PAPER GOLD AND METAL GOLD
Fernando Fluguerto
PAPER GOLD AND METAL GOLD
It sure has been a brutal year for gold and its shares and many may wonder if the $1030 top clocked in March 2008 marked the top for the gold bull market that started in April 2001. Despite the fact that many analysts want you to believe that gold has failed to act as a true safe haven this year and that gold will find itself in another bear market for years to come gold's critical drivers have never been stronger than as they are today. Let's face it, physical demand for gold broke record highs in Q2 this year followed by an explosion towards new record highs in Q3 with dollar demand for gold exploding by 45% compared to Q2.
Against this explosion of physical demand we're witnessing a dramatic decline of new gold discoveries which will force the mine output down for years to come. The junior gold exploration sector is bleeding to death due to its inability to secure the financings necessary in order to advance their exploration projects. Please remember that the supply chain for gold starts with the junior gold exploration sector, 75% of all discoveries are made by juniors. Simple 101 economics teaches us that falling supply against skyrocketing demand will force prices higher.
OK you'll say, physical demand is strong indeed, physical inventories for retail sales have dried up completely which resulted in huge premiums for those who want to get hold on this physical stuff (E-bay is showing off premiums up to 25%), then how the heck it's possible to see gold prices tumbling down to lows not seen since 2006?
The answer is quite simple. Gold prices are determined by the paper gold market, not the physical gold market. It's not difficult to understand why since the paper gold market is about 40 times as large as the physical gold market. Since gold futures are trading more or less like an inverted dollar they will drop down upon (temporary) dollar strength. And exactly here lies the heart of the problem. Government can easily create the illusion of a strong dollar and low inflation expectations by suppressing the price of gold. Market interventions became the tune of the day. When the dollar was on the verge of total collapse in March this year (and gold reaching all time highs to $1035) joint intervention was seriously considered in order to rescue the crashing dollar