George Maniere: Gold is Still the Best Safe Haven

InvestingAdvicebyGeorge – Gold may not be the perfect safe haven but it’s sure the best one we have and we can use all of the confidence we can muster.

Consumer confidence in the U.S. fell this month to the lowest level since March of 2009. Just to refresh your memory that was when the Dow was at 6400, the S&P was at 667 and the NASDAQ was trading at 1265.

You may argue that since consumer views are usually wrong the contrarian view is actually positive for stocks. Sadly I don’t share this contrarian view. What I see happening is that we will stage a nice “head fake” rally in September and then at the end of September the market will bounce around and consolidate. In October the market will sell off with a vengeance. We will see the S&P at 1040 before it’s done.

Gold continued its rise this week as it rose in New York, capping the biggest monthly gain since November 2009, on speculation that the Federal Reserve will take more action to spur growth. This will only fuel the fire that is already burning out of control in gold. Gold prices have moved too far and too fast. When this happens increased volatility is the normal result. Healthy stocks in an uptrend like to move at a 45 degree angle. When a stock goes up in a straight line it is never really sustainable.

Despite pullbacks, I believe that gold’s position as a safe haven is intact. I believe prices will eventually trend higher because of these for secular trends.

1)    The law of supply and demand is a pivotal factor in supporting the eventual rise in gold prices. From 2005 to 2009, the gold industry received 59% of its supply from mining production, 31% from recycled or scrap gold and 10% from central bank sales. Well central banks are no longer selling their gold. The amount of scrap gold is falling as investors hoard the metal, which leaves mines to fill the gap. I will add here that while we have seen the gold miners ETF, GDX put in a tremendous show of strength lately and I believe we will see the GDX start to put in a strong showing very soon.

2)    In the Worlds Gold Council’s recent Gold Demand Trend Report for the second quarter of 2011, mine supply grew 7% to 708.8 tons but total supply was unchanged as gold producers de-hedged and sopped up excess gold.

3)    The above ground supply is estimated to be around 165 metric tons and half of that is in the form of jewelry. Of the 82,500 tons remaining in bullion, 30,000 tons are owned by central banks and the rest is privately held.

4)    The total gold demand for the second quarter was 919.8 tons which far outpaced the growth in mine supply. This leads further credence to my belief that we may soon see the GDX enjoy gains it has rightfully deserved.

One thing is for sure. Gold has lost a big buyer recently, the miners. Miners have been buying gold on the open market to eliminate hedging positions, where they had been previously locked in to gold sales at a lower price. This was a brilliant tactical move on the part of the miners as the role of dehedging has been instrumental in pushing gold prices higher and without it, the market loses the key driver.

One factor that could help is the advent of physically backed gold ETFs. Along with GLD, the Swiss Gold Shares (SGOL), the Central Fund of Canada (CEF) and the Sprott Physical Gold Trust (PHYS) they hold 1,400 tons of gold or more than half of the annual production.  And as I said earlier the big winner will be the gold miners.


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