Lear Capital: Brewing Gold Story About To Boil Over

2010_01_05_17_53_260001Of late, gold is being beaten like a rented mule.  Something I would never do, by the way – rent a mule that is.  You can’t listen to or watch the financial news for 15 minutes without hearing someone predict gold at $1000 an ounce, even $800 an ounce based on the most absurd interpretation of reported inflation data.  How soon we forget that government subsidies of all kinds have served to skew true inflation rates.  In the absence of subsidies, everything you buy would cost more.  PERIOD!

Last week, a real blockbuster story broke that should have gotten more play than any other financial story in the last week.  Instead, it barely got a mumble from the talking heads.  The House just rejected a Senate approved Farm Bill.that would cut subsidies to farmers.  In short, the House didn’t think the Bill went far enough on the cutting side.  Included in this bill are food stamp subsidies which the House also maintains did not include enough cuts.

My contention is that ANY cuts will manifest themselves in higher prices for everything we buy and everything we do.  Don’t be fooled.  The low costs of groceries, gas, heat and electricity, that we enjoy today, come at a cost.  Either deficits continue to soar or the cost of goods has to rise.  If you think debt can now rise to infinity without consequence, you are one who is susceptible to another blindside attack by Debt Crisis – Part II.

This story has turned up the heat under the cauldron of budget controversy and could well be part of the Gold rebound story about to unfold.  Turning the heat up further is the fact that gold, by many many accounts, is now trading at a cost at or below its production cost.  The cost settled on by many experts, sits at $1300 an ounce.  For the moment, the gold paper traders are ignoring this as COMEX gold prices seem to be in free-fall.  In reaction, gold mining stocks are also feeling the pressure.

If prices remain this low for any period of time, miners have no choice but to stop production and dry up any new supply.  If you are a gold naysayer, you may say, “so what?  Who needs gold anyway?”  I say, tell that to the central bankers of the world who bought record amounts of physical gold last year.   Tell that to Russia and China who are in full accumulation mode.  Word on the street is that both China and Russia are working to establish a new currency to replace the dollar as the world’s reserve currency.  Yet, another story that gets little play but does turn the heat up even further under the brewing gold story.

I spoke to one avid market follower who warns that if gold prices stay low, miners will be squeezed so hard they may have to sell all or part of their company in order to pay the bills.  “Sell to who?” I asked.  “China,” he responded.  China has openly said, if they go onto the open market to buy all the gold they desire, it would drive the price higher.  Obviously, that’s not something you desire if you hope to accumulate enough gold to some day back an alternative currency.  That leaves but one alternative.  Buy the cow, not the milk.

All these stories are brewing in one giant cauldron, setting the stage for the gold rebound story to come to a boil.  It makes no sense for gold to be so in favor one day and so out of favor in just a matter of a few weeks.  It makes no sense for it to trade below its production cost.  Once again, enter the “M” word.  I normally give little credence to manipulation as I believe to the extent one can manipulate a market, it is short lived as the truth ultimately prevails.  But, if I were in gold accumulation mode and I did have the ability to manipulate the price lower, I would do it.  Then, to avoid detection I would opt to buy up the financially crippled mines (a cash cow) in lieu of the physical metal.

I believe these are the stories behind the story:

  • Cut in Farm Subsidies Sets Off Inflation Bomb
  • Gold Trading Below Its Production Cost Triggers Massive Price Rebound
  • Central Banks Take Advantage of Low Prices and Step up Buying of Physical Gold
  • China Sets Sights On Further Mine Accumulation

Imagine these stories all breaking at the same time.  All of them consuming as much air time as the beating gold has taken of late.  Suddenly, the mood changes, the price rises and those who failed to take advantage lament over a lost opportunity.  Evidence this story is about to boil over comes in recognition of a rise in physical demand.  Those who still share concern over rising debt and inflation prospects – those who refuse to be suckered into another blindside attack of Debt Crisis – Part II – have already stepped up their accumulation of physical gold.

Gold is not going away.  If it were, Central Banks of this era would go down in history as bigger fools than Chancellor Gordon Brown who sold 60% of Britain’s gold reserves just before a 500% rise in the gold price.  Can gold go down further?  It is something gold investors are praying for as these brewing gold stories get set to boil over.

If you don’t agree, you wouldn’t be the first as the opinions expressed herein are just that.  It is up to you to stay in touch with the events taking place around you and make your own decisions.  But, if you do agree, I would be honored to have you follow me @DaveTheGoldDR.

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