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October 03, 2008

Gold Investments Market Update
by Brady Willett

Gold fell sharply yesterday on lower oil prices and the recently surging dollar, despite unprecedented physical demand for coins and bars in the UK, US and internationally (gold closed at $840.40 down $40.20 while silver closed at $11.57 down $1.04).

As warned yesterday, anything is possible in the short term in these markets and leveraged trading in futures, CFDs and spread betting is an extremely high risk endeavour in the current markets and not advisable.

Movements in the gold market were very counter intuitive yesterday. Granted oil and the wider commodity complex fell sharply and the dollar continued its sharp ascent and this may have led to profit taking in gold. However, the severity of the sell off (more than 3%) is unusual given the huge and unprecedented demand internationally for gold bullion as evidenced by vault staff throughout the world working overtime, queues outside bullion dealers in the UK (see front page of yesterday's Guardian in the UK http://www.goldassets.co.uk/images/the_guardian_02-10-08.jpg) and in Asia and in shortages and rationing of small gold coins and bars (Eagles, Philharmonics, Buffalos, Krugerrands and Sovereigns) in Europe and the US.

Short sellers pushed their advantage, aggressively selling gold again and pushing gold back below $850/oz, the nominal high in 1980.

There has been a very determined seller above $900 in recent days and it would certainly seem like some large institution or institutions did not want the gold price surging above $900/oz as contagion spreads throughout global money markets. Some contend that this may be US government and US Treasury motivated (through proxy institutional sellers) others that it is to protect a very large short position and some such as the Gold Anti Trust Action Committee (GATA) contend that it is both.

However, this is likely to be another short term (paper) futures market sell off and we would not be surprised if gold prices rallied sharply on the Congress's decision regarding the Paulson bailout plan. Congressional approval of the plan may be bearish for gold in the very short term but it is very bullish for gold in the medium to long term as the US' fiscal position deteriorates significantly. Should Congress vote against the plan again we are likely to again see stock markets plummet and gold surge.

The FT reports this morning 'Gold rush as investors pile into bars'. Bullion dealers are busier than at any time since 1980 as retail investors, concerned with the safety of bank deposits, rush to buy gold coins and bars. "Dealers are doing incredible business," said Philip Olden, managing director for jewellery at the World Gold Council, an industry body. "Some are calling up and saying they have run out of stock."

Similarly the Daily Telegraph reports 'Financial Crisis: Rush for gold as savers queue for bullion') that "savers have been queuing in the street to buy gold bars and coins, as they search for a safe place to invest their money."

With physical demand on a par if not higher than 1979-80, gold will not languish at these levels for long and $1,000/oz should be reached very soon after election day. Interestingly, the gold rush in 1979-1980 was after a period of deep recessions and stagflation internationally. Today, bullion shortages on par not seen in 1979-1980 are taking place before major economies have even slipped into recession which is extremely bullish.

Retail investment demand is unprecedented and there is an increasing likelihood that institutions and central banks are becoming net buyers again as per our market update yesterday.

Investors Trusting Gold More Than Banks and Governments

"You have to choose, as a voter, between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

It would seem that the above quotation from Irish philosopher and playwright, George Bernard Shaw, is ringing true during these uncertain and tumultuous financial times.

Given the unprecedented nature of the financial and economic uncertainty facing us, it is wise to step back and take a long term historical perspective of the current crisis. Throughout history, gold has been used as the safest form of money - a currency that cannot be debased or printed into oblivion by bankers and politicians. When experiments with paper money and massive creation of debt go wrong as unfortunately they inevitably have done throughout history, economic hardship has been the result.

This is why wise men throughout history have always appreciated the finite currency that is gold. From Aristotle to G. B. Shaw their thoughts help enlighten why one should save or invest in precious metals.

Aristotle, the Greek philosopher and genius (384-322BC) wrote "in effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings." In the same vein, Voltaire, the French poet, historian & philosopher ( 1694 - 1778) wrote "paper money goes down to its intrinsic value - zero."

More recently Hans Sennholz, author & economist of Austrian school wrote that "for more than two thousand years gold's natural qualities made it man's universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper. No other commodity enjoys as much universal acceptability and marketability as gold."

And Lord Rees Mogg, economist & former editor of The Times & assistant editor of The Sunday Times said that "governments lie; bankers lie; even auditors sometimes lie: gold tells the truth."

Brady Willett
FallStreet.com

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