Thursday, October 23, 2008

More Golden Analysis

From and Daily Telegraph,

Demand for gold soars as price tumbles - Daily Telegraph (71.71 )

Daily Telegraph reports the onset of a global recession and falling stock markets have triggered a stampede for gold -- the traditional safe haven during times of uncertainty. According to the World Gold Council, exchange traded funds are the main beneficiary of the flight to safety. ETFs experienced their strongest quarterly inflow during the third quarter since the ETFs were launched in November 2004. But the Council added that bullion dealers around the world reported an unprecedented surge in demand for coins and small bars. It said that there had been reports outright shortages of gold and high premiums over the gold spot price. The US Mint temporarily suspended sales of American Buffalo gold 1 ounce coins after its stocks were depleted, while UK, German and Austrian coin dealers have also reported an enormous increase in demand during the third quarter, it added.

The reports of a physical gold (and silver) shortage have been well-documented. In the face of this physical shortage, precious metal futures have actually been dropping precipitously. Gold is down over 30% from its high and silver is less than half it $20+ high spot price from earlier this year.

This only makes sense to the most wacko of gold-nuts who've maintained all along that one should ONLY buy physical metal. For these past few months, they've been absolutely right. Though the physical price has been dropping, too.

So, where do we go from here? A genuine physical shortage just has to be long-term bullish for both metals, does it not?

Though a bear would argue, "Look, even with hoarders loading up on the metals, the prices still are getting hammered. This price action bodes negatively."

I, have no stinkin' clue where the metals are headed long term. Plenty of worrywarts from the previous generation hoarded precious metals; my brother-in-law fondly remembers being instructed by his father to bury a bag of some coins in a hole under their backyard shed. These *prudent bears* and end-of-the-worlders were stuck with these coins and bars and lost money on them for a couple of decades straight.

Now I did nibble on the XAU yesterday at around 77. It's already down to 71. Let's hope I wasn't *waaay too early* - yet again.

Sure their revenues will be lower; and sure, gold miners are terrible investments over the long term; but also keep in mind that *high energy* prices were killing their margins recently. With oil more than halved from its July peak, they should expect some relief in that department.

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