By Alexandra Goss, The Times, London

Gold has glittered particularly brightly this year, soaring to a record high of $1,226 an ounce at the beginning of this month. Despite dropping back since then and finishing the week at $1,110, the gold price has been one of the star performers of the decade, having risen more than 300% since 1999.

Private investors in particular have piled in as a hedge against the financial crisis, the weak dollar and fears that central banks printing money will lead to a spike in inflation.

Demand for 1-ounce American Eagles, the world’s most popular gold coin, has been so strong the US Mint ran out last month. Meanwhile, Harrods, the department store, recently started selling gold bars and said demand had been well ahead of expectations.

However, half the fund managers surveyed for the Bank of America Merrill Lynch Global Research report, published last Wednesday, said the precious metal was now overvalued and would fall next year.

The figurehead for the “bullion bubble” argument is Nouriel Roubini from New York University’s Stern School of Business, who warned last week that prices face “significant risks of a downward correction.”

“The recent rise in gold prices is only partially justified by fundamentals and is, in part, a bubble that could easily burst,” he said. He added that there was “little reason” for bullion prices to rise rapidly toward $2,000 an ounce unless the world enters a period of high inflation or slips into a depression — neither of which he thinks is likely.

Here, we examine the arguments:

… Gold Bulls

Many analysts are positive that the gold price will continue to rise, citing strong market fundamentals.

Catherine Raw, fund manager in Black Rock’s natural resources team, said: “The gold mining industry is struggling with production — it has fallen 8.7% since its peak in 2001.”

Bill O’Neill at Merrill Lynch Wealth Management thinks bullion will hit $1,500 in the next 18 months, driven up by a combination of continued credit risk, US dollar weakness, and commodity market strength. He said: “Although the gold price may be volatile in the short term, the long-term trend is upward, and investors should take advantage of any dips to increase their holding.”

Others also point out that gold is not obviously overpriced compared with its own previous highs in real, inflation-adjusted terms (gold hit a high of $2,200 an ounce in 1980). Exchange-traded funds that track the gold price have been popular with private investors, with $80 billion now invested in the schemes.

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By Ron Hera, GoldSeek

The fact that investors around the world are turning to gold is remarkable.  Unlike a bond, stored gold offers no yield and, unlike a stock, gold provides no leverage to the performance of an enterprise.  Buying gold is not an investment per se, compared, for example, to buying a gold mining stock, where a company’s financial performance is linked to its resources and production, at the same time providing leverage to the gold price.  In fact, industrial applications for gold consume far less than the annual supply, thus investing in gold is fundamentally different from other commodities.  According to the World Gold Council (WGC), investment demand for gold, e.g., from Exchange Traded Funds (ETFs), was up 46% in the third quarter of 2009.

Gold is commonly viewed as an inflation hedge and, because it is the only financial asset with no counterparty risk, as a safe haven, but the spectacular rise in the gold price indicates more than caution on the part of investors.  Gold hit a low of $713.50 per troy ounce on November 13, 2008 (London Bullion Market Association PM Fixing) and closed at a 52-week high of $1,115.25 on November 11, 2009, up an astounding 56.31% from its 52-week low.

Central bank gold is the proverbial elephant in the room that no one wants to talk about.  With official gold holdings of 29,633.9 tonnes of gold worldwide, compared to world gold production of roughly 2,400 tonnes per year, central bank gold sales, leases and purchases, have a huge influence over the gold price.  Central banks are changing their reserve asset compositions and a number of central banks, led by India and China (which has been the world’s largest gold producer since 2008), are buying gold.  Evidently, the full faith and credit of the United States of America isn’t what it used to be.  Faced with aweakening world reserve currency, the questionable status of the world’s largest economy, and unsustainable US government spending, central banks are rendering a quiet vote of no confidence on the US dollar.

The US economy, the US government, US banks, and US stock markets exhibit various problems including unemployment, looming commercial real estate defaults, the US budget deficit, a massive public debt and huge unfunded liabilities, residual toxic assets on bank balance sheets, mounting mortgage defaults and credit card delinquencies, an emerging stock market bubble, etc. Unless the economic problems of the US can be addressed, the US dollar will quite probably loose its status as world reserve currency.  Whether a transition to a new world reserve currency would take place in a cooperative manner, e.g., a managed retreat of the US dollar, or in a more disruptive way is unclear.

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The price of gold has been on a five-day price slide, but ironically the timing of the decline was slightly off in helping collectors pay less for US Mint gold collector coins.

The US Mint uses a London Fix weekly gold average to determine whether to keep gold coin prices the same, or adjust them up or down. The average came in 28.8 cents higher than the threshold needed to cause a reduction of UHR Gold Double Eagles by $50, First Spouse Gold Coins by $25, and 2009 Gold Buffalo Proof Coins by $50.

The Buffalos go on sale Thursday at noon ET. Since the London Fix five day average is $1,050.278, the coins will launch with a price tag of $1,360.00. Had the average been at or below $1,049.99, the coin would have been released at $1,310.00.

