Watching and waiting for gold

Precious metals markets have been quiet today, that is, up until the last few minutes when that little line on Kitco's live gold chart went vertical for what amounted to about a $7 gain for gold.

It could be an interesting day ... we'll see.

Citigroup's report the other day will certainly add some fuel to the fire when it comes to the debate over the future of gold prices. They figure the yellow metal could rocket as high as $2,000 an ounce sometime within the next two years, possibly before the end of next year, as all the government stimulus money works its way into the system.

Ambrose Evans-Pritchard filed this report on the Citigroup paper and GATA has hosted the document that is full of charts, but, more importantly, ends with the following:

While we believe that Gold could very well head above $2,000 we do not think that is today, tomorrow next week or next month.

We do however believe that it will happen over time as this financial / economic backdrop heads to “the wings”

What do we mean? The excesses of the last 10 to 25 years have come to fruition in the U.S. and across the World with severe repercussions for financial markets and the Global economy. There is an increasing recognition of this at official levels and the monetary and fiscal floodgates are starting to open.

We doubt, as a consequence, that we are just going to muddle through here. Our bias is that when the dust settles on all this action the authorities will have been very successful or very unsuccessful.

In the very successful arena is the idea that “throwing the kitchen sink” at this has worked and we see signs that the Global economy is reflating / inflating. As a consequence debt will get devalued and the wash of money in the system would suggest a greater likelihood of an inflationary outlook, which will benefit Gold.

In the very unsuccessful area is that too much damage has been done to the patient and as a consequence we continue to have financial instability. This will breed further economic instability, which could lead to political instability in some nations and possibly even domestic / regional unrest or worse. This deteriorating picture would also likely be a catalyst for Gold to perform well with a status of “safe haven”

Considered opinion is that all the Gold in the World can fit in a 25 square metre cube so even a relatively modest a change in the supply / demand dynamics could result in an outsize move in price. Gold has been used as a monetary instrument as far back as you can look. The same cannot be said about precious art or wine or fine cars etc. In times of extreme concern it is highly likely that it will regain that “luster”

As a consequence we remain of the view that Gold will continue to perform well and will do particularly well as the consensus grows as to how we will come out of this mess (or not). Compared to just about every other asset class in the last 5 to 7 years holders of Gold likely look mellow…it is the holders of other assets that are looking a bit “yellow”.

It's not hard to tell who's winning the epic battle being waged right now between asset deflation and government reflation - the former clearly has the upper hand.

But, the government effort is just ramping up with momentum now set to begin swinging the other way. And one thing is sure - governments and central banks know how to finish the job.

One look at monetary policy in the U.S., when asset deflation last threatened life as we know it, reveals that the Greenspan Fed kept asset deflation on the mat for what seemed like an eternity, continuing to pummel its adversary even after the opponent was completely knocked out.

Better to err on the side of caution they said.

If policymakers are successful, they will be sure to not let up until their opponent is incapable of rising again anytime soon, by which time, another gargantuan asset bubble of some sort will already be inflating rapidly.