January 31, 2007
Are the Latecomers Still Golden?
By Brady Willett

As gold and silver attempt to extend their bull run into year six, there are only two numbers I keep in mind: 725 and 14.94. These are the highest fixes that gold and silver reached in 2006 respectively, and unless they are to be broken to the upside in 2007 it could be the case that the precious metal bull is set for an extended rest…

The rational for new highs being a required ingredient to keep the precious bull running is obvious: investors have a tendency to chase performance.  Accordingly, with commodity prices potentially topping out in 2006 there is the possibility that investor interest in precious metals has likewise already peaked.


Another related reason why gold may pause/correct is because in order to match the average gain from annual-peak to annual-peak over the last 5-years gold would have to reach $870 an ounce this year.  Given that the commercials threw everything but the kitchen sink at $700 an ounce last year, it can be speculated that they would do so again if gold surpasses $700 an ounce again. Similarly it can be said that if central bankers want to keep up the mirage that they are united in the fight against inflationary pressures (that they created), they are not exactly keen on seeing the price of gold raging at all-time highs.





What About Those Presses?

Concluding that the precious metals bull is going through a period of healthy consolidation, many goldbugs have reverted to contending that hot central bank printing presses will be the fuel that propels gold going forward.  I would concur with this speculation if it were not for the fact that before the current gold bull started precious metals went through a vicious 20-year bear market, and all the while central banks kept printing their worthless paper money.

Yes, if there is going to be a lot more money sloshing around in the financial markets tomorrow it is undoubtedly the case that more capital will land in precious metals. But if on the other hand a period of financial market destruction is around the corner precious metals will have to make the difficult jump from inflation hedge to crisis hedge to keep the bull charging.  I have been talking about this difficult leap since gold bounded above $700 an ounce last year, and it is worth keeping in mind today. 

For the record, during times of severe financial crisis gold has proven itself as the safest asset, and this is unlikely to ever change (i.e. if there is going to be a run on US banks tomorrow I would want to own precious metals an nothing else).  However, during mild financial crisis’s gold’s record is not all roses. For example, gold did well during the great depression and stagflation 70s, or severe periods of crisis, but failed to rally during Japan’s lost decade, multiple emerging market blowups in the 1990s, and also during the 2000-2002 US equities meltdown.

Suffice to say, gold is an excellent financial crisis hedge if that crisis shakes investor confidence in paper money. However, mayhem in emerging market may not be enough to spark a record run in gold today, another Enron or two would likely be of no service to bugs, and more hedge fund meltdowns could potentially hurt gold if a wave of redemptions ensues (the hedgies leveraged and long gold could be forced to reduce their positions).

As for those that are steadfast in their belief that the next financial crisis will propel gold higher, perhaps they should take an objective look at recent history: the last 5-years have essentially been crisis free and gold is flying!

Keeping Things in Perspective

If the precious metal bull is currently in a prolonged pause it won’t be because central banks have acquired religion. Rather, it will be the result of many positive 1-time events not recurring.  For example, a producer can only de-hedge once and a gold/silver ETF can only be launched once.  Gold and silver have rallied strongly in recent years not only because of the hot printing presses and commodities bull, but also because 1-time events have perked investor interest.   

During these uncertain times it should be said - however reluctantly - that it is possible that $725 an ounce will come to be regarded as an important peak in gold. What should also be said/remembered is that during the historic gold rush in 1980 gold fixed above $800 an ounce only twice, and within 2-months of doing so it had corrected by more than 40%.  Point being, the latest precious metal bull has already been extremely profitable for many investors, and the odds of everyone catching the peak is exactly zero.


Although I do not think that it is good idea to completely abandon precious metals ownership until USD hegemony is more severely tested, I do have reservations about record gold coming to pass when so many are calling for record gold. In short, 725 and 14.94 are the numbers to beat in 2007 on a spot basis. My fear is that - baring a major financial crisis - economic slow down and a further correction in commodity prices could put these price levels out of reach...

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