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Read the rest of 28.8 Cents Prevents US Mint Gold Coin Price Reductions (139 words)

Clive Corcoran submits:

The following are some musings on the U.K. economy, prompted by an adage that seems quite appropriate for our times of thinking the unthinkable.

1. The U.K. public finances are in dire straits with a likely deficit this year well in excess of £200 billion and with red ink as far as the eye can see. It seems highly likely that within the next three or four years outstanding public debt will exceed 100% of GDP.
2. The U.K. is still in recession with a -0.4% GDP reading for Q3, 2009
3. The fact that the U.K. faces a national election within the next nine months means that there is no immediate political will to address the problem or even to spell it out to the electorate.
4. The markets are expected to fund the deficit through the continued purchase of gilts despite the fact that the Bank of England has indicated that it is winding down its Quantitative Easing program.
5. Sterling recently has exhibited as its default mode a tendency for sudden plunges against other major currencies.
6. A recent posting here reveals that the price of gold as expressed in terms of a variety of currencies showed that holders of the U.K. currency had lost the most purchasing power vis a vis the precious metal over the last five years. The real point of this is to highlight that the U.K. economy has historically been more inflation prone than many others.
7. Could the U.K. government – whatever flavor it takes after June 2010 – be faced with the awkward choice of having to approach the IMF for an emergency loan to bail out the gilts market and prevent a collapse in sterling, or to adopt the euro to seek some safety under the umbrella of a more globally acceptable currency?
8. Will Tony Blair, as the possible new President of the European Union, find that he has been provided with the unique destiny of rescuing the U.K. economy by facilitating the early adoption of the euro in place of sterling?

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Many short-term investors prefer the liquidity of gold American Eagle bullion, since our government backs these modern coins for weight, and precious metal content. These 22-karat coins contain a full Troy ounce of pure gold, and their obverse design is among the most exquisite in existence. The obverse design on gold American Eagle bullion coins are near replicas of the legendary, rare, $20 Saint Gaudens Double Eagle gold coin, minted from 1907 to 1933. The original Saint Gaudens rare coins are vastly more expensive than the modern Eagles, which carry a face value of $50, so bullion investors can enjoy the artistry of a valuable, rare coin at prices that are only slightly higher than the spot price of gold.

The classic design that modern, gold American Eagle bullion coins share with their rare coin counterparts is the image of Lady Liberty walking into view, wearing a long, flowing gown. She is carrying a torch in her right hand, and an olive branch in her left, with the capital building in the background. The reverse designs on both coins portray American Eagles, but are completely different designs from two different artists.

Many household investors are making long-term investments in rare coins like the aforementioned $20 Saint Gaudens, or the $20 Lady Liberty, which is the original Double Eagle gold coin. These investors are diversifying their rare, Double Eagle holdings with gold American Eagle bullion, to capitalize on short-term gains while their rare coins appreciate over time. Investors can receive institutional discounts on their bullion, and rare coins by contacting one of our friendly specialists, who offer these institutional discounts to household investors like you.

Danny Burns

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The Daily Reckoning

If you’ve invested in gold, you’re about to gain a powerful ally: pension funds.

“I think the largest institutions like our own are realizing that we barely own any [gold]” Shayne McGuire, head of the Teacher Retirement System of Texas said in an interview in Hong Kong very early this morning. “The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.”

McGuire, who oversees $95 billion, just opened an internally managed gold fund for his 1.3 million public education employees, and suggests other pension funds follow suit. Owning gold is “financial insurance,” he said, sounding a lot like David Einhorn at the Value Investing Congress earlier this week. “Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing… I don’t think the question really is what is gold worth but what are currencies not worth.”

According to the FT, there are 2,600 public pension plans in the U.S., worth over $2 trillion.

“If we believe we’re in a secular bear market or entering a world of hyper-inflation and debased fiat currencies,” Eric Sprott, fund chief at Sprott Hedge Fund LP, added. “There’s no better place to be than gold and precious metals. I find it quite instructive that the price of gold has gone up every year for the past nine years, since the bear market started. That’s not a coincidence, and we think the full cycle could easily reach 15-20 years.

“There is a survivalist aspect to having such a big stake in tangible assets. As long as governments show such low regard for policies that support the real value of paper financial assets, investing in precious metals is about the only way to guarantee the preservation of your wealth.”

“Sprott is our kind of guy,” notes Addison Wiggin, fresh back from the Congress himself. “His $4.2 billion hedge fund is long 30% in silver bullion, 15% in gold bullion, 30% in gold stocks, 10% in energy, 5% in miscellaneous stocks and 10% in cash. Suspicious of equities going back to the tech bust, Sprott played what we had termed ‘The Trade of the Decade’ like an impresario…”

Now, after nearly 10 years, “bargains are harder to find today,” Sprott continued, “but we’re still finding small gold miners that appear to have slipped through the market’s cracks and trade — based on what we believe are reasonable production estimates and no increase in the price of gold — at only around five times estimated 2011 earnings. When we find those, we’ll buy them all day long.”

