Gold continued its ascent as the price reached a high of $1,226.50 before settling back near $1,215. Calls for higher gold prices are widespread as a mini-gold fever has broken out on Wall Street. After rising 13% last month, gold has began December with the same vigor as it did in November. Gold mining stocks have been the hottest sector in the marketplace with the Market Vectors Gold Mining ETF (GDX) up by 29.2% over the past five weeks. Bullish sentiment is near an extreme, with the Marketvane bullish consensus figure at 89% bulls.
Long-time gold bulls have been re-iterating their calls for a much higher gold price in the future. Peter Schiff told CNBC yesterday that the gold price was headed to $5,000. Schiff exclaimed, “It might not hit $5,000 this year or next year, but it will eventually-maybe before Barack Obama leaves the White House.” Schiff went on to state that, “I don’t think there’s enough gold to meet the new demand that’s coming – because gold is money, it’s not just some other commodity.”
Jim Rogers, in his recent interview with BusinessWeek told Maria Bartiromo that he expected gold to “be over a couple thousand dollars an ounce” and succinctly summed up why gold has been moving higher, “Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets.”
Societe Generale analyst Dylan Grice recently penned a research report outlining why the price of gold was actually very cheap near its current level. Grice’s paper concluded that, “One way to value gold, therefore, is to ask at what gold price the value of outstanding central bank paper would be completely backed by gold. The US owns nearly 263 million troy ounces of gold (the world’s biggest holder) while the Fed’s monetary base is $1.7 trillion. So the price of gold at which the US dollars would be fully gold-backed is currently around $6,300.”
Amidst calls for $5,000 and $6,300 gold, there has been some talk of a gold bubble with a deputy governor at the People’s Bank of China being the latest to opine on the topic. Hu Xiaolian told a Hong Kong newspaper that “Gold prices are currently high and commodities markets should be careful of a potential asset bubble forming.” Federal Reserve officials did acknowledge that their zero interest rate policy and quantitative easing programs may fuel “excessive” speculation in and could potentially cause a rise in inflation expectations.
What could derail the gold price? The most obvious answer is a U.S. dollar rally, one that feeds on itself and shakes out the late longs. The popularity of the dollar carry trade has grown and if the dollar begins to rally, then short covering in the greenback and liquidation in the assets purchased would likely cause a general sell-off in the markets. A rally in the U.S. dollar could be spurred by the Federal Reserve telegraphing a change in its monetary policy. There is growing speculation that the rise in the gold price is on the radar screens of Fed officials.
Longtime market veteran Richard Russell opined on Tuesday, “The gold action is now persistent enough and impressive enough to worry the Fed. Therefore, I think we are near some kind of inflection point.” Russell speculated that the Fed may attempt to manipulate the price lower. Regardless of whether this comes to pass, the bottom line is that as the gold price rally intensifies, policymakers will be forced to pay increasing attention to it – and possibly to act.
Initial jobless claims came in at -457,000 this morning, better than market expectations. If economic data continues to improve and stock markets around the globe keep rising at their current pace, Federal Reserve officials will be forced to either join their counterparts in Australia, who have begun to tighten monetary policy, or they will face a potential acceleration of the U.S. dollar’s decline – and risk a more parabolic rise in the gold price.
Gold Price News provided by GoldAlert.