What’s Driving Gold?

kitco ^ | January 4, 2006 | Frank Holmes

[hubbubhubbub]

These are good times for gold investors, according Frank Holmes, Chief Investment Officer for U.S. Global Investors. In a recent webcast, Holmes told listeners: “We have a unique situation where all critical drivers for gold are pointing in the same direction.” Holmes identified six key drivers and talked about why they are all pointing to higher gold prices.

”There are many components here that are driving gold, and they sort of rotate around,” says Holmes. “It’s not linear.”

Currently, we are in a secular bull market in commodities because gold is the ultimate money, says Holmes, and because demand is now exceeding supply. “When paper money is being printed at an extreme rate, gold becomes more significant as a reserve currency,” says Holmes. “It starts to show up in people’s portfolios, and in governments.”

According to Holmes, gold prices are currently being driven higher by:

- Fear of a slowing GDP, which leads to negative real interest rates. Gold is attractive when real interest rates are negative. Currently, there is a global wide fear of a slowing GDP. Historically, when Americans have been concerned about inflation, the price of gold has surged.

- Oil exporting countries are increasing their percentage of gold reserves. There has always been a strong interrelationship between gold and oil, and historically, gold and oil have always moved in the same direction. “With 3 billion people consuming 20 million barrels of oil per day . . . it is more likely that gold will rise before oil falls, because oil won’t fall much,” says Holmes. Russia announced in November plans to double gold reserves as a portion of all of its reserves, from 5% to 10%.

- China, which now has a trade surplus, is increasing its foreign reserve gold exposure. Incomes are increasing dramatically in China, and citizens are becoming big consumers of American and Chinese goods. The new Shanghai Gold Exchange, combined with the liberalization of citizens to freely buy gold and the culture’s affinity toward gold, make gold an attractive asset.

- Low gold prices in the 1990s led to cuts in exploration and falling production – which has ultimately led to a decrease in supply.

- Lower interest rates have curtailed hedging – which also has led to diminished supply.

- The War on Terrorism has resulted in deficit spending and a weaker U.S. economy. The cost of war is hard on a country’s currency, and a weaker U.S. currency always results in higher gold prices.

According to Holmes, the supply side of gold is running at a significant deficit to demand. South Africa, the U.S. and Australia – which combined represent 36% of gold mining supply – have all seen declines in gold production. The world’s largest gold companies can’t find large deposits, and rising energy prices have hurt the cash flow margins of most large producers.

With the key drivers all pointing toward higher prices, Holmes says a gold price of $600 to $650 over the next 12 months is a “high possibility.” (January 3, 2006)

[edcoil]

What’s Driving Gold?

A gold cart...

[Nachum]

If Gold gets high enough, it will bring gold mining companies to life, get people to melt down and sell everything of gold they have. There will be so much gold in the market, there will be a glut.

[governsleastgovernsbest]

”There are many components here that are driving gold, and they sort of rotate around,” says Holmes. “It’s not linear.”

Sounds like the same kind of fuzzy stuff you'd hear from a religious charlatan pushing a cult. Hmm, come to think of it . . .

[governsleastgovernsbest]

Fear of a slowing GDP.

This is a classic example of how, for the gold charlatans, it's always the perfect time to buy gold.

Here he argues that if the economy is slowing, it's the right time to buy gold. And if the forecast were for strong growth? "There's fear of inflation: buy gold!"

[rellimpank]

--the usual sort of commentary on the only commodity of which virtually all that has ever been mined is still available--

[earplug]

If you would reread the article, gold has been driven up by the devaluation of paper money.
Its the printing press value compared with the metal.
When somthing is melted down and exchanged, the amount above ground does not change.
If mines are opened up and more gold hits the market, it will be to supply demand.
As we live in a global economy many exUSSR citizens remember the fall of the Ruble. I have a Russian friend who's salary is pegged to the dollar. They are buying gold to protect themselves from a dollar decline. The Euro is not safe either.

[Petronski]

Shiny metal god!

[hubbubhubbub]

True. The biggest question is, a what price to we have to get to in order for there to be a glut. In 1980 it was $850.

[Species8472]

From the Anchorage Daily News

: -snip-

Pebble ore find expands outlook
ENORMOUS: Grade of minerals in new discovery on claim's eastern edge called richer than main deposit.

By PAULA DOBBYN
Anchorage Daily News

(Published: December 30, 2005)

A Canadian company hoping to develop the giant Pebble gold and copper deposit near Iliamna found so much more minerals there this year that executives are revamping the project and will delay seeking permits for at least a year.

Northern Dynasty Mines says it found an enormous amount of gold, copper and molybdenum on the eastern edge of its claim block during recent exploratory drilling. The company says the grade of the minerals is even richer than in the main Pebble deposit, 236 miles southwest of Anchorage.

The company plans to announce more drilling results shortly, said chief operating officer Bruce Jenkins this week.

