Although the press has now set gold aside for hotter stories, I can tell you demand for gold coins continues at unprecedented levels worldwide, and production is still struggling to keep up. Take a look at these recent reports:

***Sales of the Austrian Philharmonic gold coin soared 544% in the first two months of 2009 (vs. the same period the year before), with production at the country’s mint running quadruple its usual volume.

***The demand for Krugerrands is at its highest level since 1986. The South African refinery recently doubled production of blank gold coins to 20,000 ounces per week.

***China, now the fastest-growing market for gold, saw 2008 sales (measured in dollars) rise by 50% over the year before – and total sales in January 2009 were one billion yuan (US$146 million), 30% more than all of last year.

***The U.S. Mint sold 193,500 one-ounce gold Eagles in the first seven weeks of 2009 – equaling the number shipped in all of 2007 and about matching the first half of 2008.

***Russia’s Sberbank says it has “never seen such strong demand for investment coins.”

With this incredible interest in gold, it’s worth going over where to go for the best deals in bullion… and what the stated wait times and premiums are. Here are the dealers that have consistently treated their clients (and our readership) well over the years:

Kitco (Kitco.com; 1-877-775-4826). All bullion products are available at Kitco and can be shipped within 24-48 hours of a paid order. Premiums are slightly higher than our other dealers recommended below, but what’s particularly attractive at Kitco is that you can get silver for less than 1% over spot… Its pool account is currently charging only 14 cents over spot (premium fluctuates daily), which is a great way to build your silver holdings while waiting for physical premiums to come down.

The Coin Agent (thecoinagent.com; 1-888-494-8889, or email thecoinagent@gmail.com). Wayne Lemonier currently offers immediate delivery on paid orders for all gold coins except the Eagle, which takes two weeks.

Premiums for gold coins are 6% over spot for Maple Leafs, 6.5% for Philharmonics and Krugerrands, and 7% for Eagles (one of the lowest in the industry).

Silver bars are at the lowest premium we know of: A 10-ounce silver bar costs $1.75 per ounce over spot, and 100-ounce bars are only $1.50 per ounce over spot. American silver Eagles are spot + $4.50, and silver Canadian Maples are spot + $4. Shipping and handling for silver is $20 per 100 ounces.

Border Gold (bordergold.com; 888-312-2288, ext. 7). Both gold and silver Maple Leafs are readily available and can ship the day an order is paid. Border told us premiums are slightly higher this year than last because the Royal Canadian Mint raised its prices.

Premiums on gold Maple Leafs are only 5.5%, one of the lowest in the industry. Shipping and insurance is $25 for one or two coins. A one-ounce gold bar is spot + $25; 5-ounce and 10-ounce bars are available in limited quantities at spot + $22 per ounce.

The one-ounce silver Maple Leaf is $4 over spot for up to 99 coins and then $3.25 per coin. Both 10- and 100-ounce silver bars cost $2.50 above spot, with the 100-ounce silver taking a week to deliver.

ASI (assetstrategies.com; 1-800-831-0007). Gold Maple Leafs, Philharmonics, and Krugerrands can be shipped immediately upon a paid order, with American Eagles currently taking about three weeks.

One-ounce gold coins are 7.5% to 8% over spot; Eagles are 8.5% to 9%. One- and 10-ounce gold bars can be had at 6%. One-ounce silver Eagles are $4.30 over spot. A 100-ounce silver bar is $2.20 per ounce, and a one-ounce bar is spot + $2.50. Costs for junk silver vary but average about $2.20 per ounce over spot.
Some of our readers ask… why don’t we recommend any of the larger dealers?

Availability and premium are the primary considerations in selecting a bullion dealer. Some of the larger houses may match the prices of our recommended dealers; however, there’s an intangible issue: the hard sell.

Many of the big dealers push high-margin numismatic coins. So while you may get good prices and delivery on your bullion coin, beware the salesman who begins talking up rare coins. You won’t experience this with our smaller dealers, and it’s this no-hassle service that gets our business. If you start to hear, “Hey, my friend, I have a great deal right now on a rare Swiss coin…,” you might want to reconsider where you shop.

Gold is the safe-haven investment in times of crisis, and more and more investors worldwide realize this. But even though gold has risen more than 140% in the last five years, there is something that can give you even higher returns: we call it Toronto’s Secret Gold Investment.

Source: Where to Find the Best Deals in Physical Gold

This from Karim:

President Obama has all-but sealed the fate of the U.S. dollar.

In doing so, however, his policies – no matter whether they’re forced upon him or deliberate – have opened the floodgates for gold and gold stocks.

In fact, they’re setting the stage for the biggest rally in gold’s history.

