I’ve had a few debates lately over the future price of Gold. Many people can’t believe it will continue to climb as it’s risen for 11 straight years already and has recently gone almost parabolic, exceeding $1,900/oz before correcting back to the $1,700 level.
I hear from people who already own gold wondering if they should sell. Many people think it’s too late to buy or worry that there’s too much downside risk at this point. Aren’t we close to the top now? I say we’re not even close.
Sure, we’ve had a decade long bull market in gold and on the surface it appears to be a bubble ready to pop. Yet bull market bubbles typically end at the height of extreme speculation, characterized by three to five days of a decline in price with higher volume than the preceding session, occurring within a relatively short period of time. This is followed by a mass entrance by retail investors, who as always are late to the party and soon get wiped out. Think dot com mania. So far, we have seen neither of these events.
While gold is trading significantly over its 150-day moving average, the fundamentals contributing to gold’s rise remain unchanged. With the latest speech from Bernanke today, I have even more confidence that it will continue to rise.
But it’s not just my opinion. South Korea’s central bank recently purchased gold for the first time since the Asian financial crisis in 1997. The gold portion of South Korea’s official foreign reserves surged to $1.32 billion at the end of July, up from just $80 million at the end of June.
I expect prices to continue to climb so long as central bankers around the world are underinvested gold and are still looking to increase their holdings:
- Mexico recently upped its gold reserves by almost 100 tons, up from just 6 tons holdings prior!
- Russia purchased 26 tons during the second quarter, taking its total gold holdings to around 837 tons, equivalent to almost 8% of the country’s reserve assets.
- Thailand’s gold reserves rose by 15.5% in the two months and rose to about 4.07 million ounces in June, from about 3.523 million ounces in May.
So if central banks around the world are topping up their gold reserves and have quadrupled their total purchases from the market in the last quarter alone, should we feel safe holding gold as well?
Central banks were net sellers of gold for nearly two decades up until 2009 when the became net buyers of gold.
Venezuelan President Hugo Chavez said that he plans to nationalize the gold sector, including extraction and processing and use the production to boost the country’s international reserves:
“I have here the laws allowing the state to exploit gold and all related activities. That is to say, we’re going to nationalize the gold and we’re going to convert it, among other things, into international reserves because gold continues to increase in value” – Hugo Chavez
He’s also ordered the repatriation of 90 percent of Venezuela’s gold reserves held abroad, returning the country’s gold reserves back to Caracas:
“We’ve managed to increase the international reserves. We have close to 12 or 13 billion of dollars in gold reserves. We can’t allow it to continue to be taken away” – Hugo Chavez
With the current policies of central banks around the world, the fundamentals for gold price appreciation (which is really fiat currency depreciation) remain sound. Unless we see some major shifts in global economic policies, we’re still far away from a ceiling in the price of gold.
