"Lack of confidence in the gold price bull prevails. Almost everyone seems obligated to hedge when predicting price, in spite of having marshaled an array of intimidating and compelling facts and arguments" says Arnold Bock and in his article below he questions why there is so much reluctance.
Bank of America suggests that gold will reach $1,500. Talk about going out on a limb with a high risk prediction!
Why are Precious Metals Analysts and Financial Experts so Cautious?
Why is it that precious metals analysts are frequently so resistant to recognizing or accepting reality? Many technical chartists seem welded to the lines and shapes in front of them. How useful is a gold chart using data which spans a period of less than forty years, the time since President Nixon took the US dollar off the fixed price gold standard in 1971? Extrapolating trading patterns and imposing conclusions from other investment sectors is just not a valid alternative. Those of us who rely on economic fundamentals also tend to exhibit excessive timidity.
Of course there is no shortage of financial experts conversant with the broader financial markets, many of whom it seems make their living denigrating commodities generally and precious metals in particular. Their negative line of thinking remains current even after nine consecutive years where gold bullion, valued in US dollars, has experienced year over year price gains. Stated another way, over those years the gold price has risen about 400 percent. These same folks can be counted on to advise us that gold is long overdue for a major correction and that it is now entering the bubble bursting phase. Interestingly, these self same bubble specialists spent the past decade exhorting all and sundry to participate in the dot com and housing bubbles in spite of their looming and predictable collapse.
The Reasons for the Current Gold Bull Market are Many
We are all aware of the reasons cited for the current bull market in gold. The fact is gold is the only "real" money amongst the paper coupons and digital versions we use daily. Supply is also severely limited by virtue of the constraints in finding and extracting more from the earth. For example, all the gold ever mined would fit into a cube 19 meters square. Even more riveting is the realization that the composite world-wide market capitalization of the all the publically traded gold mining companies is less than the market cap of individual companies such as Wal-Mart or Microsoft. Simply stated, gold and the precious metals mining sector are barely visible on the typical investor's horizon.
Demand for gold is now expanding dramatically from investors seeking protection against inflating and devaluing currencies, especially the US dollar, the world's main and virtually exclusive means of pricing commodities and manufactured products. It is also the primary method of settling international trade accounts. Central banks, sovereign wealth funds, hedge funds and investment pools such as pension funds and insurance companies are all awakening to the need for safe haven investments and hedges beyond the fragile dollar, or increasingly, to protect themselves from the dollar itself.
In spite of the factors outlined above, I remain baffled by the reluctance of knowledgeable analysts to entertain the prospect of substantially and even dramatically higher precious metals prices ahead? Even when all the relevant fundamentals have been enumerated, explained and quantified, the obvious conclusions are seldom adequately articulated. Why? A lack of confidence in the arguments presented?
How the "Political Process" is Affecting the Price of Gold
Maybe something more central is missing leading to this gold price timidity? To this day I remember a professor of a graduate course in urban planning who consistently reminded us budding technocrats that the physical and social engineering inherent in urban planning was not simply a rigorous technical specialty, but rather a complex "political process."
This professor spent much of his time in the real world consulting his specialty to clients comprised mainly of government bureaucrats, concerned and involved citizens, special interest and business groups as well as elected politicians. He knew intimately the terrain of his consulting environment. He understood what motivated the various individuals and groups and was convinced that nothing much could be accomplished outside the cumbersome political decision-making process. The presentation of an exquisite technical proposal in itself was inadequate. It needed to be sold! My professor also knew that the results frequently were expedient, short term fixes imbued with the usual failings resulting from compromise. Nonetheless, nothing of consequence would be accomplished outside this messy political process.
What this means in terms of the price of gold is that politicians and legislators generally, along with their senior bureaucrats, as massaged by consultants, lobbyists and assorted interest groups, will cause policy decisions and legislation which can be characterized as expedient short term fixes. These decisions are almost always deficient in terms of what is really needed and frequently result in greater harm and unintended consequences. Political imperatives invariably prevail.
The political version of long term planning, the date of the next election, will trump all other considerations. Implications of short term pandering almost always runs counter to sound public policy. Moreover, as desperation mounts more unfunded spending, deficits and debt, money creation and creative new ways to bribe the voter become the norm. The escalating price of gold is the inevitable consequence.
The political process outlined above explains much toward why we are facing mounting economic and financial problems. Imperatives of the electoral process cause politically expedient decision making to go into overdrive resulting in a feverish succession of costly and doomed initiatives. Real money is the safe haven destination to its consequences. Precious metals prices can be expected to gain serious momentum and reach unheard of price levels in this environment.
Where is the Ultimate Gold Price Destination?
Clearly no one knows. However, a few issues can be accepted as given in this new and rapidly changing economic reality. The magnitude of the financial crisis caused by government deficits and debt, coupled with the complexity and scale of financial products, is unprecedented. It is also necessary to factor in the global scope as well. In truth there has never been a time, not during the Great Depression or WW II, which we can look to for guidance. We are facing a confluence of economic problems which guarantee that real money, precious metals prices, will skyrocket to unimagined levels.
Carefully consider the following question. Who are the owners of most of the world's gold? Yes, they are governments starting with the United States, Germany, France, International Monetary Fund, and Italy along with countries like China and India including a succession of third tier nations currently buying as if there is little time remaining to stock up. These institutions effectively place a floor under gold prices. Their readiness to buy removes much of the risk. Price consolidation and corrections following seemingly relentless upward movement will inevitably occur, but they will be shallow and brief.
So who wins with huge price increases? Select national governments primarily, but also certain hedge funds, institutional investors and some individuals who own precious metals. High gold prices provide more than just the obvious benefit of price appreciation to governments which own it, but that will be the subject of a future missive.
Precious metals should rank at the top of your investment "to buy" list. Prices cannot be predicted with precision because the factors affecting price are different in many ways than at any time in our past. What can be said, however, is that price will go dramatically higher as confidence in paper money and digits on a computer screen continue to deteriorate.
Think Big!
Arnold Bock is a Contributing Editor to www.InsidersInsights.com and Lorimer Wilson is Editor of www.FinancialArticleSummariesToday.com.