Over the past several months, we’ve told you why you should buy gold and highlighted one of the best gold indicators you can use to determine when to buy gold. But today, we’re simply going to show you how to profit from the yellow metal…

Three Reasons Why Gold Is Headed Higher

Okay, so Obama hasn’t specifically said, “Buy physical gold,” but  he’s certainly saying it with his actions instead. Here’s why the metal is headed higher…

1. The Printing Press: The U.S. government is printing a massive amount of money every day. In fact, we’re up to $2 trillion since last November. But here are the questions we should be asking…

~ Where’s this money coming from?
~ What is supporting this huge flow of new money?

America can print money today because the world believes that one day we’ll pay it back. But we haven’t paid down our debt in decades! In fact, over the past 30 years, our debt has increased 10-fold. (We have paid the interest though and that is better than most countries).

However, each new dollar we print is like adding a tiny little bit to the price of gold. And we are printing trillions of dollars.

1. The Currency Fear Factor: Gold is going higher because people are frightened that they won’t allow themselves to fall into the dollar/yen/pound/euro trap again.

For example, did you know that gold is at new highs against the Pound and Euro? Because those two currencies have fallen sharply against the dollar, the price of gold in both currencies is much higher than the last time gold was at this level (about this time last year).

1. More Educated Investors: With the huge amount of upheaval that the economy and stock market has faced over the past year or so, we now have a greater number of educated investors, who can plainly see that gold is the asset to hold. We wondered out loud why this wasn’t the case back in October, as investors seemed to ignore the dire news coming out each day and gold prices were stagnant. They’re not ignoring it now – and readers who took our advice to buy gold are doing very well.

But because more investors have jumped on the gold bandwagon now is exactly why you should not be buying gold right now.

That is, of course, unless you’re using a strategy that allows you to make some money or reduce your cost if the shares move down. I’ll give you an example in a minute…

Mind The Gap: Why You Should Set A Buy Alert At The $800 Level

Since mid November 2008, gold prices have pretty much moved up in a straight line.

Be warned: Like any investment, this cannot last forever.

Gold will sell off for a variety of reasons: Because they need money more than jewelry… because China and India are a little bit poorer… because investors sell for technical reasons.

Gold needs to fill a gap on a chart that goes back to the $800 level. And that is when you should buy gold. But not physical gold. Let me explain…

When Gold Hits $800 Again, Here Are Four Gold Investments You Should Buy

Rather than buying physical gold – as many people like to do – you should instead buy shares in gold mining companies. This includes…

~ Goldcorp (NYSE: GG)
~ Yamana Gold (NYSE: AUY)
~ Barrick Gold (NYSE: ABX)
~ Newmont Mining (NYSE: NEM)

You could even buy a silver-based play like Silver Wheaton (NYSE: SLW).

Here’s the thing with physical gold: Unless you’re counting on it to come in handy during something like a government coup where you need to flee the country (in which case, you’d better take a donkey with you, as it will be a heavy load), there are disadvantages to owning physical gold. Ones that result in less money for you.

For example, physical gold is difficult to store. It doesn’t pay dividends. And you can’t apply professional investment strategies like covered call writing to gain additional income.

Most importantly, gold shares move up by a factor of between two times and three times more than the percentage move for gold. So if gold prices move up by 10%, you can expect gold shares to move 20% to 30%, depending on what their cost is.

Everyone Is Buying Gold… But Not Everyone Is A Pro: Here’s The Pro Way To Profit From It

Okay, so once you’ve bought some gold mining shares, how do you start milking the investment for bigger profits than most other investors? I’ll show you…

The bottom line is that not only do you want to capture the price appreciation of your gold shares, you also want to sell call options against your stock to reduce your cost and take money off the table. Here’s how it works…

Let’s say you buy shares of Silver Wheaton for $7. Using a covered call strategy, where you sell one call option for every 100 shares you own, you can get back almost 6% in cash over the next seven months – and still have the chance to more than double your money.

Think of it as a free dividend that no one else knows about.

That’s the kind of stuff we do all the time in my Strategic Income service and every so often in our Xcelerated Profits Report (XPR) newsletter.

Gold Is Going Higher… Let It Take You Along For The Ride

The bottom line is this: Gold is going to move higher. Ultimately, much higher.

There will be opportunities to buy the metal along the way – and you’re going to hear a lot of people crowing about those opportunities.

But what they probably won’t tell you is that there’s a way of not just buying gold, but buying it through a simple strategy that pays you back and also mitigates some risk.

Understand though, that gold is not going to shoot to the moon tomorrow. That’s why we’ve taken a defensive posture on two of the gold stocks I mentioned above. One is a covered call play on Goldcorp, and the other is a spread play on Yamana Gold that has allowed us to take 95% of our money off the table, yet still left us with the chance to make over 4,000% on the money we have at risk.

