Gold Investments Market Update – The Financial Times and Reuters on Increasing Gold Bullion Shortages

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Gold and silver fell yesterday (gold closed at $874.40 down $13.30 cents while silver closed at $13.19 down 18 cents) despite the wider markets becoming increasingly nervous regarding the possible US bailout.

Oil rose but the dollar’s strength, despite the litany of increasingly bearish news confronting the world’s reserve currency, led to further profit taking and hesitancy by gold longs to take positions. Today, oil has given up yesterday’s gains and the dollar has continued to rally and this is putting pressure on gold.

The litany of bad financial and economic news continues. Washington Mutual has collapsed under the weight of its enormous bad bets on the mortgage market and becomes the largest bank failure in world history. Banks internationally are announcing massive job losses such as today’s announcement by HSBC of 1,100 job losses.

Meanwhile the systemic crisis remains as elevated as ever. Washington politicians have been unable to agree on the bailout and this is leading to massive distress in the money markets.

US banks and money managers borrowed a record amount from the Federal Reserve in the latest week, an incredible $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.

The problems in the banking system look set to spread to the high street and to main street, leading to company defaults and a deep recession in most western economies.

Gold remains in a range between $860 and $910 but after last week’s higher close and this week’s consolidation and likely higher close this week, the short and medium term trend for gold is now again clearly up and $950 should be reached by early October.

Bailout or No Bailout, Gold is Going a Lot Higher

Bailout or no bailout, gold is going a lot higher in price as no matter what size the bailout is it will not prevent a recession in the US.

Should the bailout succeed it is possibly even more bullish for gold in the long term. This is because it will be very inflationary, potentially even hyperinflationary as the humongous figures are akin to Weimar Germany’s money printing to pay war reparations in the 1920s.

Should the bailout fail then we could see systemic meltdown and massive deflation which would also be bullish for gold (as it was in 1930s).

One way or another, the dollar and other fiat currencies are set to come under significant pressure in the coming weeks and months as central banks attempt to stop a 1930s style wholesale liquidation and deflation. This and competitive currency devaluations will lead to huge safe haven demand for gold internationally and to higher gold prices as it did in the 1930s when gold was revalued (and the dollar devalued) from a fixed price of $22/oz to $35/oz – in 1933 gold was revalued by President Roosevelt from $22 to $35 or by some 60% overnight. Therefore even in a massive deflationary event where equities and property prices fell some 80% and more, gold massively outperformed all asset classes and performed its safe haven role.

It is very difficult to know exactly how events will unfold and there are so many potential factors and possible eventualities and a lot depends on how America’s creditors in China, Japan, India, Russia, the Middle East and elsewhere react to America’s woes and the huge risk a sharply falling dollar will pose to their dollar denominated assets and their wider economies.

FT and Reuters on Increasing Gold Bullion Shortages

Bailout or No Bailout, Gold is Going a Lot Higher The shortages in the retail bullion market continue to intensify and are spreading to a variety of bullion products. The FT and Reuters report overnight (see our news and commentary section) that the US Mint has now “temporarily” suspended the sale of the popular Gold Buffalo coins (1 ozt) due to them not being able to keep up with unprecedented demand. The FT reports that “the shortage of gold coins is the latest sign of investors seeking a safe haven into bullion amid Wall Street woes. Gold prices this week surged above $900 an ounce, up about 20 per cent from its level before the collapse of Lehman Brothers.”

Retail demand is extremely robust as evidenced in shortages of gold and silver coins and bars internationally, but particularly in the US, India and in Asia. The US and Canadian government mints have not been able to keep up with demand for their legal tender bullion coins and the world’s largest gold refinery, Rand Refinery, in South Africa was cleared out of their entire inventory of Krugerrands in one order by an anonymous Swiss buyer – http://blog.goldassets.co.uk/2008/08/29/largest-gold-refinery-in-the-world-runs-out-of-kruggerands/.

Premiums on nearly all gold and silver bullion products continue to rise significantly. Some premiums are actually increasing on a daily basis. Gold and Silver Investments are now paying a wholesale premium of 4.5% over spot for Krugerrands in volume, up from 3.2% two weeks ago and up from near spot or melt value a year ago.

Some of the largest wholesalers in the US have no stock left of silver bullion coins (Eagles and Maples) and silver bullion bars (1, 10 and 100 ozt) and are running low on 90% and 40% silver bags ($1000 face value worth of the actual silver coins used as currency in the US pre 1965). Increasingly there are delivery delays on a swathe of bullion products including on older European coins like British sovereigns. Some wholesalers are not just talking about delays of a few weeks but delivery delays into 2009 on certain products. These shortages are leading to premiums going up sharply on all bullion products . Some large wholesale bullion dealers have assigned and appointed a dedicated person to monitor pricing and raise premiums as required in accordance with lack of supply and rising demand.

The confluence of supply and demand, macroeconomic, inflation and systemic factors is leading to extremely bullish conditions for the gold market – probably even more bullish than in the 1970s when gold rose some 3,000% from $35 to over $850 in just 9 years.

Mark O'Byrne

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