Good Morning,

Gold prices once again backed away from the mid $950s, but not by very much,overnight. This, as dollar strength bit into, and sapped some of the resilience the metal had shown since the start of the trading week. Still rising oil prices, and North Korean missile-rattling failed to motivate gold to higher ground for the time being. The US dollar rose 0.34 to $80.43 on the index, while black gold advanced 33 cents to $62.78 per barrel. Nice and rich - just in time for the kick-off of the summer driving season. Might not be done in GM cars, though...

The butterflies are once again aflutter on the world geopolitical scene. Three years after they appeared to have flown away from the Korean Peninsula.Afresh doomsday warning was sounded by the mouthpieces of that Ronery bespectacled little guy, Kim Jong Il, who promised an attack on South Korea, should any of its weapons-carrying ships be intercepted by...anyone.

The midweek session in New York got off to a fairly promising start for bullion, with spot price showing only a minor decline of $1 at $951 bid per ounce. Silver lost 8 cents, to start at $14.53 per ounce. Platinum and palladium were marking time at lower levels, not moving more than $1 each, at this time. $1133 and $229 per ounce were their respective spot quotes on the open.

GM came one step closer to the inevitable, after it cancelleda noteholder's meeting following a substantially lower than expected amount of interest in its $27.2 billion worth of tendered notes. Uncle Sam is seen as a certain candidate for an 80% ownership levelin the soon-to-be-defunct giant of US industry. No more debt for equity game for the General. More like pleas(e) for equity.

I see...eyeglasses in my future

Fortune-telling pronouncements from no less than two Doctors (of)Doom were set loose in this morning's news flows. Nouriel Roubini, the 'original' Dr. Doom, declared that the US slump will end before this year runs out. He sees interim hiccups such as 10% unemployment, and a stock market rally that will not endure, but he sees a recovery nonetheless. Marc Faber, who adds Gloom and Boom to his doctoral degreeof Doom, envisions (with no less than 100% certainty!) the USA turning into Zimbabwe as far as inflation is concerned.

How about, neither of them will turn out to be correct? It is more thanplausible that we will not get a US recovery until well into 2010, and that when we do see inflation returning, it will be one of a moderate type, as well as one that prompts tax and interest rate action by the Fed? We've only met one economist who was 80% correctall these years - the one who reserved the right to change his mind 50% of the time.

Thus, his batting average was very much in line with the rest of the league of pundits. And, of course, the guy who got it completely right, is actually a gal.She is not knownfor her credentials,she is not known for what she predicted, and, she has long ago retired to anisland on that single bet. Someday, she might write a book. But, don't count on it. Such things are normally not meant to be shared.

More crystal-ball gazing was on offer this morning as regards gold and its future price prospects. Not to sound repetitive, but price is not the issue for the majority of holders we speak to. In fact, stability is more of a concern/desire. But, as you can see, opinion is neither in short supply, nor verydoes it exhibithomogeneity. At all. First, the extreme views. Much like a scene from Religulous. - no possible peaceful coexistence of views here:

THE basic premise is not new, but then nothing's changed much... Ludwig von Mises, the father of Austrian economics, who recognised early on that government attempts to massage the credit cycle always end in tears, memorably described the phenomenon as follows: “There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The “final and total catastrophe of the currency system”, is in this case the dollar. If you believe that's where we are headed then gold still has some way to go. To believe it doesn't is to believe the worst is pretty much over, that the excesses have all been unwound, that the central banks have triumphed, that paper currencies have won the day… without threat of inflation.

What about deflation? All over the world the central bankers' reaction to the threat of a slowdown has been the same: print more money, slash interest rates, find ways to stimulate. If the patient is going to die, even the most radical course of action is better than doing nothing. Most paper currencies will suffer the consequences. - could be authored by Ludwig von Mises and/or Marc Faber - take your pick.


The gold ETF (GLD) is the 6th largest holder of gold in the world - the whole world, even ahead of China. When investors buy GLD they have to go out and buy gold driving up the prices. This raises a little question - who will be buying this gold from GLD when investors will decide to sell it? Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash flow analysis to value it - it has no cash flows. It is an asset where perception and realityaredeeply intertwined.

Investors buying the gold ETF (GLD) are influencing the price of gold which is fair for the most part as otherwise they'd be buying the real thing. Though of course the ease of buying GLD creates a slightly higher artificial demand, but still it is fair game. The violent sell off in GLD will drive the prices of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt for instance) and the gold price could get cut in half overnight. Suddenly perception of not being a store of value will create a reality of gold not being a store of value. The gold game will be over. - was penned by Vitaly Katsenelson. Not a household name, but a correct assessment of the reality of a market with the GLD present in it.