The question is: Are you just going to “buy gold” because everyone else is? Or are you going to really profit from gold like the pros do?

Source: Obama Says, “Buy Gold”… Three Reasons Not To Listen

This from Whiskey & Gunpowder:

Lately I’ve been discussing concept of scarcity in the energy and natural resource sectors. In one recent note, I discussed how the idea of scarcity has transformed from a “geological” basis to an “above ground” basis. In another note I discussed how the financial system of the world has broken down. This breakdown has damaged many a portfolio. But I still believe that an investment focus that is based on future scarcity of energy and mineral resources is basically correct.

In the future there will still be profound restraints on the availability of energy and natural resources. So owning shares in firms that “do energy” or “do resources” is still a good idea over the medium and long term.

We Still Have a Big Problem

We still have a big problem. The credit system is broken (and that’s the nicest thing you can say about it). Many large banks in the world are broken too (ditto). The investment model of the modern era, starting back in the 1860s during the U.S. Civil War, has almost ground to a halt. That is, the idea and method of “floating capital” is not functioning. Indeed, capital no longer seems to float. Actually, it seems like capital has been sinking like a stone.

The lack of capital (at least, in the forms that we’ve come to utilize it for large scale investments) means that it is difficult – impossible in some cases – to go forward with the new energy and resource projects that are designed to mitigate the present depletion’s in older oil fields and other resource provinces.

In the face of this, most governments of the world are trying just to look good for the TV cameras. Central banks and government treasuries across the world have been reduced simply to throwing money at whatever problems catch their collective eye. Squeaky wheels get the grease. So we see the national treasuries “recapitalizing” busted banks. We see the likes of the U.S. Big Three automakers coming hat-in-hand to Congress for a bailout, and Congress in turn acting like it knows how to run a sophisticated manufacturing business. And we hear announcements, from China to the U.S., of massive new public works programs to get the world moving again.

It’s like if we pour enough concrete, and then everything will turn out all right. Somebody ought to ask the Japanese about that. They all but paved the island of Honshu in the 1990s, and still lived through a stagnating era.

Can things really turn out all right? Can we return to some happy past? As Heraclitus once noted, “You cannot step twice into the same river, for other waters are continually flowing on.”

Prosperity Stolen from Fort Knox

Indeed, all rivers flow to the sea. In Asia Times Online, the always insightful Henry C. K. Liu recently wrote that the credit crash has “turned out to be a catastrophic, global, financial perfect storm of unprecedented dimension that will cause serious structural damage to all market economies around the world. It may even spell the end of the cowboy finance capitalism of the past two decades in which risks are socialized and gains privatized, with debt manipulated to act as phantom capital.” Yep.

A fellow Pittsburgher, financial writer Jim Willie, is even more pessimistic. He thinks that in 2008 the U.S. economy and financial structure suffered “mortal wounds.” Jim states – using a very clever turn of phrase (I wish I’d said this) — that a “decade of prosperity was stolen from Fort Knox.” That is, major elements of U.S. monetary policy in recent years involved the gold carry trade enacted by the U.S. Treasury in the 1990s.

What is the gold carry trade? The U.S. Treasury and Federal Reserve treat the details like state secrets. But what has leaked out makes for a sordid story – treasonous, even. It’s enough to make you wish that we still executed people by firing squad in this country. Let me put it this way. Perhaps President-Elect Barack Obama thinks that his biggest surprise will come when he gets “THE briefing” and finally learns what is really out in the tightly guarded hangars near Groom Dry Lake in Nevada (a/k/a “Area 51”), and Dugway Proving Ground in Utah. Well just wait until Pres. Obama asks how much of the original Fort Knox gold still remains the unencumbered property of the U.S. government. Surprise, surprise.

The Wolf is At the Door – Say Hello to the Nice Wolf

In 2008 we all experienced the destruction of a world-wide credit bubble. This was the end of many decades of dollar-abuse and monetary malpractice by the U.S. Federal Reserve and the utterly profligate U.S. government in general. As Gresham’s Law states, “Bad money drives out the good.” And decades of bad money did not just drive out the good stuff. In turn it sowed the seeds of its own destruction.

It was just a question of time before the wolf showed up at the door, and that time has arrived. Say hello to the nice wolf. So now it’s time to face the fact that the U.S. economy is in far worse shape than most people believe. And it will be in bad shape for a long time to come. If everything goes right, it might take a generation to clean out the stables.

But we are already off to a bad start. The 2008 credit meltdown has caused huge collateral damage. And in 2009 we will see an extraordinary attempt to re-inflate that bubble. Will it work? Probably not like people expect.