Gold’s New Ally originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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The Daily Reckoning

The central banks of the world are changing tune. Since 1989, the banks have been net sellers of gold reserves, meaning that as a group they have sold more than they have taken in. This is an important point because the large gold sales of central banks tend toward lowering the spot price of gold. The news emerging from a September 2009 GMFS report is that central banks as a whole are once again becoming net buyers, and their purchases have the potential to put upward pressure on the price of gold in the public markets.

According to GFMS, “this represents a remarkable change of direction for a market that has been used to absorbing substantial volumes of gold sold by central banks over the last decade.”

Central bank gold sales may have been initially enlisted in an effort to support the dollar as the world’s reserve currency, especially since 1971 when the US de-linked the dollar from gold. The changing trend may be related to recent renewed interest in the SDR, which has been getting a lot of attention in media as a potential replacement reserve currency. Or, it could reflect an anticipation of a continued increase in the value of gold over time.

Either way, this is an important trend to watch. Central banks are significant players in the gold market and can affect the value of your personal gold holdings.

The full story is available from Jesse’s Cafe Americain which has more details on the official central bank purchases and several insightful charts.

Gold May Have More Price Support now Than at any Time Since 1989 originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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The Daily Reckoning

The US dollar is a sort of monetary brand. And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their “must-have” caché. Sometimes, a brand can disappear entirely, as did Pan American Airways or “Members Only” jackets. But there is always something else waiting to take its place. So it is with the US dollar, a brand making lows in the financial markets.

The dollar has been the “Coca-Cola of monetary brands,” says James Grant, editor of Grant’s Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of The New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the “Gray Lady” fetches only $8 per share.

“What happened?” Grant asked. The World Wide Web happened, he says. “The Times has hundreds of reporters, but this is a story they seem to have missed.” As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against it headquarters building. The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The US Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant’s Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him “The Man Who Made Too Much” after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we’ve never seen before. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

You’ve probably seen this chart, or some variation of it. Still, there haven’t been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that’s because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, “almost 1-to-1 between the two,” Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The US is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson’s interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, “gold has been a perfect hedge against inflation.”

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching “$3,000 or $4,000 or $5,000 per ounce” as Paulson said.

I keep thinking how future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil settling up trade in their own currencies. The Russians and others openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

As for a replacement waiting in the wings, Grant offers up gold. Indeed, a kind of “de facto gold standard” seems to be taking shape. The SPDR Gold Trust, the largest gold-backed security in the world, is now the sixth largest holder of the metal in the world. Anybody with a brokerage account can easily buy gold today through the trust, which trades on the NYSE under the ticker GLD.

It’s still early. Most people still own no or very little gold. As it becomes clearer what’s happening, they will buy more gold, especially as it is now easy to do so.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I’m betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: “Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency.” Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

Regards,

Chris Mayer,
for The Daily Reckoning

Brand Disloyalty originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.

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As of June 2009, world gold holdings are are believed to be approximately 29,634 tonnes. But the numbers vary greatly as a percentage of each country’s reserves. For example, the US holds 8,133.5 tonnes of gold which represents 77.4% of its total reserves. Compare that with China, which has just 1,054 tonnes for 1.9% of reserves – and much of the rest is made up by its more than $2 trillion USD in foreign reserves. With the greenback becoming devalued and gold appreciating in value, we are now seeing China and others divesting of USD and acquiring larger reserves of gold, thus pushing the price to new heights.

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Everyone got a good hard look at precious metals investment in action over the last two weeks, as gold repeatedly surpassed it’s all-time high on consecutive days. Now that gold prices have retreated to $1055 levels, more investors are considering an investment in gold bullion coin. Bullion coins like the modern, 22-Karat, American Eagle $50 gold coins are only slightly more costly than the current spot price of gold, and the U.S. government backs their weight, and precious metal content, which is one full Troy ounce of pure gold. Since American Eagle gold bullion coin possess no numismatic value like rare coins do, they are widely used to capitalize on potential short-term gains, as diversifications for far more costly rare, certified coins, or as long-term, government approved, gold-backed IRA contributions.

Gold backed retirement accounts have recieved consistently growing consideration by baby-boomers in particular since 2007, as traditional IRA’s with holdings in stocks and bonds have lost $trillions since then. Rare coins aren’t permitted for IRA storage, and the aforementioned American Eagle gold bullion coin is the only 22-Karat coinage that is permitted. 24-Karat bullion bars are allowed in these IRAs, along with 24-Karat bullion coins like American Buffalos, Chinese Pandas, Austrian Philharmonics, Australian Kangaroos, Koalas, and Lunar coins, as well as Canadian Maple Leafs. All of these coins are also minted in smaller denominations like ½-ounce, ¼-ounce, and 1/10-ounces, to customize a wide range of budgets. Investors are encouraged to complete their research, and then to contact one of our friendly specialists, who offer institutional discounts on bullion, and rare coin.

Danny Burns

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