Friday, December 4, 2009

Seems like a quiet day, apart from gold gettting TORCHED. (GLD)

Gold (the December 09 spot price) is down 4.6%, or about $57 bucks, to 1160, on MASSIVE volume.



The gold Exchange Traded Fund (GLD) has traded over 59million shares, with an hour and half left until close.

Our friends in China, for one, have publicly stated that they view Gold as a "bubble." Large purchases of the metal from China as well as mining companies may be in the rear-view mirror:

"However, officials in Beijing are aware that China’s $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.
There is also a double-edged twist to news that Barrick Gold, the world’s biggest gold mining company, has closed the final 3m ounces of its notorious hedge book ahead of schedule. While the move is a bet that prices will continue to rise, it also means that Barrick has been a big buyer of gold lately. These purchases have now stopped. One of the key drivers behind the spike this autumn has been removed.
"

Gold-bulls have been recently vocal about what they see as a big argument in favor of long-term upside for the metal: John Paulson, he of "The Greatest Trade in Wall Street History" fame, is in love with Gold. Not only has he made large purchases of gold mining shares this year, but he has announced intentions to open a new fund in 2010 focused specifically on gold. It's rare to telegraph such a move BEFORE you buy, so this is certainly bullish for the metal.

Here's the issue I have with such excitement at these prices. Gold is the "last resort" asset that goes up when people think the world is going to hell, just like US Treasuries are the "reserve currency." But this is only the case UNTIL IT'S NOT. There is no reason that next year the "all hell's broken lose" asset couldn't shift to something more useful than gold.

Gold is loved for many reasons, including it's malleability, extreme durability, and long-term proven success as a store of value. But in terms of practical use, it's vulnerable, as you can see in the below data from the World Gold Council. Jewelry accounts for over half of identifiable gold demand, and it was down 30% in q309 versus q308.






Gold may keep flying, but it's only because of groupthink that this asset is chased. And as for the extreme gold predictions, like gold at $5,000 or $8,000, stop to think about what that would say about the state of the USA and global economy. If you own Gold and it hits $8,000, and IF you can find someone to buy it, take that money and invest in a shotgun, some rural land, and cattle, because we would truly be in an apocalyptic situation.

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