The traditional financial system is now in the fight of its existence. The system was based on U.S. dollar hegemony and the supremacy of U.S. national power. That, and the way that the U.S. benefited from ingrained habits of foreign monetary authorities kowtowing to Washington based on decades of living with Bretton Woods and its ghosts. It all hit the wall in 2008. But like the creatures in the Aliens movies, these critters won’t stay dead for long. The Wall Street/Treasury Axis will come back to fight hard and play dirty.

Things to Do to Ensure Your Security

I believe that the old system is irretrievably doomed. But you cannot replace something with nothing. There is still no “new” system that has come around to take the place of the old one. Thus the big task for 2009 is to save your personal wealth from going down with the ship. So how do you ensure your security?

In the short term you can protect your financial interests by increasing your cash position as a percentage of your assets. When all else fails, add to cash. Yes, we will probably see inflation in the future, but for now more cash is better.

Also, in anticipation of inflation you should own physical metals like gold and silver. I mean it. I’ve said it before. OWN GOLD! And I mean OWN THE METAL. Take delivery! Maybe I sound like the Mogambo Guru on this, but he’s right. Let me quote Mogambo. “Own freaking gold!”

And get out of any but the very best shares. The first requirement for share ownership is to look for companies with enough cash to fund operations and make it through some very lean times. Then you also want to invest in firms that are going to be important in the world that’s coming down the tracks.

What kinds of firms will be important? Well, energy and resource firms for starters.

Source: Falling Prices and Scarce Energy

More from The Daily Reckoning:

The late November rally in gold prices wasn’t quite as spectacular as mid-September’s gain, but it was still impressive. There was good follow-through too, though the momentum softened as bulls knocked on resistance near $850.

The rally was a no-brainer. There is a strong line of support at $700, which was resistance during 2006 and the first half of 2007. Moreover, the market was, and is, oversold.

The catalyst was news that the U.S. government had to bail out Citigroup (NYSE:C), the world’s largest bank by revenues. The event has given way to new concerns about the economy, which weighed on stocks and gold this week, or at least provided an excuse to take some profits in the latter.

The big question now is whether it was just a retracement rally that ultimately gives way to new lows or whether we have seen the bottom in gold, with this rally being only the first of many to come.

I don’t think the chart can answer that question alone. Technically, the structure of the market is healthy now, and as far as the fundamentals go, gold should not remain under $1,000 for very long.

Indeed, I sense the market is building up for a very bullish move.

Allow me to touch on some of the bullish factors coming into play.

“Notwithstanding the many developments on the bailout front during the past six weeks, The New York Times, like other media outlets, continues to quote Wall Street insiders who report” [that] “‘You have a market that is frozen.’ What planet do these guys live on? It certainly is not the same one to which the Federal Reserve’s data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these ‘frozen credit market’ tales are pure hooey. Look at the data, for crissake.”

- Robert Higgs, author of Crisis and Leviathan, in a recent essay on the bailout programs

The fundamentals are significantly bullish for gold. I’d like to say they are bearish for the dollar, but in truth, they are increasingly bearish for all paper currencies. Outside of the Bank of Japan, everyone is inflating madly. In the G-7, narrow money (M1) is growing at 7-10% on a year-over-year basis in the U.S., Canada, the U.K. and Australia – more in developing countries like China. And this rate is picking up now.

October’s data are not in yet for the ECB. Its balance sheet increased by some 400 billion euros during the month, which is the first big change since the second quarter, and will probably reflect in M1. The Bank of Japan started inflating M1 again in September too, after holding it steady for most of the year.

The broader monetary aggregates (i.e., those determined by the banking system at large) are growing briskly everywhere but in the U.S. and Japan, though even the latter are still growing.

Broad money in the U.S. is growing between 5-10%, depending on whether you rely on TMS or MZM or higher, if you like M3 (I don’t).

The U.S. data are good through October. Up till the end of September, as far as we are updated, the year-over-year growth rate in broad money approached 20% in Australia, its highest rate in almost 20 years. In the U.K., the broader monetary aggregates are growing at close to 14% on a year-over-year basis, which is its highest growth in almost a decade.

These growth rates are almost as bad as China’s, which is approaching 20% year over year too, again. Given these numbers, it is no surprise to me whatsoever that the yen is the strongest currency, followed by the U.S. dollar, or that the Aussie and the pound are taking the greatest beatings, along with all the other riskier currencies.

The actions governments are taking now are bearish for stocks and bullish for inflation. But they are not just bullish for inflation – they are remarkably bullish.

I don’t mean to sound happy about it. It’s just an observation that the market has yet to come to terms with. Since September, the Fed has expanded its balance sheet a total of $1.3 trillion. Of that total, it has created about $600 billion in reserves out of thin air.