If studies and new exploration next year confirm what Northern Dynasty hopes and if the economics work, the Pebble development could end up much larger than originally thought -- both an open-pit more than 2 miles wide and an underground mine.

"The drilling program at the end of this year produced some unexpected and incredible results," said Jenkins. "It's confirming an entire new deposit to the east."

Northern Dynasty already describes Pebble as North America's largest gold deposit and second largest copper deposit, with estimates of 26.5 million ounces of gold and 16.5 billion pounds of copper. The new finds could make Pebble a mine of even more gargantuan proportions.

Wow factor aside, the idea of developing a mine near Bristol Bay is thorny, to say the least: Pebble is located in the headwaters of the world's largest salmon fishery. Building a mine poses huge environmental risks and threatens sport and commercial fishing industries, making it a high-stakes project of enormous public interest.

-Snip-

[Jack Black]

$850 inflation adjusted is about $1700 now. I'm good with that. I'll sell before we get there.

[headsonpikes]

The gold bugs incessant harping on the depressed price of gold has put off most mainstream investors. Even if one believed them, who wants to put heavy dollars into something that the government can so easily manipulate or seize?

This has kept the gold market in a state of constant disbelief as the price has risen inexorably over the last while. Such fear is an excellent indicator that the gold market has not seen its highs.

For those who like gold, buy the stocks, not the metal. Should gold double from here the stocks will triple, quintuple, and more. If you follow the Canadian markets, you know that after a long delay, the gold train is finally leaving the station. ;^)

[Tijeras_Slim]

Did you know those darned Asians are buying all the gold? :)

[Toddsterpatriot]

because gold is the ultimate money

Right. LOL!

[hubbubhubbub]

LOL, You sound like someone who's mad because they don't own any. Relax, your government controlled money will still be good just not worth as much in the future.

[hubbubhubbub]

I own some shares of NAK. It's done very well for me.

[Nachum]

When somthing is melted down and exchanged, the amount above ground does not change.

Not true. I used to trade in silver and gold. I remember when the Hunt brothers drove the price of silver up. Gold is a commodity and there most certainly is production of gold in the market. When large amounts of Gold is poured into the market, the price is affected greatly. Remember the part about "gold mining"?

While there is a finite amount of gold, we have yet to know what that amount is. Of course the devaluation of the dollar inflates the value of things, but like all commodities, gold is affected by other factors, not only the value of the dollar.

[hubbubhubbub]

And as the $CN rises against the $US your gains are enhanced.

[Toddsterpatriot]

I pity the fool who doesn't buy gold.

[RightWhale]

Gold is moving with aluminum, copper, and oil.

[hubbubhubbub]

Not you again troller. Go away, get a job, do something.

[Nachum]

True. The biggest question is, a what price to we have to get to in order for there to be a glut. In 1980 it was $850.

Yes, it is possible for Gold to spike up to $850. When the Hunt brothers were involved, I believe it was at or near $1,000 (per troy ounce) for a time. Rather than buy ounces of gold, a greater profit may be had by speculating on gold futures. If the price were to spike up to $850 with in the contract's year, the profit would be tremendous.

It is also interesting to note that when gold and silver last spiked (silver was at $50/per troy ounce), the government froze trading for a time and the price began to slide. That is the trick though; predicting at what amount it will rise to before government intervention. Then, once it hits the plateau, selling short. Someone is playing the market here. I would not be surprised if the major investment houses themselves are pushing this so they can play the small investors and squeeze billions in profit from the market.

[Toddsterpatriot]

Glad you finally got your head out of your butt long enough to learn what inflation is. Did you ever figure out what deflation is? Or is one new fact a year your maximum capacity?

[Petronski]

Sorry for swiping your pic, martin, but it had to be done:

[RegulatorCountry]

“It’s not linear.”

What does appear to be linear, however, is the very recent upsurge in the use of the phrase "it's not linear."

We may have even reached a tipping point, lol.

[ex-Texan]

Just guessing. But printing greenbacks 24/7 may have a little something to do with the price of gold. Our currency is just green paper backed by the 'full faith and credit' of the government. Which means people like you and me. China and the Arabs are buying U.S. treasury notes like they are on sale today. The inflated price of residential real estate, known as the "housing bubble" may have something to do with gold prices. Oil has gone up in price steadily during the past year. Oil may hit $ 70 per barrel early in 2006. Energy prices may have something to do with gold prices. China, Europe and Arab countries buying Au like crazy may have something to do with Au prices. If the USD looses its appeal perhaps the Arabs and China will shift to the Euro. Watch the news very carefully.

[Uncle Fud]

I own some (thankfully not much) bought in the 1970's, it only has to hit $1600 or so for me to break even.

[Toddsterpatriot]

Why do you keep hyping that crank website in every one of your posts?

[HamiltonJay]

What's Driving Gold?

All this marketing that tells saps its a great investment.

