Thursday, April 5, 2012

More on Gold

A critical question concerning gold is whether the high of $1,925 last autumn was the peak of the bull market that began more than a decade ago at approximately $250 an ounce.  I don't think so, and I would suggest accumulating gold at current price levels.

The most compelling argument for owning gold is as an alternative form of money that represents a store of value during periods of monetary debasement.  A sign of such periods is when short-term interest rates are less than the rate of inflation.  This condition has existed in the U.S. for some time and seems likely to continue indefinitely.

As with any market, the gold price is set between the intersection of supply and demand.  Demand conditions have changed considerably in recent years as investors have purchased billions of dollars of physical gold and instruments linked to the price of gold, specifically exchange-traded funds (ETFs).  But also important, India and China have become the largest buyers of gold in the world.

This may be one fundamental reason for gold's recent weakness.  Demand from India over the last month has plummeted, as gold imports may have plunged 81% in March.  As a protest against a recently enacted excise tax on gold sales in India, jewelers have closed their businesses for 19 consecutive days.  Indian jewelers sell more gold than Australian and U.S. mines produce in a year.

With the indian wedding season coming soon, gold demand from India should resume.  This should improve the supply/demand balance.  Remember, the gold market is very small and prices can move sharply when demand increases.

I reiterate my advice to own gold.

Steve Lehman

Gold:  $1,632

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