Most of that is not counted in money supply, because it excludes deposits held by depository institutions. Total money supply is about $6 trillion, if you rely on the Austrian School definition (I do). It has, nevertheless, translated into growth of about $100-200 billion in new money created by the banking system since September already. Deflation is a no-show so far, and I don’t think it will arrive at all. I think history will see this as just another scare.

The Federal Reserve just announced two new programs that commit it to another $800 billion, and that is even before President-elect Obama puts his stimulus package together.

Reuters cited  Wachovia’s (NYSE:WB) chief economist:

“Some, however, are worried the mounting costs of the measures, which have the potential to reach several trillion dollars, could eventually fuel a troubling inflation.

“‘It may mean (a) longer-run issue with inflation and inflation concerns,’ said John Silvia, chief economist at Wachovia Securities in Charlotte, N.C. ‘It may be too much of a good thing is a bad thing.’”

Ya think?

Even more inflationary, in my opinion, is the fact that the talking heads think the Fed’s latest facilities are simply not enough. They are complaining the programs do not include direct purchases of credit card debt and mortgages in the secondary market and that the Fed isn’t going to buy mortgages with maturities of more than one year. Not long ago, the Fed never bought anything but Treasury notes.

Gold bulls are going to attempt to raid Comex’s vaults by forcing delivery on their December futures contracts (Dec. 19). Who can tell how that will go? I can’t. But it’ll be interesting to watch.

Facts: The open interest in futures contracts on the Comex has fallen to its lowest level since summer 2005, breaking a general uptrend in place since 2001. From a contrarian standpoint, the short-term bottoms in these data tend to favor the buyers over the sellers. However, the statistic went into orbit during the last half of 2007 – it broke away from the upper channel on the charts, creating a bubble in appearance. The current extremity could simply be a symmetrical reaction to that extreme.

Nevertheless, this is a bearish fact, technically speaking, if it represents a lasting new trend.

It is tempting to suggest that the threat of a raid in futures contracts is causing a short squeeze.

It is true that the commercials are liquidating their short positions promptly. But the funds are increasing their short bets, and the liquidation of longs is such that the net short ratio has hardly budged off its mid-September low – which, incidentally, is a level that has coincided with strategic buying points at seven other junctures since the bull cycle began in 2001.

However, the record of this statistic in gold is unique in that during bear markets, the commercials tend to be net long (wrong) most of the time.

So the fact that they are covering their short interests on net does not necessarily presage a rally if a bear market has set in. A bear market would mean that gold prices could fall as far back as US$500.

Fundamentally, the conditions just don’t look ripe for a bear.

I don’t believe the COTs (Commitment of Traders report published by CFTC) have any real predictive value. They tell us only whether the market is too much extended one way or another; they don’t tell us how long those conditions will last. Right now, the structure of the market is healthy. The commercials are covering their shorts, the funds are getting short and the numbers basically favor the bulls. The contraction in open interest worries me a little, but it could be explained in terms of a collapse in spread trades linked to various index products.

In its most recent report on gold demand, the World Gold Council said as much in trying to explain the drop in the gold price in the context of soaring physical demand. In its third-quarter report on gold demand, the WGC noted growth in both jewelry and investment demand across the spectrum relative to both the last quarter and the year-ago quarter. I don’t want to go into a critique of the method here, except to point out that it chronically understates investment demand and overstates jewelry demand.

The inclusion of ETFs all but proves the point.

In just one year, investment demand has grown in importance from under 15% to over 30% of total gold demand, causing the deficit (supply shortfall) to grow nearly tenfold. The WGC interprets this deficit as supply coming from speculative sources, like futures trading or changes in inventories at the various exchanges – like at Comex. Thus, it calls it “inferred investment.” Formerly, it called this the “balance.” But as it grew, the WGC decided it meant something. What is causing it to grow, aside from growing demand in general, is that while the WGC is “identifying” new kinds of demand, it has not kept up with the various sources of supply. Gold bugs have argued for years that the supply of gold is not limited to mine production, officialdom or scrap…that it is not like other consumable commodities.

It is more useful to assume that most of the gold ever produced is held as a reserve, or store, aboveground. And if this is true, then investment demand must be much larger than the WGC calculates, or the price would, frankly, never go up. If the WGC is smart enough to include producer hedging (or dehedging) in the equation, it should also include a measure of demand that expresses itself through all the exchanges and bring itself up to speed on all the sources that supply the market. It assumes that jewelry demand dominates the market, which is incorrect, but even if it were, it still has the wrong idea.

