Tuesday, September 27, 2011

Gold: Still a Safeguard Against Problems in the Financial Markets - Daily Reckoning - American Edition


We don’t mean to frighten you today, dear reader, but an influential gentleman whose opinion we respect thinks it might end up going much lower.

Heh, not that he’s selling.

Gold traded as low as $1,532 overnight before recovering to $1,603 as of this writing.

That’s a $50 loss tacked onto Friday’s $100 loss. Even examining the action in the context of a one-year chart, it looks dramatic…

Spot Prive of Gold Over the Last 12 Months

As of today, people who want to trade gold on the Comex once again have to post additional margin to their accounts.

Fueling the drop on Friday was an announcement by Comex parent CME Group: Gold margins were rising 21%. In addition, silver margins were raised 18% and copper, 16%.

An initial position on a 100-ounce gold contract will cost $11,475 up front.

This is the third margin increase for gold since August. Put together, the increases have totaled 55%.

And today? The Shanghai Gold Exchange is following the Comex’s lead and raising margin requirements on precious metals.

“Even with the recent correction,” comments Byron King, “gold is still priced within its long-term trading range” — as evidenced by this chart:

Gold Price Since 2000

At $1,500, gold would remain within the “channel” that’s been in place for nearly three years.

“We overshot on the upside when we went over $1,900,” Vancouver veteran Marc Faber told CNBC today. “We’re now close to bottoming at $1,500” — the bottom of the aforementioned channel, as it turns out.

But… “If that doesn’t hold, it could bottom to between $1,100-1,200.”

Not that Faber is worried. He’s been buying in since — well, probably around the same time we recommended our Trade of the Decade at the start of 2000, when gold was near $300.

So here’s a little historical perspective: Gold first broke through $1,000 in March 2008, touching $1,010 briefly. That turned out to be a high point that wouldn’t be exceeded for 18 months.

By November, the Panic of 2008 was in full swing, and gold was at $715. That’s a 29% drop.

By September 2009, gold had reclaimed $1,000…and didn’t look back.

“With history as our guide,” says Matt Insley at Daily Resource Hunter, “it’s clear that gold’s been doing this sort of thing all along its massive run-up — since 2005 it’s seen five similar corrections.”

So what now? Are we in line for another $29% drop… which would take us to $1,350? Or something steeper, as Marc Faber warns about? Will it take another 18 months for gold to reclaim the old highs and break through $1,900?

The good news is that you don’t have to know the answers to these questions to continue feeling confident about holding gold. “Nothing has changed since last week in the physical gold market,” Mr. Insley continues. “There wasn’t a mother lode discovery, and there’s clearly no substitute. So other than a market correction, gold is still high on our list of investable resources.”

“I’d buy every month a little bit of gold,” Faber advised back on Sept. 6, when gold was at its (for now) all-time high of $1,921. “When you buy gold, it’s an insurance against systematic failure and problems in the financial markets.”

Of which we still have plenty.

Addison Wiggin
for The Daily Reckoning

Author Image for Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

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