The first week in July 1997 the Australian central bank announced that in the proceeding months it had sold 167 tonnes of gold about (5,250,000 ounces), about 2/3 of its supply, worth US$1.7 billion. That knocked the market down to an 11 1/2-year low of US$317 Actually it even took it considerably below its 1982 (15 year) lows, when viewed in inflation-adjusted terms.
I've been of the opinion for several years that gold was in a long process of bottoming after coming off its manic peak of $800 in 1980. It's a dangerous job picking tops and bottoms, but 17 years is a very long bear market for absolutely anything. But just as manic tops often go far above "reasonable" or historic norms, so can panic bottoms.
Is this a panic bottom for gold? "Panic" is probably not the right word under the circumstances, except for those long a bunch of futures contracts with minimal margin. For the market at large, it's much more a case of exhaustion. The gold market has been dead on its feet for many months, and the Australian sale was simply the coup de grace. Or at least I hope so. Bull markets can only start after the last discouraged seller is gone and there's no optimism the market is ever coming back.
There really hasn't been much press coverage on gold, despite the grim state of the market. Or maybe because of its grim state, just as there was no press coverage on the stock market at its 1982 bottom, when it was at its cheapest levels in a half century. Who cares about something that's lost 80% of its value over a 17 year bear market, has been stagnant for the last few years, and then got whacked for another overnight loss of $20 an ounce? Nobody except bargain hunters.
The public is totally out, and completely uninterested. The producers have been selling advance production for years (they're now short an estimated 60 million ounces). Central bankers, at least from Western countries, have been selling gold off, saying it no longer has a place in the monetary system. Friends who I play polo with tell me they think it's now just another commodity, at best.
I could list a lot of things that augur well for the future price of gold. In addition to those just mentioned in the last paragraph, consider that the metal has been in a supply deficit since the decade began, now in the 20-30 million ounce per year range, and it's widening. One projection has a cumulative total deficit of almost 200 million ounces over the next five years. Consider that most of the current central bank selling has been countered by buying on the part of other central banks the difference being that the selling has come from countries in decline (e.g., Belgium, Holland, Canada, Australia), and the buying has come from rapidly expanding oriental economies, like China. Consider that the real price of gold, in 1971 dollars, is less than $80. Consider there's supposed to be a huge (15 million ounce) speculative short position in gold, not counting advance sales of the world's miners. Consider that the stock market will eventually roll over, and if only a tiny fraction of the $8 trillion it represents moves into the metal for whatever reason, its price will look like a moon shot.
All of that has been true for years, and all are sound reasons for building a position in the metal. I've consistently done so for years, and I'm buying more now that the price is down. The reason is quite simple although it's almost never mentioned today. Gold is money. Period. It is cash in its most basic form. It is the only financial asset that is not someone else's liability.
I'll dispense with the historical and theoretical underpinnings of what money is and why; check the appropriate chapters of any of my three financial books if you're unclear on the subject. Suffice it to say that gold is money; U.S. dollars are not money, they are a currency. They are the unsecured liability of the U.S. government, and have no more intrinsic worth than any other paper currency created by nearly 200 other governments. I'm confident that at some point governments around the world will again use gold as a reserve for their currencies, simply because it's uniquely well suited to the purpose.
The fact that foreign central banks own about $650 billion dollars of U.S. Treasury securities doesn't give me confidence in the dollar; it scares me to think that they will almost certainly start unloading those hot potatoes at some point. It's idiocy for them to trust their countries' economic well-being to the unsecured liability of a bankrupt and untrustworthy foreign government. Dollars do, however, have two advantages over gold at the moment: 1) they're widely used in commerce, and 2) they pay interest. But gold has the potential of being far more acceptable in commerce than any floating abstraction like the dollar. And gold can pay interest as easily as any currency; interest is only a function of the time value of money. It exists whenever a money or currency is lent or borrowed.
The way I see it, gold is headed over $1000 an ounce, probably much higher. At anywhere near current prices, it's the lowest risk, highest potential investment I can think of. Could it drop to $300, or $250, or less? Yes, anything is possible. But the very fact that the usual pundits have come out of the woodwork with predictions like that is, itself, an excellent indicator of the bottom.
I suggest you use this time, when some establishment pundits have even said it could fall to its official price of $42.22, to buy the metal in size. The last time it looked this good was in 1971, when people like Wilbur Mills and Elliot Janeway were saying it would fall to $8 if the U.S. Government didn't "support" it at the then official $35.
The following are bullion dealers you might shop with:
David Hall Coins, (714) 261-0509
Jefferson Coin & Bullion, (800) 593-2585
R.W. Bradford & Co., (800) 854-6991