Jewelry demand may be price sensitive in the short term, yet it has grown every year, at successively higher prices, since the bull market began. Despite my objections, however, I am in total agreement with the council’s explanation why gold prices have fallen despite the evidence of soaring gold demand:

“Notably, the selling captured by the [inferred] investment category was mainly by investors with a short-term focus. It largely reflects the fact that gold was caught in the downdraft of other commodities and other assets – it does not reflect a questioning of gold’s value or role as a safe haven. The strong buying in the ETF and bar and coin markets during the quarter, which reflects investors with largely a longer-term focus, suggests that investor belief in gold’s role as a safe haven and store of value is stronger than ever.”

No wonder the commercials are covering. The establishment is getting hot for gold.

JP Morgan’s gold analysts “urged” investors to stock up on gold this month, citing counterparty risk and tight supplies.

Citigroup’s foreign exchange group also put out a bullish tout.

Well, that’s an understatement, actually. “[Gold] continues to look like a bull market to us. We continue to believe that a move of similar percentage to that seen in the 1976-1980 bull market can be seen, which would suggest a price north of $2,000,” Citigroup’s FX group said last week.

What I found particularly intriguing, besides the timing of these calls, was that they both discounted the dollar. That is, they noted, as I have in the past, that the foreign exchange value of the dollar may not be important at this stage. Morgan said, “It is not an absolute given that a rally in gold means a falling U.S. dollar,” while Citigroup pointed out, as I also have, examples of just such a situation during the 1970s.

Anyway, it’s not a sure thing yet, and it all makes great fodder for the bull market in gold.

Source: Gold Looks Bullish as Dust Settles

This from Sovereign Society:

In the past few months, millions of investors have taken trillions in equity out of the markets, stashing it either on the sidelines or in negative-yielding US treasury notes.

And honestly can you blame them?

Real estate and equity prices have crashed and it’s almost impossible to know when they’re going to recover. Fixed-income investments are growing riskier by the day due to the global credit crisis and the projected spike in bankruptcy rates.

But here’s the reality: The U.S. government is printing money so fast, that cash is not even a safe bet anymore. That makes gold the safe bet in these rather stormy economic times.

Investors who purchased gold lately have been disappointed because the price of gold has not responded to the crisis as expected. Just think about it: If we had told you a year ago that this financial crisis was going to be so severe, would you have bet on gold falling by 30%?

Anatomy of a Disappointment

My guess is that very few of you would answer “no.” We have spoken with many confused investors lately, who don’t understand why gold is not responding positively to the current crisis. As you can imagine, this only adds to their confusion of the global markets.

Once again, it’s important to understand what moves the price of an asset short-term and what is driving that same price in the long-term. The long-term outlook for gold is still very attractive. We simply don’t have a growing supply to match the rising demand for gold.

The massive infusion of liquidity is ultimately going to lead to a massive spike in capital flows, and an upward pressure on inflation. This should also support the price of gold longer-term. Also, the weakening U.S. dollar in recent years drove gold prices higher. And the current temporary dollar recovery is also having a negative impact on the gold price.

However, at the moment, the short-term impact of various factors is out-weighting the positive long-term fundamentals.

Behind the Scenes in the Gold Markets

The reason gold has not performed well in the last couple of months is because institutional investors are dumping their gold holdings. These institutional investors need liquidity fast, so they’re selling gold. This actually shows how bad the current crisis is for many. Gold is now one of very few assets that can be easily liquidated to generate cash.

And the creativity of the financial industry has resulted in the development of a lot of commodity-linked investment funds. Typically funds buy gold as one of the hard and soft assets in their commodity-backed baskets.

These funds have all been facing a massive amount of redemptions lately. That means fund managers are forced to sell all commodity baskets they own… including their positions in gold. They could not differentiate between oil, agricultural commodities, metals and precious metals due to the nature of these investment baskets. This just adds more selling pressure on gold.

The temporary recovery of the U.S. Dollar has also kept prices rather low, but the U.S. Dollar recovery is driven by short-term money flows. We at Alpine find it hard to believe that the U.S. Dollar will continue to gain ground.

While we have seen the price of gold falling, a physical shortage of gold has developed. Go to any bank here in Switzerland and tell them you would like to buy a large amount of physical gold, either as gold bars or coins. Most of them will tell you that you have to wait a couple of days or even weeks because they are running out of inventory.

This is because more investors are distinguishing between “paper gold” exposure like investment funds and physical gold that they can touch and store in a vault. The problem is that many investment products are directly linked to the credit risk of the product issuer. This was not a big concern a year ago, but it certainly matters today – as we’ve seen so many troubled banks collapse under the credit crisis.

So if you plan to invest in gold certificates or funds, be sure your investment is physically backed by gold. Also check to ensure your investment is easily tradable, and backed by a counterparty with low credit risk.