Any room for the 'middle' road? Yes, but who is listening?

Looking ahead, the question for gold investors is whether investment flows this year will prove powerful enough to overcome the drag effect on the gold price of counter currents.

The WGC, in its Gold Investment Digest for the first quarter, noted that a prominent theme for investors was the outlook for price stability: opinion appeared divided between those concerned about the prospect of inflation and a smaller number worried about deflation.

Charles Gibson, an analyst with Edison Investment Research, says there are lessons to learn from the 1970s, a decade where structural trade deficits, burgeoning budget deficits and bank failures were prominent too. As then, the authorities are reacting to debt deflation with a stimulative monetary policy: “History suggests they will probably overdo it”.

In the 1970s, the result was a runaway wage-price spiral and a second peak in inflation later in the decade. As a result, gold rose from $35/oz to $850/oz in 1980 – a 24-fold increase in value. Though he does not expect such a dramatic increase in the current era, he forecasts that a repeat of the same cycle would see gold averaging more than $1000/oz over the next 21 years, with a short-term peak of $1,567/oz as investors again seek a hedge against inflation.

Gibson's analysis, detailed in a recent report, assumes the continuation of very low and/or negative real American interest rates and a relatively well-supported oil price. In particular, he argues that negative real interest rates disrupts the mechanism by which the bullion banks lease gold from central banks, leading to a squeeze on supply from producer hedging.

Could the slump in jewellery demand hold back the gold price? It could do, says Gibson, but during similar periods in the past, the increase in investment demand has always outpaced the decline in jewellery. In fact, he suspects that if inflation is seen as a problem, investors will rush into jewellery as much as they have piled into gold ETFs, bars and coins. “Gold is sailing and the wind is behind it,” he says.

Michael Lewis of Deutsche Bank takes a more neutral view on the outlook for the gold price: “Gold is probably the most richly priced commodity in the world at the moment: in real terms, it's trading at around 65% above its long-run historical average.” This represents a significant premium to many other commodities.

For the gold ETFs, the main threat would be dollar strength, he says. However, any change in the outlook for the gold price over the short term would be more likely to be to the upside, linked to further weakness in the dollar.

However, Lewis views the risk of inflation to be low, at least for the next couple of years, because of the large

output gap in America and the likelihood of weak economic growth persisting in 2010 and 2011. Only when the global economy starts to recover strongly are inflationary risks likely to emerge. Instead, the global economy is likely to remain in a disinflationary environment: this is a relatively benign scenario for gold as it keeps real interest rates low and allows gold to compete aggressively for risk capital. “What gold really needs to worry about is deflation,” he adds, as real interest rates would rise. However, he expects the global economy to avoid this outcome.

In contrast, Wozniak argues that persistent deflation could underpin the gold price as it would enhance the yellow metal's safe haven status.

Dan Smith is fairly bullish about the gold outlook: he expects investor inflows to remain strong for long-term reasons and the dollar to weaken significantly before the end of 2009. Though Standard Chartered expects economies to suffer deflation in the short term, Smith does not expect

this to have much impact on the gold price.

GFMS comes down firmly on the side of the bulls. It argues the $26 billion that entered the gold market last year – a relatively small amount of money compared to the regular flows into mainstream asset classes – could be dwarfed by the flows into the yellow metal this year if gold's appeal widens substantially because of investors' growing concern at western governments' and central banks' willingness to attempt an inflationary solution to the current global economic crisis.

Sierra Highcloud of GFMS comments: “There are many blips and corrections in every bull cycle, yet we believe that over the course of this year prices will, overall, remain well supported, if not move to fresh all-time highs”.

The bull market may have further to go – but investors may be in for a choppy ride.

Thus, we come to our own forecast: the gold price will.....change. It will go up, then down, then up again. Followed by more downside action, which in turn will be followed by moves to the upside. And, so on. As for the one-way street (in either direction)? You might as well hang that one up. We predict. With 100% certainty. And with the right to change our mind half the time. Still, the nearly lost little observation that the metal is trading some 65% above its long-term historical average, keeps nagging us...

Happy staring into the (unknown) future...

PS- Non-sequitor du jour: Manchester United (the world's most valuable soccer team -near $2 billion) is now said to be seeking for a new sponsor for its blazing red shirts. Their current logo? AIG...

Shall we see USA (Uncle Sam's Assistance) soon?