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"U can't touch $1,000 says the Hammer. But
everyone's got their deal price..."
"INVESTORS will drive the next leg of this bull market in gold," said Philip
Klapwijk, chairman of GFMS, at the London-based research consultancy's Gold Survey launch in Canary
Wharf on Tuesday,
"setting a new high above $1,000 in 2009 and with a real possibility of
$1,100 per ounce."
Anyone pitching for $1,100 in short order, however, might have their
work cut out for them. And all thanks to MC Hammer.
"We have seen people in Europe Buying Gold in quantities more typical of the Middle East and
Asia...particularly in Germany
and Switzerland,"
Klapwijk went on. Because "Inflation is the inevitable consequence of
today's rapid money-supply growth and quantitative easing." All told,
reckons GFMS, the monetary response to the financial crisis will prove
"extremely powerful medicine for Gold Investment."
So far, so bullish. But why no new high, therefore, in the gold price
already this year? Philip Klapwijk attributes gold's failure at $1,000 back
in February to the "astounding" flow of scrap metal coming from
cash-strapped consumers worldwide. And GFMS's raw numbers would suggest he's
right.
Scrap supplies previously lagged both gold-mining output and
central-bank sales by a wide margin each year. But recycled tonnage actually
overtook new jewelry demand worldwide at the start of 2009 according to GFMS's analysis. That was after rising 27% in full-year 2008 to
more than 1,200 tonnes.
Gold mining output, for comparison, came in at barely 2,500 tonnes,
down yet again year-on-year despite the on-going rise in prices.
Come Q1 2009 and scrap supply surged further still, reaching above a
massive 500 tonnes according to GFMS's research. New jewelry demand, in
contrast, halved to just 420 tonnes, as traditional importers – such as
former world No.2 Turkey – became gold exporters in a shocking
about-turn.
One attendee at the GFMS presentation even thought they under-played
it, putting the flow of scrap metal far higher – and dwarfing world mining
output – at perhaps 1,000 tonnes during the first quarter alone. Absurd
as that sounds, world No.1 importer India took in next-to-no new gold
at all between Jan. and March as the Bombay Bullion Association has reported.
That's an event not seen since the Great Depression of the 1930s
according to gold-market historian Timothy Green, also chipping into the Q&A at Tuesday's GFMS
presentation.
Most crucially for the new dynamic of gold demand-and-supply, the
industrialized West has seen high-margin operations led by Cash4Gold – whose advert during this year's Superbowl hardly needs spoofing, featuring as it did MC Hammer and former Tonight Show sidekick Ed MacMahon
spoofing themselves – make selling gold much easier for cash-strapped
consumers.
"I can get cash for this gold medallion of me wearing a gold
medallion!" gasped the Hammer in Cash4Gold's typically gag-laden
Superbowl slot. The airtime alone reputedly cost $3 million, so based on the scrap market's average
mark-up of 40% – if not the 60% to 80% mark-ups reported in this "consumer crusade" against America's No.1 – you'd have to
guess they brought in a chunk of change...as did everyone else touting for
scrap metal as the Christmas heating bills came due between Jan. and March.
Hence the "roadblock", or so Klapwijk reckons, on gold
breaking above $1,000 an ounce in late February. But we're not so sure here
at BullionVault.
First, Cash4Gold's parent company, Albar Precious Metals, reports 775%
growth for the last three years. So why the sudden impact on gold prices
– an impact regularly dismissed in 2008 in favor of
de-leveraged by crisis-hit hedge funds fleeing the futures and options
market? More crucially, back in Feb. this year, gold still broke new all-time highs vs. the Euro, Sterling,
Swiss Franc, Indian Rupee, Turkish Lira and pretty much everything else bar
the Dollar and Yen. Which would suggest the failure at $1,000 was more
currency-capped than supply-driven.
More critically still for gold-market analysts, how can we draw a line
between "investment" and "jewelry" for those two billion
Asians still without Main Street
banks in which to keep their savings?
Either way, gold investors might still want to beware the Hammer.
Because the only cap on Middle Eastern gold sales after the Jan. 1980 top, as
Timothy Green recalled from his experience in Kuwait
and Dubai,
was the inability of jewelers to raise enough cash each day to buy all the
scrap gold offered daily. Whereas Cash4Gold, the leading US scrap buyer, also
runs its own refineries as well as collecting scrap metal by post and touting
for metal online and on TV.
Looking ahead, an estimated 82,000 tonnes of gold exists as
privately-owned jewelry worldwide, some 52% of the total above-ground supply. The vast bulk of recent tonnage has been added by
emerging-market consumers, most often in the form of lumpy "investment
jewelry" that carries little added-value from fabrication, but which can
still lose 10-15% in dealing fees when it's sold to raise cash. So how much
of the 2008 and early-09 supply represented forced sales by truly cash-strapped
gold hoarders – and how much represented "easy scrap" sales?
You know, the really ugly old-fashioned stuff inherited from maiden aunts
that the owners never much cared for, similar to that "rabbit gold"
buried by generations of Frenchmen fearing (yet another) German invasion but
now dishoarded by their grandchildren each year.
In the same way the earth yields up "easy gold" to open-cast
mines, before forcing miners to start digging...and digging...down as far as
four and even five kilometers below the surface in South Africa, the world's former No.1 gold-mining
nation...perhaps the emerging markets are now racing through their "easy
scrap" gold. Or perhaps the decision to sell has already been tough,
"spurred by losing your job, losing money in the stock market, bad luck,
or just needing some extra cash for holiday spending," as Cash4Gold
laments on its website.
On the other side of the trade, meantime, GFMS now expects "concentrated
buying" on any price dip to $800-850 per ounce. Down there, the
consultancy says, pent-up demand will surge while scrap sales fall sharply,
just as we've seen right throughout this bull market to date, with Indian
jewelry demand triggered at ever-higher dips in the price.
And as Philip Klapwijk noted in London
on Tuesday, if it weren't for a surprise jump in gold-jewelry demand during
the plunge to $700 an ounce and below in Oct. 2008, "it's undoubtable
that gold would have fallen further...down to $650 or lower."
Everyone's got their "deal price" in short – that
level at which they're either a buyer or seller, depending on where they last
bought or sold. And also depending, of course, on their outlook for inflation
from here.
Adrian Ash
Head of Research
Bullionvault.com
Read
all the other essays written by Adrian Ash
Access
to the London Gold Report archives
City correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing
fees.
Current gold price, no delay
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