Wednesday, February 20, 2013

Gold (Excerpt)

Over the past few years, I’ve been asked on several occasions about my opinion on gold. I responded that my problem with gold is that I only know how to value assets with coupons, dividends, or earnings. I also observed that the price of gold had already increased sevenfold since January 20, 2001. That was when George W. Bush gave his first inaugural address. It was $265 per ounce back then, and soared to a record high of $1,895 on September 5, 2011. It was even a better buy in 1964, when "Goldfinger" was released and gold's price was pegged at $35 an ounce, as it had been since 1934 and remained until Nixon took the US off the gold standard in 1971. Yesterday, the price tumbled $41 to $1,563, down $229 from last year’s high and $332 from the record high.

The recent plunge in the price of gold happened despite a bullish Valentine’s Day press release just last week from the World Gold Council, the London-based industry group. It reported that central banks boosted gold purchases by 29% to 145 metric tons in Q4-2012, an eighth successive quarter of net buying. In the full year, the central bank bought 534.6 tons of the precious metal--the most since 1964, when Goldfinger plotted to nuke Fort Knox! On the other hand, demand for gold in India was down 12% last year and flat in China. ETF demand rose 51% last year, but was down 16% q/q during Q4-2012, as many hedge funds bailed out.

Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? Perhaps the most important reason for the weakness in gold is that after three years of “living dangerously”--with lots of panics about apocalyptic endgame scenarios--the global economic and financial outlook is improving. That means that central banks may start to ease off on easing.

Today's Morning Briefing: Goldfinger. (1) Attacking Fort Knox. (2) Gold was a great buy. (3) Central banks hoarding gold. (4) Bulls on the run. (5) Not enough fear for gold. (6) Easing off easing. (7) Draghi’s immaculate intervention has been a drag for gold. (8) Abe talks down the yen. (9) QE has lost its punch. (10) The debate has started at the Fed. (11) Gold and TIPS. (More for subscribers.)

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