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Yikes! China urged to quadruple gold reserves
"More orderly" because the central banks now
strategically dishoard enough gold to prevent
explosions -- as former Federal Reserve
Chairman Paul Volcker wrote in his memoirs
should have been done in the late 1970s?
* * *
Gold Rally Similar Yet 'More Orderly' Than in 1980
By Allen Sykora
Dow Jones Newswires
Tuesday, May 9, 2006
There are a number of similarities in the gold futures now compared
to when prices hit record levels back in 1980, yet analysts involved
with the metal both now and then tend to describe gold as having
more solid footing in 2006 so that any corrections lower may not be
as dramatic as they were a quarter of a century ago.
For one thing, the rally has been more gradual, meaning a better
base of support has been built on the charts.
"Right now, gold has been in a more orderly trading pace," said John
Person, the president of National Futures Advisory Service who back
in 1980 was a young trader working in the same office as the famed
George Lane, known as "Father of Stochastics."
June gold has traded as high as $700.90 an ounce so far Tuesday on
the Comex division of the New York Mercantile Exchange. This is a 26-
year high for a Comex futures contract.
The record high trade for a Comex gold contract was $875 back on
Jan. 21, 1980, according to Nymex. The market underwent considerable
volatility back then, as it rose from a low of $424 in December 1979
to the $875 peak, then fell back as far as $453 again by March 1980.
"The fundamental stories are the same -- inflation, oil and concerns
in the Middle East," said Person.
Much of the impetus behind the 1980 rally was inflation, analysts
said. At the time, some related, investors had fewer inflation
hedges than they do today, when investors can more readily use tools
such as puts in the stock market.
"Jimmy Carter was president and inflation official rate was around
12%," said David Morgan, independent precious-metals analyst with
Silver-Investor.com. "Because of that, many investors were concerned
with how to protect their wealth."
While official U.S. inflation is currently nowhere near the levels
reached a quarter of a century ago, for some time now many market
participants have been buying gold on fears that the world's central
banks have let money supply grow so rapidly that there could be more
inflationary pressures down the road.
Analysts also noted that the Middle East worries then and now
centered on Iran. Back then, Iranian militants had stormed the U.S.
embassy and held U.S. citizens as hostages for more than a year.
Current geopolitical tensions center around Iran's nuclear program.
"Back then, it was hostages," said Person. "Now Iran is possibly
turning the world into a hostage with their capacity to produce
Peter Grandich, analyst and publisher of the Grandich Letter,
commented that there were worries about nuclear war back in the
1980s, after Ronald Reagan had been elected president. And nuclear
worries persist in 2006.
Morgan added that a quarter of a century ago, there were also
worries about the dollar failing. The greenback this week has hit
its weakest level in a year.
Still, analysts suggested that that gold may be better situated now
than in 1980. For starters, said Person, the rally to the 1980 highs
began from a low of $101 in 1976. The current rally began from a
bottom of around $252 in 1999. "That opens the door at this point so
that this market really could exceed that (1980) high, because the
base from which we are starting this new bullish cycle was higher,"
Person commented that there are some parallels in gold's rally to
the sharp rise in the Nasdaq a few years ago in that a "frenzied
buying spree" has occurred. Nevertheless, said Person, gold's
current rise has been "more orderly" than it was a quarter of a
century ago when it climbed and then fell a few hundred dollars
within months. Thus, he and other analysts said they would look for
any major correction from current levels to halt in the area from
$550 to $575, which would not be as dramatic as the $875-$453 two-
month fall in 1980.
If the market did pull back $100, it may then go into a
consolidation phase and the uptrend would still be in tact, said
Person. He added that a trendline from the November to the March
lows, on a continuation chart, is around $570.
"It's possible for gold to correct substantially from here and still
remain in a bull market," said Morgan. "Gold could come down to the
$550 level and still remain in a powerful bull uptrend."
Morgan commented that gold's selloff from the 1980 high -- a peak
which happened to occur on his birthday -- came when the Fed kept
aggressively hiking interest rates to combat inflation. Furthermore,
the gold market had run up so fast that technically "it had no legs
to stand on" during a retreat after limited base building.
Morgan suggested the Fed would not be able to let the bond market
suffer as much now as it did back then due to aggressive
tightening. "There would be repercussions, such as potential trade
wars or currency blocks where countries would quit accepting
dollars," he said.
Analysts commented that the global wealth base is greater than it
was a quarter of a century ago, as countries like China and India
have seen significant economic improvement, which could also help
underpin assets in general. And, Morgan pointed out, gold has been
a "store of wealth" for thousands of years.
Grandich said that while gold hit the $870s back in 1980, it was up
there only briefly and spent more time around $650 to $700. Thus, he
said, he had listed this as his price objective during much of the
current rally. While he eventually does look for gains beyond the
old record highs, some consolidation first may be necessary, said
Grandich. Then one of three events may have to occur to spark record
prices, he continued.
"We will need even more heightened geopolitical fears where not only
are we beating the drums, but some actions start taking place like
military movements," he said. "We have to see it go from rhetoric to
some form of action." If the dollar index should break down below
80, he said, "everybody in the world will get a sell signal on the
U.S. dollar and that in turn will be extremely bullish for gold."
Lastly, added Grandich, mining and other resource companies are
having a harder time upping production, in part due to political
concerns, such as Bolivia's move to nationalize its energy sector.
There has been political unrest around foreign mining operations in
"The environment to explore and develop metals, particularly gold,
has become very tough," said Grandich. "So supply doesn't look like
it's going to increase (significantly) any time soon. Any furthering
of that inability to get supply would be another bullish factor to
get us over this hump of $700 or so.
"I think we'll go through the old high of $875. I just think we'll
have to do some work to get there."
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