War Room 08/31
Gold – Where Do We Stand, And Where Are We Going?
War Room
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Gold Market Fundamentals
Past + Present
Gold Market Fundamentals Jewelry = 57% of gold demand
Investments = 32% of demand
Two-thirds of Q1 2011 demand growth investment-related
Mining is keeping pace with core demand, not investment demand
Gold recycling fills the difference
Gold is never destroyed – unlike oil, the total world gold supply keeps on rising over time
Demand ('05-'10 5yr avg)
Supply ('05-'10 5yr avg)
Gold, Inflation, and Crises
- Gold responds to higher inflation, as expected- But gold has a mixed record in responding to crises
USSR Collapse,Gulf War I
9/11,Gulf War II
Gold Comparisons:
Silver Oil S&P 500
Silver vs Gold, 1960-2011
Silver moves with gold, but with higher volatility Has outperformed gold during precious metals rallies
Oil, Gold, S&P: Correlation Trends
Diversification? Oil, gold, and equities are thought to be non-correlated, but in fact their relationships widely vary over time.
Oil, Gold, S&P: Correlation Trends
Since financial crisis, oil, gold, and the S&P all highly correlated Correlation broke down in recent correction If gold – oil correlation is breaking down, which is overpriced,
and which is underpriced?
Oil – Gold Ratio, 1960-2011
Ratio has been as high as 34, and as low as 7, with Mean at 15.5
Currently near 20 – above average but not overextended
Oil Barrels Per Ounce of Gold
Commodities Boom + Bust of 2007-08Surge – 19 months
Gold Boom + Bust of 1979-80Surge – 10 months
Previous Commodities Bubbles
Comparing Oil 2008 + Gold 2011
Is Gold walking on air since July, or is it different this time?
Oil was Wile E. Coyote, walking on air, from May to July 2008, and then falling off a cliff.
Gold Miners are not Gold Exposure
Gold Miners more tied to Markets
Don’t confuse Gold Metal + Miners
Gold Scenarios
Present Gold Surge – 2 months old
The surge has just begun
Bullish Case for Gold:
QE 3 succeeds = more asset inflation
Euro Zone situation further deteriorates
Bubbles last a long time (JP Morgan target $2500)
Bearish Scenarios for Gold
QE3 Fails: Liquidity Trap
Deflation: US Becomes Japan
Gold Crash (via economic recovery)