Gold bugs see vindication in Wall Street mess

Die-hard gold believers, derided by mainstream investors because of their steadfast bullishness no matter what market conditions were like, feel vindicated by the current turmoil on Wall Street. 

Shaken by the worst financial crisis since the Great Depression, people fearful of their bank deposits and money market accounts have flocked to buy gold jewelry and coins. Gold’s rise above $1,000 an ounce in March was an “I told you so” moment for one leading gold advocacy group, the Gold Anti-Trust Action Committee. Conventional investors view GATA as a conspiracy-theory group, with very little evidence to back up its claim that governments, central banks and commercial banks have colluded to keep the price of gold weak.

Although gold is off its record at slightly below $900 an ounce, GATA Chairman Bill Murphy predicted this week that the U.S. government’s $700 billion market rescue proposal for the financial sector will give a “staggering” boost to gold because it would feed inflation and hurt confidence in U.S. markets. “People from the average American to the sovereign wealth funds are going to pile into the tiny gold and silver markets,” said Murphy, who maintained that gold needed to rise to between $3,000 and $5,000 an ounce for market equilibrium. Even when gold was at its post-floatation low at $251.70 an ounce in 1999, GATA kept saying bullion would surpass its 1980 high above $800. 

Last Wednesday, gold logged its biggest one-day price jump ever as investors switched out of the U.S. dollar, equities and government paper into a trusted safe haven. On Wednesday, spot gold traded at $888.15 per ounce. It has rallied 18 percent since hitting an 11-month low at $754.70 on Sept 11. While oil this year hit a record in inflation-adjusted as well as nominal terms at near $150 per barrel, gold is far from an inflation-adjusted record, which analysts GFMS has put as high as $2,079 per ounce.

HOARDING Gold dealers around the world reported that physical gold buying has soared, particularly in top consumer India and in the Middle East, with upcoming Hindu and Muslim festivals. The industry-sponsored World Gold Council reported strong sales of gold coins and small bars in the U.S. market, particularly by private retail investors. 

On the other hand, Eric Harris, co-owner of New York-based jeweler Niletti Creations, said he has seen clients selling instead of buying gold to profit from the lofty price. “A lot of my customers who have been hoarding up their gold are selling it because now it’s a good time to sell scrap gold,” Harris said. Donald Doyle, CEO of Blanchard & Co said sales at the largest U.S. rare coins retail dealer had tripled in the past two weeks. “Our business has been busier than we have ever been before in the history of the company. People feel like if they can’t even count on the money market funds for absolute safety, they want to get something even safer than that,” Doyle said. “Anything gold flies out the door,” Doyle said. In August, a shortage of the popular American Eagle bullion coins forced the U.S. Mint to temporarily suspend their sales.

Bullion holdings at SPDR Gold Trust GLD.P, the biggest gold exchange-traded fund, have increased by more than 100 tonnes to a record 724.94 tonnes since Lehman Brothers filed for bankruptcy protection and the takeover of Merrill Lynch by Banc of America was announced on Sept 15. NEW GOLD STANDARD? Peter Schiff, chief global strategist of broker-dealer Euro Pacific Capital, who has long promoted gold as an alternative investment, said the U.S. government bailout plan could backfire. “It’s going to ignite a huge round of inflation, and maybe finally the world is going to question why is the dollar the reserve currency,” he said. Schiff, who forecasts that gold will rise to $2,000 next year, said he believes the world should ultimately return to the gold standard, under which central banks pin their currency’s value to gold, Most developed countries abandoned the gold standard before the end of the Second World War. The dollar has not been convertible into gold since 1971. Philip Gotthelf, publisher of Commodex System and the Commodity Futures Forecast Service, said the real market fear was that the dollar could be worth a lot less should the U.S. government decide to print its way out of the mess.