A Review of Gold

Summary: Gold and Gold Equities: The near term is uncertain. The near-term path of the dollar is unclear. The world is probably decelerating towards disinflation. This could be a negative. The ability of the gold futures market to absorb large spec liquidation on a small price break is long term bullish. Perhaps, the official sector is conducting an orderly retreat. As opposed to our very positive supply/demand framework, the official” gold supply/demand framework is not especially constructive. It now diverges so much from historical trends and abundant anecdotal information, that it has become discredited. First, The Big Picture... We stated in our fourth quarter letter to certificate holders of the ABN Amro gold certificate: Recent developments now make us even more bullish on gold longer term. We also believe that, owing to the recent correction, the shorter-term risks have abated. (See below.) Yet, on balance we fear the shorter-term downturn in the gold price since late last year may remain in force. In addition, we are concerned that, late last year, the global economy outside the U.S. (Japan, Europe, even China) began to slow, and that this may be the beginning of a major cyclical shift from global reflation to disinflation. The global bond market seems to sense this. But other markets have not. Such a shift could prove costly to reflation plays. Gold and gold equities would probably not go unscathed. Lastly, owing to a severe fall off in interest in the junior golds, this sub sector faces special risks should the overall gold sector fall further. That said, let us go on to the longer-term bullish case. The Intermediate- To Longer-Term Looks More Bullish From our quarterly letter: We regard the recent reduction in the net spec long position on Comex to below prior reaction lows (38,000 versus 50,000) on a fairly modest (10%) break in the gold price as very bullish” Why? At this point it is appropriate to bring up our basic supply/demand framework for the gold market, which was laid out in our 1998 Gold Book and in several papers that we have written in the intervening years. We believe that fabricated demand and bar hoarding in the gold market has exceeded mine and scrap supply by a much larger margin than is reflected in the Gold Fields Mineral Services official supply/demand balances. Second, the size of the net spec long positions in the futures and forwards markets in recent years has been larger than at any point in the past — including the 1970s. Remember, trading volumes in the OTC gold market are more than 10 times what we see on Comex, and total derivative positions may be comparably larger than Comex positions. (See our Gold Book). Speculative purchases of this magnitude have no obvious offset. In the past, producers offset such purchases with forward sales; but in recent years, they have become buyers through reductions in their forward sales positions. There is only one possible explanation for why purchases of thousands of tonnes of gold in the futures and forwards markets does not blow the price of gold sky high: The official sector must step in on gold price rallies as an offsetting forward seller. It is for these above reasons that we have long contended that the gold market is a managed market. GATA attributes this management to a combination of bullion dealers and official entities. We believe it is only the latter. If anything, investment bank prop desks have been long gold in recent years, in keeping with their overall bearish stance on the dollar. As we have written in the past, we do not understand the motivations behind such official intervention, but simple inference and abundant collateral evidence makes us convinced — gold is a managed market. The official sector hoard of gold is very large, but it is not infinite. It is obvious that someday it will be depleted and the gold price will trade higher once official supplies no longer flow. We also know that the central banks will not sell and lend all their gold. Therefore, the end of official supplies will come long before the official hoard is depleted. Because we have long contended that the gold market is in a larger deficit (between fabricated demand and bar hoarding, on the one hand, and mine and scrap supply, on the other) we have argued that this end of official supplies will come sooner than the consensus believes. When these supplies dry up, even if there is no Western investment demand, the price of gold will trade at its commodity equilibrium, which we believe exceeds $600...

Je me connecte

---

J'en profite