Is the Gold Rush over? Just a few weeks ago this was the pervasive question across the mainstream financial news. Talking heads did everything but yell, SELL YOUR GOLD as many were convinced a jobless recovery was well underway. I say tell that to the jobless and see if you don't get a poke in the eye.
Even yesterday as jobs data rang an alarm through the markets, sending gold higher, while everything else collapsed around it, the news wasn't, gold is up! It hit me hardest when just the day before a friend asked me why gold was down. Hmmm!
Of course the last couple days have seen gold prices rise as the Jobs Data Reality Show premiered. Those gains aside, many will be surprised to hear gold was still up near 10% for the year. The S&P, on the other hand was down 1%. Today, the disparity is even larger as the S&P plunged and gold picked up 1.5% in the past 24 hours.
So where is gold heading from here? I just got my hands on a report from Merrill Lynch regarding their prediction of $1500 gold back in October of 2008. In short, Merrill is still tracking $1500 gold with now a caveat - Gold could go higher.
Ultimately, if gold prices were to rally well above our target, the move would probably come on the back of sovereign debt fears, inflation or an economic catastrophe. Hence, the yellow metal remains a golden bullet for a diversified portfolio when it comes to tail risk. - This from Merrill's Global Metals Weekly released August 10, 2010 corrected.
We usually see the experts hedging their predictions to the downside. In this case Merrill is making it clear their prediction could be low and if it is, they explain why.
Merrill did estimate, gold's rise to $1500 an ounce would be within 18 months. Given gold today is up 10% or 11% on the year, another 25% move over 18 months keeps gold on close pace with its 20% annual rate of growth over the last 9 years or so.
The bottom line is, gold demand remains high and all signs point to even higher demand ahead. It's as hard to imagine lower prices to come as it is to imagine a balanced budget within even the next 5 years.
I think China has the right idea. They are encouraging citizens to own gold as protection against tough economic times. Chinese workers are told to buy gold with every paycheck. Here, we are instructing everyone to spend and are doing everything we can to make that possible. If you have no money to spend, we want to make it possible for you to borrow more money to spend. And if that doesn't work, we may just have to come up with new stimuli and give you money to spend.
Many believe growing Chinese gold demand alone could double the gold price from here. Merrill does not mention this in their report but frankly, I think this could play just as large a role in driving gold prices higher as any of the cited reasons within the report.
And, if we continue to borrow money to buy things from China and they continue to buy gold with money we give them for things we buy, soon we will have all the debt and they will have all the gold. I hope that's not the case cause my Chinese is limited to, One number 14 please and number 33 for my dinner.
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