Gold demand remains extremely robust throughout the world

In thin holiday trading, gold rose 1% on Friday closing above the important $800/oz mark for a gain of 3.1% for the week – its third week in a row of gains. It was up 14% for the month of November which was its largest monthly gain in more than 9 years.

In Asian and early European trading gold has fallen some 2% likely on sharply lower oil prices (Light Sweet Crude Oil Future - Combined - JAN09 is down by more than 4%) and the dollar remaining firm after strong gains at the end of last week. Renewed uncertainty and weakness in stock markets could result in short term weakness in gold but should see gold continue to see a flight to safety in the medium and long term.

The sharp reversal in the gold price in November may indicate that the recent global deleveraging induced gold sell off has likely run its course and the fundamentals are set to reassert themselves.

Especially as safe haven demand remains extremely robust throughout the world as investors and savers seek to protect their wealth from deepening recessions and massive central bank and government credit creation and money printing.

Despite the very strong fundamentals, gold remains taboo in most of the media with little or no coverage in the mainstream press of the rising premiums, supply shortages and very strong fundamentals. From a contrarian perspective this is very bullish as gold remains the preserve of a small minority of the “smart money” and the media remains lukewarm at best towards gold. The majority of investors and savers know little or nothing about the gold market and the majority remain extremely uninformed as to the many strong reasons as to why they should have an allocation to gold.

As central banks slash interest rates (the EU, Australia and Britain are likely to have emergency rate cuts again this week) and attempt to flood the world with cheap money (to prevent crippling deflation) and government debt surges we are likely to see significant weakness in currency and more particularly bond markets. In the medium to long term, bond prices are likely to fall sharply (particularly long dated bonds) and yields rise from their near historic lows. A percentage of the outflows from the bond market is sure to enter the gold market which should see gold rally to its inflation adjusted high of $2,400/oz in the next 2 to 5 years.

This is especially the case as the bond market is massive – the value of the international bond market is an estimated $68 trillion of which the size of outstanding U.S. bond market debt is more than half (the amount of derivatives outstanding is more than $500 trillion). All the refined gold (0.9999 pure) in the world could fit into is a tiny 25 metre square cube and thus if even a fraction of the money that will flow out of bond markets in the coming years (particularly as the Baby Boomers begin to retire) moves into the safety of gold we are likely to see sharply higher gold prices in all currencies in the coming years.