Do you own gold yet?
During the last market rout, the price of gold plunged from $900 an ounce to $690 an ounce. The talking heads, seeing this, announced that gold is no longer a safe haven or a storehouse of value.
The idea that gold has somehow lost its safe haven qualities due to a temporary drop in price is beyond idiotic. To claim this is to ignore the role gold has played for well over five millennia. What are the odds that this has suddenly changed?
No, this recent drop in gold has come almost entirely from downward pressure in the “paper” gold markets—the COMEX and Gold ETF (GLD). And this downward pressure has come from two trends:
Hedge funds, pension funds, and even mutual funds have been slammed with redemptions in the last year—mutual funds alone have experienced $967 billion in redemptions since the beginning of 2008.
In order to meet these redemptions, funds have resorted to liquidating portions of their portfolios. Gold—which the stock-centric crowd never really believed in anyway—was one of the first items to go. And since the “paper” gold market is relatively small—the total value of gold on the Commodity Exchange in New York (COMEX) is roughly $5 billion—it doesn’t take much capital to crush gold in the “paper” markets.
As for the dollar’s rally, the Feds’ interventions and hyperinflationary money printing will put an end to this sometime in the not so distant future. You can’t add $6 odd trillion in liabilities to the US balance sheet, start trading in un-secured commercial paper markets—as the Fed did with its TARP facility—and increase the monetary supply at an annualized rate of more than 300%—the pace of money printing maintained by the Feds during the last month—and NOT kick the dollar in the face.
No, the dollar rally will end sooner rather than later. When it does, the last obstacle standing between a raging Bull market in gold and gold mining shares will have been removed.
Speaking of miners…
While gold has been hammered, gold mining stocks, particularly juniors, have been truly creamed. The explanation here is much the same as for gold: liquidations. However, while the gold paper market may be roughly $5 billion, gold juniors as individual plays are even smaller. So it takes even less money to beat these stocks down.
Because of this, today, gold mining stocks are currently trading at levels you only see at the end of BEAR markets. Taken as a whole, the sector is at its second cheapest level relative to the price of gold since 1984.
It’s an absurd situation. Gold is undergoing a correction during a bull market… while gold miners— basically real estate companies sitting atop gold—are trading as if they just ended a bear market in gold. This won’t last forever. At some point both the institutional liquidations and the dollar’s rally will end. When they do, gold miners will explode upwards.
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