Gold Discussion

Quoting narafa

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6- The reason Gold prices and the US Dollar always go in opposite directions is that lower interest rates for the USD is always accompanied by declining stock prices, and people don't want to invest their money in the US stock market or even buy US bonds or open saving accounts,so they have 2 alternatives, either invest overseas, or invest in gold

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Quoting narafa

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I have always questioned the relationship between the gold prices and the currencies and specially the US Dollar. In general, here is my overall conclusion:

1- Gold Bull Markets are short in time and Gold Bear Markets are much more longer in time. There are always exceptions, but this is the main rule

2- 90% of gold companies who are engaged in mining, processing & production, marketing and selling gold fund their operations using loans from banks and financial institutions

3- So, gold production is mainly financed using debt. And since bull markets are short and bear markets are longer, financing must be made when interest rates are at historic lows or low enough to justify injecting money into gold production

4- When interest rates start to rise, money starts to pull out and little investments are left over in the production proccess

5- When investors buy gold, they know that gold pays no interest and has no dividend to offer them, so they are mainly looking for price appreciation of the instrument itself. In most cases, it's very wise to buy gold or gold companies stocks when interest rates are at the lows, because that's the time where all gold companies start working and start making profits

6- The reason Gold prices and the US Dollar always go in opposite directions is that lower interest rates for the USD is always accompanied by declining stock prices, and people don't want to invest their money in the US stock market or even buy US bonds or open saving accounts,so they have 2 alternatives, either invest overseas, or invest in gold

7- Another reason, people think of gold as an insurance against any unwanted surprises. Many investors and funds use gold stocks as a portfolio hedge, increasing and decreasing the owned percent of gold stocks based on the interest rates and the overall performance of the US stock market

Now, everyone might think that the previous points are confusing, but I will clarify more using an example.

Back to the 1960's, gold prices were hoovering around the $50 per ounce mark. By the end of the 1973, and when the second war between Egypt and Israel started and tensions in the Middle East heated up, gold started to appreciate rapidly in conjunction with the increasing oil prices, specially during the oil embargo of the 70's.

If you pulled the USD index chart which covered this period, you will find that this period was a huge inflationary period in which the USD lost huge percentages of it's value several times. In other words, oil was going up, gold was following and the USD was going down from the purchasing power point of view.

By the 80's, gold was looking at the $700 mark and it seemed that nothing is going to stop it. This period was a rosy one for the gold companies. They kept mining, exploring, producing and warehousing gold to further push it's prices up more. The bull market for the gold actually took around 7 years, from 1973 to 1980.

The gold then entered a long bear market, following the declin in oil prices. The USD followed again and appreciated in value between 1980 and the 1999 period. Although inflation was high during this period, the USD was a strong currency and stood in the face of inflation. By the end of 1999, the interest rate for the USD was 6.5%, oil was stable, and gold was still declining. The higher interest rates for the USD during this 20 year period prevented gold companies from injecting money into heavy gold production.

Before the start of the year 2000, gold was hitting multi decade lows below the $300 per ounce. The US stock market made superior performance between the period of 1980 and 1999. Warren Buffet was one of the people who called for buying stocks in late 1975 when everyone was screaming, GET OUT OF STOCKS!!! and he was dead right about the greatest bull market which lasted 20 years and never interrupted except in October 1987, and in the early 90's during the gulf war. But these were corrections in the main uptrend in stocks as they were corrections in the main downtrend of the Gold.

The US stock market went into deep recession starting 2000, interest rates went down to 40 years low in just 2 years and the dollar declined hugely against almost everything, oil was going up slowly, gold was following. Gold companies started to inject borrowed money once again into gold production as low interest rates help them to do so. But unfortunately, rates were not at the bottom for too long, and soon they went up because of inflation. The explanation of this is simple. Many people who tended to spend in a certain way during the 1980-1999 period never wanted to change their spending habits, that's why consumer spending remained high and inflation remained high even during the recession of 2000-2002. Actually extreme low rates encouraged people to spend more depending on low rates. You are buying highly inflationary items and is being charged very low interest, isn't this something great??? Durable goods, cars, real estate, all these items are being bought on credit basis because of extremely low rates. It's no matter when will I pay, it only matters that I won't be charged too much when I pay late, so actually I am getting huge discounts for the goods I am buying.

For the reason of rates increase, gold prices stalled. The gold companies are feeling a huge threat right now. Should the rates keep going up, the cost of money injected would go up dramatically and they will be extremely hurt financially. At the same time, they have been stocking gold production all the way while interest rates were falling, so they have a huge stock of money in the form of gold. Such stock can't be sold immediately or else the gold price will fall sharply. In other words, gold companies are in a very tough situation right now. They are facing lots of threats, and have very few opportunities. An advice from me, if you are long any gold company stock, consider getting rid of it, risk is too high investing in gold stocks right now untill this situation is solved. Personally, I predict that many gold production companies are going to go bankrupt.

So what's ahead ???

My own opinion. Oil is not going to stay that high for too long. As soon as oil shows signs of going down, gold will fall sharply, and the USD will appreciate against everything. The US economy and the US stock market will start taking off after a period of consolidation during late 2004 and 2005 after the runup during 2003. I expect rates to be held at the 4%-4.5% for a considerable amount of time before the feds think of raising them again. I am bullish on the US stock market, bullish on the USD and bullish on the Yen as well, bearish on the gold, Euro, GBP and the Swissy.


I am welcoming all types of feedback.

Thanks,

Nader.

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Quoting tonyc

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USD GOLD -complicated but the gold bull enjoy the USD fundamentals weakness.

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Quoting SliverB

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The only gap I see around 600 is from the 17th of April. Hasn't that been filled already?

SilverB

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Quoting OrangeRoshan

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Thants my Birthday!! hehehe

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