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Searching the Market Clouds for a Golden Lining

by: Brett Steenbarger September 30, 2008 | about stocks: GLD    
Brett Steenbarger

Brett Steenbarger

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(Click chart to enlarge.)

The gold market has been an interesting one of late. Even as other precious metals have swooned along with commodities as a whole, gold has managed to hold its own. When commodities were in favor during a period of inflation concerns, gold managed to benefit. Now, with economic weakness and the need for extensive government intervention to save the financial system, gold benefits from concerns over the value of the U.S. dollar.

The chart above shows the SPDR Gold Trust ETF (GLD) from 2006 to the present (blue line). The pink line is a 50-day moving average of volume in GLD. GLD is an interesting vehicle in that it is a way for the non-futures trading investment public to benefit from movements in the metal without the requirements of physical ownership and storage. What we see is that trader and investor interest in GLD has skyrocketed since the summer of 2007, which is also when we saw stocks make their bull market highs.

One interesting dynamic that could play into a longer-term bullish picture for gold is the fact that many countries hold very little of their reserves in the form of gold. The United States, for example, holds about 78% of its reserves as gold; Germany holds 66%. Japan, on the other hand, holds only 2% of its reserves as gold; China limits gold to 1% of reserves; India, 3%; Russia, 2%; Brazil 1%; and South Korea just .2%. So, if these countries aren't holding gold, how are they storing their reserves? Many of them are heavily weighted toward U.S. Treasury instruments. Should these countries decide to aggressively diversify their reserves out of concerns for the U.S. dollar, gold -- and the shares of gold mining firms -- could be primary beneficiaries.

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This article has 7 comments:

  •  
    Sep 30 06:19 PM
    Coulda, woulda, shoulda pie in the sky. Reader, pass by.
    Reply
  •  
    Sep 30 07:40 PM
    Again, as one of us usually notes--we don't know how much the U.S. has in gold since the last audit was in the 1950s or so.

    Don't worry about gold or silver, or even platinum and palladium. They will thrive when the economy stops thrashing around so much in its death throes.
    Reply
  •  
    Oct 01 08:46 AM
    Anybody try buying physical SILVER lately? Tru to buy it at spot price! Dealers are running short on supply if they have any at all. You CAN NOT get it for anywhere near the spot price. GOLD seems to be NO problem in procurring it and supplies seem adequate
    Reply
  •  
    Oct 01 10:51 AM
    The precious metal ETFs have added a bit of complexity to the market. They are sucking up a lot of physical metal and storing it away. This is likely contributing to the shortage in physical assets now being seen. The stage is being set for the start of a long and powerful rally in precious metals. All that's needed is for a large increase on the demand side.

    The author points out several sources of such demand. In addition there are reports that the Russians are considering backing the ruble with gold.

    Whatever the source, once the strong impulse to demand begins, the surging price of precious metals will draw even more demand for the dwindling physical supplies. The $90/oz jump in one day in mid-September is only a glimpse of things to come unless the US gets spending under control. If the US debt continues to grow,the rest of the world will begin edging away from the dollar as a store of value.
    Reply
  •  
    Oct 01 11:07 AM
    Gold has not followed the world events for the last 6 months but prior to that did react to major economic/world events. I believe that the price of gold and mining stocks during 2008 has become the most controlled investment by large foreign countries, primarily China and Japan as they like the U.S. keep their currency printing presses running full speed with too little gold reserves. Gold today, in light of world economic conditions and international problems such as Iran,
    Russia, North Korea, etc., etc., should be at least at $1,000/1,200.
    Japan and China with their hoards of U.S. dollars have and are continuing to manipulate their currencies to the dollar (they want to keep selling us their production) and supporting the value of the dollar holds gold prices lower than international events really dictate.
    Reply
  •  
    Oct 01 01:02 PM
    When you refer to gold representing a percentage of a country's reserve, what are you referring to as "reserve" for the US in particular?
    Reply
  •  
    Oct 01 01:43 PM
    Excellent posters as usual (EXCEPT for Jake2, who hasn't a clue). I too take umbrage with the percentiles the author uses for gold holdings by countries, particularly the US. Methinks the fire sale by Brown (UK) in 2003 did more to bolster our "reserve" than anything else in the past 4 or 5 decades. That's another story, though.

    GMiki is right. We don't know what is in Fort Knox or in the bowels of Manhattan either, but whatever it is, it probably belongs to the CHINESE! They have been saving our (US) bacon for a decade now. And to be sure, paybacks are gonna be a BITCH!

    As sieraromero correctly states, silver is getting to be like hen's teeth, try to find one! BUT, you MUST keep searching. Scoop up every piece you can lay your hands on.

    Howard Ruff stated not long ago, this is the time of a lifetime...when Joe Sixpack can take a "few dollars" buy some silver and gold, and be genuinely WEALTHY as a result. Please do this. You owe it to yourself. Uncle Sugar is only going to devise ways to relieve you of your $$$ through taxes, etc.

    Good hunting!
    Reply
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