[mallardx]

I have a limited-time-only supply of golden tulips - get 'em now before the Europeans buy me out!

[mallardx]

Also, check out this S&W .38 in solid gold! A dual investment in heavy metal AND security!

[governsleastgovernsbest]

"government-controlled money"

Nice! Do they teach that in Gold Bug 101?

Please just answer this question: when was the last time the same kind of guy who wrote this ever said that this WASN'T the time to buy gold?

[ex-Texan]

How about this opinion editorial from Business Week ? Is the stodgy editorial board of BW too mainstream, or not mainstream enough enough for your tastes? Or is everybody you disagree with simply classified as a "crank" in your own mind?

[Real Cynic No More]

The professional speculators are creating hype to persuade the amateurs to buy at these high and higher prices so that they (the speculators) can take their profits. If they try to sell without a large number of buyers, it will force the price back down. The true test is whether they are continuing to buy in large volumes or are just awaiting their selling trigger price.

[Toddsterpatriot]

Or is everybody you disagree with simply classified as a "crank" in your own mind?

No just the cranks.

[JudgemAll]

High energy prices makes mining and exploration of gold expensive, add gulf nations buying gold as a result of oil transactions, and a glut is not so evident.

Also some cultures have traditions of buying jewlry, like.... 2 billion Indian and Chinese who are now going to be able to do so.... there is not enough gold on earth to adorn all the women in India with a mere basic gold bracelet

[Nachum]

High energy prices makes mining and exploration of gold expensive

High gold prices make it less so

Also some cultures have traditions of buying jewlry, like

Which will all get melted down and sold when the price of gold gets to a certain point...

[DebtAndDelusion]

Those darn Asians and Islamics are buying all the gold!

They take those silly dollars for junk and then turn around and buy all the gold. Then those central bankers in Washington DC have their fancy lunches, belch a couple times and then decide to print more dollars.

Meanwhile the gold mines can only produce so much gold. They can't make gold with a printing press or computer -- some poor soul has to dig it out of the ground.

I've written here before how we would have never survived the 1930's if Father hadn't brought those gold coins back from France in the Great War. Now you are seeing a lot of folks saying, "Gee, I'd like to have some Krugerrands but where do I get 'em?"

Everybody has to find out for themselves. And I don't mean ordering them off this here Internet. Because then the government knows you have them and when the next FDR gets elected...

You guessed it -- like that thieving dog Roosevelt they will steal all of our gold!

Darn Asians and Islamics are buying all the gold. They are making America look like a bunch of suckers.

Oh well. You seen one great depression then you've seen 'em all. Of course if you have never seen one then you have a whole new experience in front of you.

Gold is going to the moon. Those central bankers ought to read about what happened to Mussolini...

HG

[earplug]

Massive selling of PM would drive the price down, Correct. When the average person starts talking about buying gold again the dollar will be toast.
As far as North American citizens go, most have little silver or gold. They turned all that old money into dollars during the 80's.

[Nachum]

When the average person starts talking about buying gold again the dollar will be toast.

We will have to agree to disagree. I have seen $1,000 dollar gold during the Hunt period and it did not last for the reasons I gave.

[Pete from Shawnee Mission]

As an investment sometimes its more efficent to own the stocks, or a mutual fund that trades in stocks of gold mining companies. Look at his US Global Investors Global Resource Fund. Some portion is invested in Gold mining stocks. (Diversification is a good thing!) It went up 99% in 2003, 30% in 2004, and probably about 40% this year. Like any investment it will have down years. What did the dow do in 2003? in 2004? This year? Does he know what he is doing? Some Sap.

[Mase]

Because then the government knows you have them and when the next FDR gets elected...

You guessed it -- like that thieving dog Roosevelt they will steal all of our gold!

Darn Asians and Islamics are buying all the gold. They are making America look like a bunch of suckers.

Well, now I understand the "delusion" part of your screen name. Where does "debt" come from?

[hubbubhubbub]

"Because then the government knows you have them and when the next FDR gets elected... "

You mean Hillary. She still speaks with Eleanor you know.

[hubbubhubbub]

Who do you think controls the supply of money, Einstein?

[hubbubhubbub]

LMAO! you are quite the investor. buy an asset AFTER it appreciates 2300% in 6 years.

[hubbubhubbub]

No thanks. Eagles, Kruggerands and miners with growing reserves that pay dividends are all I put my money on.

[hubbubhubbub]

Hey troll go back to DU. I don't have the time or patience to educate you.

[hubbubhubbub]

Two weeks ago, now crawl back in your hole.

[governsleastgovernsbest]

"Now crawl back in your hole."

Temper, temper.

Are you hanging out there with a long position? Nervous?

[Uncle Fud]

Well, you do some dumb stuff in your twenties. Having said that, the gold marketers have been eagerly offering to trade me their precious yellow metal for my green printed funny money, year on year ever since. They must have more faith in the Federal Reserve than they are letting on.