These are uncertain times and could remain so for quite some time to come. Eventually, we believe that the market is going to focus more on the longer-term outlook for gold again and the short-term selling pressure is going to subside. This should drive the price of gold upwards towards US$1,000/ounce, possibly even higher.

We predict that ultimately, gold will shine again and that time could come sooner rather than later.

PS. Still not convinced? Here’s an excellent video from INO.com that uses technical analysis to show why the recent break above $800 an ounce could trigger the next big leg to the upside for gold prices.

Source: Why Gold Isn’t Shining (Yet…)

On that topic, a friend sent this item along last week…

(Gulf News Nov 12) Riyadh: There has been an unprecedented demand for gold in the Saudi market recently, with over 13 billion Saudi riyals (Dh12.75 billion) being spent on the yellow metal during the last two weeks.Demand is expected to rise still higher as more investors turn to gold as a safe haven in the midst of the global financial crisis, according to market sources.

Sami Al Mohna, an expert on the gold market, said the trend had resulted in a substantial rise in the gold reserves of Saudi investors.

Since soaring to an all-time high of $1,033.39 per ounce in March this year, gold has plummeted 30 per cent.

Gold for December delivery on Monday rose $8.60 to settle at $726.80, roughly the same level at which it traded a year ago.

“Many Saudi investors see this as the right time for making investments in gold as its price is the most reasonable one at present,” said Al Mohna.

Needless to say, the Saudis have a lot of money. Not just a lot… but a really, really, big, stupendous mountain of the stuff.

Oh, and like you and me, they’re human.

Which means they can’t help but glance through the morning’s financial news, adjust the reading glasses, and think, “Blessed Mohammed! This is getting really, really serious. Maybe just a little extra gold under the tent right now wouldn’t be such a horrible idea.”

They aren’t alone. We are getting regular reports that at these prices, demand is soaring in India (where price inflation is now running around 11%), and brisk sales have pretty much wiped out physical supplies of small coins and bars in the U.S. and Europe… among other corners of the world.

On that score, a few days ago, correspondent Jim G. sent along the following…

Most of you are probably aware that there’s a shortage of gold bullion coins at the retail level.What does that mean?

Today I decided to purchase some gold bullion coins. So I called the Northwest Territorial Mint, one of the larger operations in the country or at least the Northwest, so I’ve been told.

I called to see what the availability was. The operator put me through to sales, where I sat for 30 minutes. I finally got in my car and drove 40 minutes there, all the while still on hold. When I finally got there, a woman went in the back to see about bullion coin availability. She was told they were back ordered with 30,000. Not dollars, orders. If I placed an order today, they thought they could fill it in 16 weeks.

To sum, I’m buying… if you know a seller.

While we already know $750 is no magic number below which gold cannot fall or below which it cannot loiter, I take no small comfort in the fact that there is a clear increase in demand at that price. In time, as the dollar continues to participate in the fiat currency race to the bottom, that number will ratchet higher and higher still.

Maybe not overnight, but in the next six months to a year, certainly… or as certain as anyone can be about anything these days.

One thing that could get the show on the road pronto-like has to do with the continuing presence of the other 900-pound gorilla in the room, foreign dollar holders. Like the Saudis, the Chinese have at their fingertips a lot of greenbacks. Actually, not just a lot, but enough to remake the Great Wall.

And they, too, are humans.

And so, over their morning cup of tea, they finger the abacus while watching the daily financial news and say, “Holy Mao! This is getting really, really serious. Maybe just a little extra gold in the rice jar right now wouldn’t be such a horrible idea.”

On that front, here’s some news from Hong Kong…

(The Standard, Hong Kong. Nov 14) — The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.

China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

In another article from Bloomberg, the head of China’s gold association commented that he thought China could triple its reserves.

And there was this quote from that same article.

China has the world’s biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China’s demand for gold jumped 23 percent in 2007, making it the world’s second-largest consumer.The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper in Hong Kong reported today, citing an unidentified person.

In the final analysis, we can’t say with certainty what path gold will take between now and the time this crisis is over. But until I can see some tangible evidence that it has lost its value as money, I’m a happy holder and, at under $750, a buyer.

Source: Gold in the Low $600s?

Demand for physical gold is soaring so much that it is almost impossible to get hold of right now. And gold production is lower than in 2000. Andrew says all this means it will soon be gold’s time to shine…

More from Investor’s Daily Edge:

Gold dropped from $915 to $859 on Friday. That’s not supposed to happen while the market is crashing. What’s going on?

It’s not that gold has lost its luster. But institutional investors were forced to sell gold on Friday to meet margin calls.

If equity and hard assets continue to lose value anywhere near the rate of last week, margin liquidation will continue. And gold could go down even more.

But make no mistake about it. With the market crashing and dozens of governments printing money like there’s no tomorrow, investors want to be in gold.

