Replies to post #195444 on The Golden Lounge

[Jim Bishop]

Gold has a 'true bull run'
This 'bubble is still being blown up,' analyst says

Jonathan Ratner, Financial Post
Published: Thursday, February 19, 2009

Safe-haven demand and a lack of investment alternatives continue to help gold break from its traditional trading relationships, rising toward a new record, despite a strong U. S. dollar and weak crude oil prices.

In fact, analysts at Genuity Capital Markets noted that gold has been trading more than US$200 per ounce above its normal value relative to the greenback. The firm also pointed out that the opportunity cost of holding bullion has diminished, with treasury yields at record lows and demand fundamentals deteriorating in the broader commodity and equity markets.

"Gold's run since autumn, 2008, has been a true bull run, rising despite the strength of the U. S. dollar and outperforming virtually every other commodity and currency class," said Canaccord Adams analyst Steven Butler. He told clients that bullion has set recent new highs in euros, pounds and Canadian dollar currency terms, among others.

Canaccord raised its peak gold price by another US$150, to US$1,100, now that gold has broken through the firm's previous target of US$950.

"It is fair enough that gold may be in a bubble, but we think the bubble is still being blown up," Mr. Butler said.

While credit risk has fallen from its recent highs, he noted that it is as elevated as during gold's first peak last March, which coincided with the collapse of Bear Stearns. However, gold is still below the US$1,003 high set about a year ago.

Meanwhile, inflation may not be registering yet in terms of near-term expectations, but Canaccord believes that it and a general devaluation of paper currencies will be the result of the concerted monetary and fiscal policies to reflate the global economy.

Gold is known as a measure of real assets value because of its ability to preserve value during inflationary times. However, during disinflationary times like these, the current global growth and demand landscape also supports the notion of too many dollars chasing too few gold ounces, according to Ashraf Laidi, chief market strategist at CMC Markets in London.

He noted that the equity/ gold ratio has fallen about 85% from its 1999 peak, which occurred when gold stood at 20-year lows and equities reached their highs at the top of the dot-com bubble. Just as the equity/gold ratio stands at 18-year lows, the ratio of total financial assets to physical gold is near the low end of its historical range.

Mr. Ashraf also pointed out that the world's available gold stock stands at only 5% to 6% of total global stock and bond market valuation.

Sustained investor interest in gold throughout 2008 helped push U. S. dollar demand for bullion to US$102-billion, a 29% annual increase, according to the World Gold Council. Its Gold Demand Trends report said identifiable investment demand for gold, which incorporates exchange-traded funds (ETFs), bars and coins, rose 64% last year. This is equivalent to an additional inflow of US$15-billion.

Genuity noted that holdings of the largest gold ETF, SPDR Gold Trust (GLD/NYSE), have increased by 26% since the beginning of 2009. So while bullion held in depositories on behalf of gold ETFs continues to grow from record levels, price volatility is an important consequence on both the upside and downside.

The ease of investing in gold via ETFs is matched by the ease of disinvestment, said Jeffrey Nichols, managing director of American Precious Metals Advisors.

"Just as quickly as gold-ETF depository holdings have grown, so might they shrink when sentiment changes," he told clients.

This has already contributed to short-term volatility and may do the same for the long term, given that gold's ultimate peak could be much higher than many had expected.

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