As you read this, I'll be heading home from the summit Casey Research just co-hosted with Sprott Inc. in Carlsbad, California. Of course, many attendees had questions about where the price of gold is going, and what roles the fates of the US dollar and the euro may play in that. This may seem like a very complicated set of variables, and it can be so – I certainly don't want to try predicting what the price of gold, the USD, or the EUR will be next Tuesday at 3 p.m. GMT. But the essentials of the situation are pretty simple, and I do have some thoughts on them below.
(You can get much deeper insights about gold, as well as silver, energy, and a host of alternative markets in our Summit Audio Collection.)
Generally speaking, I went into the summit feeling bullish about gold in the near term, and came out even more so. I've stepped up my buying, and am happy to do more of the same, before stock prices start really heading back up again.
I would not tell anyone that the bottom is definitely behind us and they should go "all in," but this is a good time to buy good companies, and I am.
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||50.46||44.23||65.43|
|Gold Junior Stocks (GDXJ)||23.47||19.98||38.12|
|Silver Stocks (SIL)||22.96||19.10||28.47|
|TSX (Toronto Stock Exchange)||12,268.01||11,863.50||12,720.56|
By Louis James
One of the points we've made several times over the last year is that traders stuck in an old paradigm are frequently selling gold for the wrong reasons. The most egregious (or just plain silly) example is that gold often drops when the euro drops.
This happens, not because there's anything wrong with gold at such times, but because gold is priced in dollars. Instead of being thought of as a store of value in many investors' minds, gold is viewed as a hedge against weakness in the dollar.
But what are dollars priced in? Nothing, actually. Purchasing power is the underlying reality any "price" for dollars should get at, but that's hard to measure – and the government can't be trusted to report the truth about this. Unfortunately, in today's world currencies are valued in many people's minds by their "strength" in foreign exchange markets.
Maybe that's in part because nobody believes CPI statistics anymore. At any rate, the dollar is frequently valued in relation to its main competitor for reserve currency status. In other words, to many players in the market, the dollar is priced in euros.
So when the euro gets slammed, the dollar rises, and this apparent "strength" of the dollar makes gold seem less attractive as a hedge, and gold sells off. You can see this inverse correlation between gold and the dollar – as well as a very tight correlation between gold and the euro – in this chart of recent price action.
The pattern is very strong. The inverse correlation between the dollar and the euro is extremely high, at -0.92. The inverse correlation between the dollar and gold is not as high, but still very strong: -0.78. And the correlation between gold and the euro is also very high: +0.74.
In our view, this set of relationships clearly shows the error of those caught in this trading paradigm. The euro is not backed by gold, nor anything at all. It's a floating abstraction, even more nebulous than the dollar. Gold is a solid commodity, the ultimate safe haven people all around the world turn to when the acceptance of paper currencies and other assets is in doubt. There's no valid reason for gold to gain and lose value in concert with the euro – it's merely an artifice of both gold and the euro being "not the dollar."
This point is clearly evident in a longer-term chart of the same variables as above.
As you can see, while in the short term gold and the euro seem alike (alternatives to the dollar), over the long term, the euro and the dollar are much more alike, while gold is a beast of an entirely different nature. The euro and the dollar take turns winning and losing against each other, but both are being debased, both are losing ground in the real world, and both have lost a lot of ground against gold.
Now, which of these three would you like to trust your savings to?
And which would you like to speculate on, going forward?
The answers are crystal clear to us here at Casey Research, and they form the basis of our recommendations in our metals newsletters.
India May Hike Gold Import Duty Again (Mineweb)
The Indian government is considering increasing its import duty on gold for the third time this year in an attempt to reduce the country's current account deficit and to support the weak rupee.
According to the World Gold Council, gold imports in India plunged 42% in the first six months of 2012 to 340 tonnes (11 million ounces). If the new import duty were implemented, end-purchasers would inevitably have to pay more for gold. That may hold down gold imports in the second half of 2012.
Broadly speaking, while the ongoing festive season maintains gold demand in the country, the week rupee keeps the population sensitive about the price. Between this and the government's intervention in the gold market, India may well lose its status as the top gold consumer to China soon.
After two recent mining accidents in Peru that involved toxic emissions from a copper and a zinc mine, officials want to double the maximum penalties for companies that pollute the environment. Current fines run from US$0.8 million to $11.5 million.
"We think this [doubling] is an effective mechanism and that it will send the right message to Peruvians who want the state to enforce its environmental laws," Environment Minister Manuel Pulgar-Vidal said. His office will turn to the president's cabinet to approve the new rules in two weeks.
Peru is a top exporter of gold, silver, copper, zinc, and tin, and its mining sector attracts billions of dollars of foreign investment. This year, however, due to clumsy government decisions concerning the industry, investors have been looking for better jurisdictions. According to Peru's mining, oil, and energy society (SNMPE), mining investment is expected to fall 33% next year.
Implementation of the new penalties may continue to deteriorate the Peruvian investment climate.
Bloomberg reports that "investors are buying platinum at the fastest pace since 2010 after disruptions at South African mines caused the biggest loss of supply in at least seven years."
On Thursday, platinum traded at $1,586.99, up 13% since the beginning of the year. That's about the same percentage increase as gold, but substantially less than silver.
According to Barclays, global supply will contract 6%, outpacing a 2.2% decline in demand. The decrease in platinum supply is bullish for the metal's price, but in the longer term we also expect slowing demand due to ongoing global economic uncertainty. We may have to revisit the balance of these trends soon, but you can read our analysis of platinum from earlier this year.