On Monday, a large Chinese delegation arrived in Washington D.C. with the distinct goal of expressing their concern over the reckless spending of our current administration. Secretary Geithner spent several days reassuring them of the soundness of the dollar. After all, China holds $2 TRILLION of these dollars and they are concerned about the decline in the dollar in recent years. Not surprising to anyone, the Dollar gained huge increases on Monday and Tuesday. Anyone who can read a ticker could see the obvious manipulation in the dollar pits. Of course, gold and silver were taken down. The Chinese left on Wednesday and the dollar fell right back down to its lowest point of the year. This meant that gold and silver rebounded to where they were last Friday. This is all getting too comical if it wasn’t so illegal. Nonetheless, we know we are getting closer to when the physical supply of silver will be seriously depleted.
The dollar declined to the lowest level this year against six major U.S. trading partners after a report showed the U.S. economy shrank less than economists forecast, reducing the demand for the greenback as a refuge.
As we’ve discussed before, the lives of gold bull markets play out in three main stages, which generally overlap:
Stage One: Currency Devaluation
Stage Two: Growing Investment Demand
Stage Three: Speculative Mania Buying
So far in today’s gold bull market, we’ve seen strong evidence of the first two stages. A dramatic drop in the value of the U.S. dollar against other world currencies has lifted gold prices over the past eight years. This devaluation is evident in the 42% drop of the U.S. Dollar Index, a measure of the dollar’s value against six world currencies. Due to macroeconomic issues, such as the massive debt of the United States, the dollar seems destined for continued devaluation. This will continue to be positive for gold prices.
In the second stage of a bull market, gold prices continue to grow, due to increasing investment demand. Attracted by the gains of the first stage, speculators begin to buy gold as an investment. . . which further snowballs the price of gold. Figures from GFMS show that identifiable investment demand increased 229% between 2003 and 2008. Continuing this trend, gold investment demand continued to boom in the first quarter of this year, reflecting a desire for a safe haven from the U.S. dollar and other paper assets. Gold investment demand reached a historic high of almost 600 tons during the first quarter of 2009 — a whopping 248% increase compared to the same period a year earlier. In dollar terms, this represented a net inflow of $17.4 billion, up from $5.1 billion (or 42%) a year earlier.
GFMS Executive Chairman Philip Klapwijk wrote in a recent report, “Looking at the second half of 2009, investment demand is expected to remain the driving force behind gold price movements.”
The independent consultancy group predicts identifiable gold investment will exceed 1,500 tons by the end of this year. This estimate would represent a 36% increase over identifiable gold investment demand in 2008.
In the meantime, it’s important to keep our eye on the prize. Don’t get disheartened by another pullback in gold prices. Rather, use any pullbacks to add to or establish new gold positions. If gold does in fact slip below $900, I always recommend buying every ounce you can afford.
The third stage, panic buying, is yet to occur. You won’t need me to identify this stage when it begins. Si it’s not a question of “IF”, but rather “When”.