Gold Decoupling from other Commodities Hit by Demand Destruction

By: Mark_OByrne

Gold rose yesterday on bank failures and systemic fears in Europe and after the U.S. Congress voted against the Paulson and Bush bailout plan ( gold closed at $88 8.4 0 up $ 7.2 0 while silver closed at $12.93 down 45 cents ). Subsequently, gold surged in after hours and in early Asian trading rising to over $923/oz.

We are living in i ncredi b le, tumultuous  and unprecedented financial and economic times and given the extent of the increasingly uncertain outlook for the global equity, property, money market, interest rate and currency markets it is surprising that gold prices did not surge by a larger amount. Astute analysts contend that there is a highly motivated and non profit motivated aggressive seller who wishes to keep the price around the $900/oz mark.

As we have continually pointed out it is inevitable that financial and economic conditions will get worse before they get better given the systemic nature of the crisis and the fact that we are now experiencing financial contagion. The bailout's failure is not the end of the world as it would have proved another in a long line of short term panaceas to be latched onto by complacent politicians, economists and analysts.

W hile stock markets in Europe have experienced a bounce so far this morning, unfortunately it is likely to be another bounce of the dead cat variety. While the bailout failed, central banks are printing and injecting billions into the global money markets (some estimates are as high as $180 billion per day in recent days and  $630 billion yesterday alone) and thus fiat currencies internationally are being debased at an unprecedented rate.  

As expected, gold is decoupling from other commodity markets as demand destruction affects non safe haven and non monetary commodities and metals. Oil fell some 10% yesterday and every single commodity was down on the day except for gold. Inflation has not gone away yet though and the Reuters Jefferies Commodities Index remains up 17.7% for the year and oil even after yesterday's meltdown is still up some 14% in the last year and 255% in the last 5 years.

Gold prices are set to move higher on broad based retail, high net worth, institutional and central bank demand. The news was incredibly bullish yesterday with the German Bundesbank and the Swiss National Bank confirming that they will not be selling any more of their gold reserves. The SNB said it doesn't plan a further reduction of its gold reserves, which now stand at 1040 metric tons.

Meanwhile, the London Bullion Market Association Conference in Kyoto heard that HNW individuals have been asking to buy gold for "wealth preservation".
Something we have been recommending for some years.

The global financial crisis will support gold prices at near-record levels, according to the chairman of the London Bullion Market Association.  Speaking at the LBMA's annual conference on Monday, Jeremy Charles told delegates that gold's important role as a haven had returned. Mr Charles, who also acts as head of precious metals at HSBC in London, said "Those who traditionally have shied away from gold as part of an investment portfolio can no longer afford to ignore this unique asset. "It is my opinion that, even when the crisis draws to an end as it inevitably will at some point, that gold will be looked at in a very different light going forward."

"High bullion prices are here to stay".

Both technically and fundamentally gold is looking as good as it has ever done and prices are set to surge in the coming months.  There will soon be fireworks in these markets and a price surge akin to that seen in the late 1970's. In the four years after the election of Jimmy Carter, gold surged by more than 700% and given the confluence of even more bullish factors in this election year, we are likely to see a similar price surge in the coming years .

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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