is back then inflation was running at about 13 percent. Today it is about a tenth of that, and if Bernanke is to be believed, will remain so.

So, we are still a long way off $2,500 an ounce... right?

In June, 2007, when the price was sub-$650, chairman of Canada-based US Gold Corp Robert McEwan said: "I expect gold to test $850 by the end of 2008, and by the end of 2010, north of $2000, possibly $5000."

If that happens, all the of the little old ladies who have been hoarding gold for years will outperform Wall Street's finest hedgefund managers. But then, these days, gold is the ultimate hedge.

Damian Reilly is the editor of Arabian Business English.

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READERS' COMMENTS

Nonsense
Posted by scc on Saturday 17 October 2009 at 08:14 UAE time


Supply and demand have little effect on it (gold) ?

As a start I suggest you read Bill Murphy from GATA who notes "Gold demand has been outpacing gold mine and scrap supply by more than 1,000 tonnes per year for the past decade. The difference has been met by official bank selling and clandestine central bank lending … meaning bullion banks like JP Morgan Chase have been borrowing gold from central banks at extremely low interest rates and selling it into the physical market, using the proceeds for their internal operations, etc. As a result, the central banks have less than half of the 30,000 tonnes of gold they say they have"

Add in the kind of fractional reserve system operated by the banks that leads to a chronic liquidity crisis in physical gold and you will see it is all about supply and demand

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