Saturday 25 June 2011

Standard Chartered Bank report indicates that "Gold Top" is coming.

No, they did not say that in their report. In fact the report of Standard Chartered Bank is just the opposite. They are calling for US$ 5000/oz gold very soon. And the arguments are same that has been used over and over again during the last 10 years of gold Bull Run.

Before, we go over their argument for $5000/oz gold, let me clarify few things. I have deep suspicion about any recommendation from the big banks which comes out for the benefit of their clients and other investing population. Remember Goldman and other similar banks? It is alleged that (If I don’t use the A word, I might hear from their Lawyers), they packaged all the shitty deals and crappie products into AAA products and unloaded on their unsuspecting clients.  Didn’t Senator Carl Levin say the same thing in his report that Goldman Sachs Group Inc. (GS) “clearly misled their clients and misled the Congress,”? Yes, of course GS has refuted what Senator has said but Justice Dept. may be considering taking action based on that report. In light of that, if I continue to have deep suspicion on the recommendation of these Big Banks, may be that is healthy skepticism after all. Normally, when they say buy, I sell and when they sell, I buy. So far it has served me and my clients well.

So when Stan. Chart Bank comes out with a report based on old hashed reasoning; my conspiracy theory antenna goes up and starts giving alarm signal. May be the top is near, 3 months at the most.
Let us look at their reasoning:
We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz, as highlighted in our commodity team’s earlier report." 
Now, Indians have been purchasing gold for ages infinite. How come, pray, gold went into a bear market for over 20 years? Let us look at the long term chart of gold.

As you can see for yourself gold reached the top in the year 1980 with a parabolic move, and then came crashing down. From 1980 till 2001, for 20 long years, gold was in a bear market. Investors, who listened to the same logic in 1980 and purchased gold at the top had to wait 20 years to see any traction in price. In the mean time gold reached near $ 200/oz.  On an inflation adjusted basis, if gold has to match its peak price reached in 1980, it should be over $2500/oz now. So even at today’s price, Investors of Gold in 1980 have actually lost money.

Were not the Indians buying gold for those 20 years? Did the production of gold increased during those years and have now fallen dramatically? Were not there any war or inflation scare during those periods?  And regarding the purchase by central banks, the 2nd largest holder of gold is not any central bank but the GLD fund. Central banks buy gold along with other foreign currencies and it is always within a certain percentage of their total holding. In the year 2010, as per Wikipedia, ( ) China had only 1.7% of their reserve in gold. It is the developed world, North America and Europe, who have the largest gold reserve as a percentage of their forex reserve.  And we shall not see any dramatic change in the holding percentages anytime soon. So the logic given by Stan. Chart does not sound very convincing.
Standard Charted Bank knows all these and yet they come out with a report based on fairy tale.  Let us see when the gold price started rising.

We see the rise in gold prices from the year 2001. Do you remember what happened during that time? The Tech. Bubble burst. Allan Greenspan, in his infinite wisdom, started flooding the market with liquidity. Most of the liquidity went to create another bubble, i.e. Housing bubble, but some part of that money flowed in commodity sector, not because of increase of demand from India and China, but because of the speculators had a free run. By the way, biggest commodity desk and speculative section is usually found in the confines of the big banks. In the year 2008, when the housing bubble burst, helicopter Ben, started throwing more money, more liquidity in the market. The Stock market and commodity became the next bubble. Actually Ben wanted just to inflate the share market, to create a wealth effect, but he has no control where the money ends up. So Oil went up from $35 to over $ 100 and gold and silver went for a parabolic rise. Don’t we hear the same logic about oil? Production is limited. India and China consuming more and more oil etc, when we all know that $40 out of every barrel price is for the speculators.

Let us look at the US Dollar index:

This is a 30 year monthly chart.  In March 2008, UD$ index reached its lowest level of 71. And gold reached $ 1000 for the 1st time. Thereafter when the dollar index jumped up, gold fell. If gold is to reach $ 5000 in the foreseeable future, the dollar index has to fall to the level of below 20. Can you imagine such a situation? If that was to happen, US dollar would have lost its world reserve status, there would be riot on the streets of USA, Gas would be $ 20 per gallon, and food prices would be beyond the reach of common people.
If and when gold reaches $ 5000/oz, we are better off buying guns and ammunition and fill up the basement with dry foods. Because then there will be civil war folks. Then we will not need gold.
Standard Chartered Bank knows that as well. They know that such a situation is not likely to happen. Still they come out with such a report. Only reason I can think of is that, they want to unload their gold position.
gold do well before the crisis not during the crisis. If there is a credit event, another recession, war , balance sheet contraction or whatever the theory the gold bugs are propagating, gold is sure to go down along with other asset class.

Personally, I think, Gold will reach a temporary bottom by end of June 2011, and then it will go up for another two, max three months and reach a top price of $1650/oz. That is when I would want to get out of gold.   

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