Gold over $1808 - May Be Poised for 'Parabolic' Rise; People in West Not Prepared for Possible Currency Crisis

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By Mark O'Byrne | August 18, 2011 11:49 PM EST

Gold's London AM fix was a second consecutive record nominal high in USD. Gold's London AM fix this morning was USD 1,794.50, EUR 1,246.44, GBP 1,087.12 per ounce (from yesterday's USD 1,792.00, EUR 1,240.39, GBP 1,089.96 per ounce).


Cross Currency Table

In my interview this morning on Bloomberg, the interviewer picked up on our recent suggestion that gold could go parabolic soon. Indeed, we said that it is likely not a question of if - but rather when.

A short interview is not conducive to informing people and therefore we wish to elaborate about a possible parabolic move.

Bull markets almost always end in a mania phase where there is a near universal belief that an asset class or security is going to rise and there is no risk involved.

This has been seen throughout history and was seen with the Nikkei, the Nasdaq and more recently with property markets in Ireland, the UK and the U.S.A.

It was also seen with gold in the 1970s when gold increased 128% in 1979 alone. On January 2nd 1979 gold's London AM Fix was $227/oz. By the 31st of December, gold's London AM fix was $524/oz.

21 days later gold had increased another 60.9% to $843/oz.

This is parabolic.

Today's 27% rise year to date in dollar terms is very tame in comparison. 

The blind belief that an asset class, security or currency is a one way path to financial nirvana always leads to a bubble and the bursting of that bubble.

Today there is no such blind belief. Gold remains the preserve of the smart money - those who know their financial and economic history. 

It is also the preserve of those who understand the importance of real diversification due to the risks posed by currency debasement and inflation. 


Bloomberg: Gold Prices May Be Poised for 'Parabolic' Rise 

The largest buyers of gold today are institutions seeking to diversify themselves and protect themselves from currency debasement and the risks of depreciation of major currencies such as the dollar, euro and pound.

Sentiment remains muted and every single little scrap of potentially bearish news is greeted as a sign of the top or a bubble - whether it be cryptic statements from George Soros or the odd gold ATM globally.

One article from Bloomberg entitled 'Gold Demand Falls 17%: World Gold Council' was sent to me by a large number of clients and associates this morning alone.

Some are genuinely concerned that gold might top out at these levels. Others have been bearish and wrong in recent months and there is a large degree of confirmation bias going on here - and has been for some time. 

Others simply do not own the asset class and fear they are missing the boat. Some are envious of others managing to protect themselves as unfortunately they may not be in a financial position to do so.

Other excellent Bloomberg articles this morning that are more bullish such as 'Venezuela Gold Move Shows Foreign-Storage Discomfort, UBS Says', 'Gold Allocation of 10% Will Work in Any Scenario, Goldcore Says' or 'China Gold Investment Demand Jumps 44% on Rising Inflation' were not forwarded.

More nuanced articles in our news section today were not forwarded.

This is a small but relevant sample of the sentiment towards gold. Many are nervous about gold at these record nominal highs and some are downright bearish (and some have been since gold reached the nominal high of $850/oz).

There is not a universal acceptance yet that the majority of people in the western world should own some gold bullion - physical coins and bars owned personally or stored in the safest way possible.

Quite the opposite - Joe and Josephine public have been selling the "family gold' in the global phenomenon that is 'cash for gold'.

This is in marked contrast to the Middle Eastern and Asian world where owning gold as a store of wealth is the norm due to their experience of currency debasement. 

The emirate of Dubai's launching of a 5 ounce bullion coin is another indication that demand from the Middle East is set to remain robust and may surprise to the upside.

The conditions today are more bullish than they were in the 1970's for a whole variety of reasons which we have looked at in recent weeks.

One fundamental reason is the emergence of China and Chinese demand for gold. There was no Chinese demand for gold in the 1970s.

The unrealized, important fact that the people of China were banned from owning gold bullion from 1950 (by Chairman Mao) to 2003, means that the per capita consumption of over 1.3 billion people is rising from a tiny base. 

Many market participants and non gold and silver experts tend to focus on the daily fluctuations and "noise" of the market and not see the "big picture" major change in the fundamental supply and demand situation in the gold and silver bullion markets - particularly due to investment and central bank demand from China and the rest of an increasingly wealthy Asia.

Another factor today that was not present in the 1970s is a global debt crisis that is threatening the global financial, economic and monetary system.

The vast majority of people in much of the western world are not prepared for the real possibility of continuing global currency debasement.

Owning gold is like owning car or health insurance. You do not stop buying insurance because the premium goes up. You shop around and get the best insurance at the best price.

The price may fall or rise (although given current conditions it is unlikely to fall in the medium and long term) but one needs to own it in order to protect oneself and one's families financial future.

With all the focus on the nominal price of gold, the value of gold is still not understood by the majority in the western world today.

It will be soon.

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