Before the sell-off on Friday, the price of gold was up more than 20 percent following Lehman’s collapse.

The demand for physical gold this month has surged to what one trader calls “unprecedented” levels. The US Mint has doubled its gold-coin production but it hasn’t been enough.

Gold dealers have had to turn away customers wanting to buy coins and bars.

But it’s the physical demand (for jewelry) that ultimately decides the price of gold. Jewelry demand accounts for 60 percent of total gold demand and it’s down so far this year.

Will it pick up? The world’s biggest gold consumer is India and Diwali – the festival of lights –begins October 28th. Gold sales usually surge with the approach of this festival.

Then there’s this: Gold production today is lower than it was in 2000.

Gold is rarer than ever. The markets are going to hell. It’s gold’s time.

Source: Has Gold Lost its Luster?

David Galland says profit taking by institutional investors has ‘trampled’ metal prices. But the deepening crisis on Wall Street, geopolitical tensions and a traditional September bounce could send gold soaring back towards $1,000 an ounce. David says this could “happen literally almost overnight.”

Here’s a no-brainer long-term investment strategy to stick to: buy and hold resources now.

This from The Daily Reckoning:

As we take a longer view on the precious metals here at Casey Research, I’m not much for commenting on current market gyrations or the various sub-themes that regularly emerge in the blogs.

First and foremost, as to the purported discrepancy between the price of gold on commodities exchanges and that of physical gold, in my view, any real discrepancy would be jumped on by the arbitragers so fast, it might even break the land-sound barrier.

As for the shortage of gold and silver bullion products, we would attribute this to a couple of factors. The first is that there has been some poor planning on the part of the mints. Secondly, the poor planning is likely due to a failure to appreciate how many people are coming to the conclusion that it is better to own at least some precious metals, instead of holding only the unbacked paper of governments.

As for gold’s recent steep fall in the face of the clear signs of physical demand, it seems clear that this was largely caused by gold traders taking profits. At every step up in this bull market, the precious metals have been stuck, for months at a time even, in trading ranges… the bottom of which evokes buying and the top of which triggers selling.

It is always worth keeping in mind that the defining feature of commodities exchanges is the leverage the instruments that trade on these exchanges offer. Consequently, the traders who call those exchanges home are able to marshal considerable juice in their quest for a new Lexus with 16-way driver seat features and custom leather interior.

The salient point is that while those of us who believe in the values offered by gold and silver like to think of them as “substantial” markets, when it comes to futures markets, they are like a gnat on the tail of an elephant. To make the point, consider that the cash value of foreign-currency contracts traded globally each 24-hour period is on the order of $3.2 trillion. By comparison, over the same 24-hour period, on average, $26 billion worth of gold trades hands. For silver, the number is even smaller, just $4.5 billion.

All of which is to say that (a) these are markets that can be “pushed around” by the traders, and (b) when a large number of traders shift into “take profits” mode, the price of the metals can be trampled.

The long and short of it is that range trading will go on for awhile, until something occurs in the psychology of the market that shifts the majority into the long side… at which point the upper end of the trend is decisively broken and the range is reset to a higher level. It is my contention that the top of the range for gold is now $1,000, and we could see it continue to test that level, then fall back, for some time. But really, who can say? It could happen literally almost overnight.

Shifting to a somewhat nearer-term perspective, however, it is worth looking at the chart from Seasons of Gold, the archived article from the April 2006 edition of the International Speculator.

While the chart hasn’t been updated lately, the data used is so long-term – 30 years – that updating it wouldn’t have changed anything by any noticeable amount.

Viewing the chart, it doesn’t take a lot of imagination to assemble a scenario whereby the continued strong investment demand for physical gold meets the traditional strength of the Indian wedding season buying that contributes so much to the historical pick-up in gold prices in September.

Toss in the effective nationalization of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM), putting the U.S. taxpayer as the guarantor of last resort on fully half of the mortgages in the nation…and mix in some of the ripe geopolitical apples now falling from tall trees, or the imminent realization that oil isn’t going back to $50 or that the inflation phenomenon is not temporary, and we could see a big bump in the gold price over the next couple of months.

Time to go long in the futures market? Well, on that topic, all I can say is, tread carefully…and use as little margin as possible just now.

That’s because, as wild as things have been in pretty much all the markets, we haven’t seen anything yet. If there is one thing you can take to the bank, it is that, in the months just ahead, the volatility of virtually all markets is going to go ballistic. For the attentive trader, that can mean big, and repeated, opportunities for profit. But for the casual trader, high volatility can lead to quick loss making.

Sticking to a longer-term perspective – buying and holding and, if resources allow, buying more on the dips – is the way to go.

Source: Whither Gold?