David Rosenberg on How We Get to $2,750 Gold

Gold prices are currently trading at the record level of $1,100/oz. Looking at the long-term loss of value in the dollar, and the damage caused by the financial excesses of the last quarter century, the question is whether this is just the kickoff phase for the precious metal. Many experts expect gold to trade above $1,300 by the first quarter of 2010. They ultimately see the correlation between peak gold and weak dollar resulting in gold above $2K.

Gluskin Sheff Chief economist David Rosenberg thinks that as the world keeps losing confidence in paper currencies, and as investors worldwide seek safe havens from a declining greenback, there are reasons to be bullish on gold:

Here is Rosenberg’s latest piece on: This Is How We Get To $2,750 Gold

“Another reason to be bullish on gold is the recurring trade spats. Indeed, this is good news for the commodity complex as security of supply resurfaces — see China Attacks U.S. in Fresh Trade Spat” on page 2 of the weekend FT. If it’s not Chinese-made tires fingered by an increasingly protectionist U.S.A. one day, it’s steel pipe the next. This latest anti-dumping measure by the United States is facing a severe rebuke, as per the press reports, in China.

In addition to these trade protectionist actions, there is also the matter of more stimulus measures being undertaken in a mid-term election year at a time when the Treasury is expanding its debt issuance to new records right across the maturity spectrum. All anyone needs to do is have a look at the article Congress’s Blank Check For Housing in the weekend WSJ — to see this happening at a time of 10% budget deficit-to-GDP ratios, had indeed become a bottom-less fiscal pit.

Since the USA will not default, not raise taxes nor cut spending, the only logical recourse will be to print vast sums of U.S. dollars to fund this surreal foray into deficit finance. In other words, reflate. As we keep on saying, under Dr. Bernanke’s tenure, the monetary base has risen twice as much as nominal GDP has and the two lines continue to diverge. At the same time, gold production peaked a decade ago. It’s all about scarcity of supply, and as Sri Lanka’s central bank just reminded us, and India before that, there are buyers with deep pockets lining up to diversify into bullion. Here are the ‘what if’ realities stack up:

  • If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
  • If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
  • If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.”

emphasis added

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1 Comment on David Rosenberg on How We Get to $2,750 Gold

  1. Over the last eight (almost nine) years Gold has been rising against the major currencies. While for years Central Banks have been a primary source of supply to the markets, supply from mines continues to shrink, but now more and more Central banks seem to see the long term value of holding on to their national treasure rather than selling their dwindling supplies just to prop up fiat currencies in the short term. As a result Central banks are becoming net buyers. Even if that wasn’t so, the folks at the gold anti trust action committee, GATA, believe that the way the central bank gold accounting rules work, there is much less available physical gold in the vaults than on the ledger and that is because swaps and leases do not show up on the inventory report if I’m understanding GATA’s theory. So according to the reasoning, much of the central bank gold may have already been sold in a decades long gambit to supress gold prices and after years of supression there is a huge pent up potential price energy. Gold isn’t near its inflation adjusted high’s and silver is at about 1/10th of its inflation adjusted high’s. Following the work of the silver analyst Ted Butler, it seems that one or at most two Primary Dealer’s of the Federal Reserve hold the vast majority of short positions in silver on the COMEX. It is interesting when you look at who these shorts likely are and what role one of them plays in a major Silver ETF in my opinion.

    The market Cap for all of Gold is less than that of Microsoft and all the gold ever mined has less value at current prices than about half the US GDP. All the Gold ever mined would fill approximately two Olympic size swimming pools and the Silver market is minuscule compared to Gold.

    If the new mainstream investors in gold and silver ever get the big picture, they’ll shift from paper proxies of gold and starting taking physical delivery from COMEX of silver and gold, stop using margin, and move to a buy and hold long term strategy in my opinion. This is because the long term picture in gold and silver is a simple one of Supply and Demand. Supply is decreasing and demand is increasing.

    Gold and silver have long been considered money and by many the world over they still are. For others they are a hedge against the growing distrust in fiat currencies increasingly encumbered by accelerating debt levels which will likely never realistically be repaid.

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