Citigroup Report Further Fuels Debate About the Future of Gold

by: Tim Iacono November 30, 2008 | about stocks: GLD    

Tim Iacono

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Precious metals markets were quiet on Friday. That is, up until the last few minutes when that little line on Kitco's live gold chart went vertical for what amounted to about a $7 gain for gold.

Citigroup's (C) report the other day will certainly add some fuel to the fire when it comes to the debate over the future of gold prices. They figure the yellow metal could rocket as high as $2,000 an ounce sometime within the next two years, possibly before the end of next year, as all the government stimulus money works its way into the system.

Ambrose Evans-Pritchard filed this report on the Citigroup paper and GATA has hosted the document that is full of charts, but, more importantly, ends with the following:


While we believe that Gold could very well head above $2,000 we do not think that is today, tomorrow next week or next month.

We do however believe that it will happen over time as this financial / economic backdrop heads to “the wings”

What do we mean? The excesses of the last 10 to 25 years have come to fruition in the U.S. and across the World with severe repercussions for financial markets and the Global economy. There is an increasing recognition of this at official levels and the monetary and fiscal floodgates are starting to open.

We doubt, as a consequence, that we are just going to muddle through here. Our bias is that when the dust settles on all this action the authorities will have been very successful or very unsuccessful.

In the very successful arena is the idea that “throwing the kitchen sink” at this has worked and we see signs that the Global economy is reflating / inflating. As a consequence debt will get devalued and the wash of money in the system would suggest a greater likelihood of an inflationary outlook, which will benefit Gold.

In the very unsuccessful area is that too much damage has been done to the patient and as a consequence we continue to have financial instability. This will breed further economic instability, which could lead to political instability in some nations and possibly even domestic / regional unrest or worse. This deteriorating picture would also likely be a catalyst for Gold to perform well with a status of “safe haven”

Considered opinion is that all the Gold in the World can fit in a 25 square metre cube so even a relatively modest a change in the supply / demand dynamics could result in an outsize move in price. Gold has been used as a monetary instrument as far back as you can look. The same cannot be said about precious art or wine or fine cars etc. In times of extreme concern it is highly likely that it will regain that “luster”

As a consequence we remain of the view that Gold will continue to perform well and will do particularly well as the consensus grows as to how we will come out of this mess (or not). Compared to just about every other asset class in the last 5 to 7 years holders of Gold likely look mellow…it is the holders of other assets that are looking a bit “yellow”.

It's not hard to tell who's winning the epic battle being waged right now between asset deflation and government reflation - the former clearly has the upper hand.

But, the government effort is just ramping up with momentum now set to begin swinging the other way. And one thing is sure - governments and central banks know how to finish the job.

One look at monetary policy in the U.S., when asset deflation last threatened life as we know it, reveals that the Greenspan Fed kept asset deflation on the mat for what seemed like an eternity, continuing to pummel its adversary even after the opponent was completely knocked out.

Better to err on the side of caution they said.

If policymakers are successful, they will be sure to not let up until their opponent is incapable of rising again anytime soon, by which time, another gargantuan asset bubble of some sort will already be inflating rapidly.

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This article has 15 comments:

  •  
    Nov 30 07:07 AM
    The current asset class in a Bubble is the Treasury market.

    Historically low yields, etc, but no one appears to believe that it can pop and drop as rapidly as other Bubbles have done.

    I submit that it is rather insane to buy Treasuries with this low of a yield when debt issued by those Financials under the protection of the Government are also backed by the "Full faith etc." of the Treasury. The yields are certainly more attractive and they can, in fact, be viewed as substitutes. IMHO

    Reply | Link to Comment
  •  
    Nov 30 08:00 AM
    Gold is at about the same price now as it was in 1980 when it peaked. How's that for buy and hold.
    Reply | Link to Comment
  •  
    Nov 30 09:46 AM
    Or if you'd like to data mine a different way, it's up quite a bit from $300-$350 range of 2003. ;-)


    On Nov 30 08:00 AM Here's a thought wrote:

    > Gold is at about the same price now as it was in 1980 when it peaked.
    > How's that for buy and hold.
    Reply | Link to Comment
  •  
    Nov 30 10:25 AM
    Let me get this straight - Citigroup's stock was headed to zero until Uncle Sam stepped in. They get a cash infusion and now they are giving it to the prop trading desk. They are signaling that they are going to be going long gold to try and drive up the commodity price like the prop desks did last summer until the Ponzi scheme blew up. Now they are coming out with this report which says, this precious metal which gives off no dividends and has big tax disadvantages when you sell it is going to be rising. If you are going to believe that, email me, and I will give you my PayPal address so you can send me your money and I promise you that I will honestly waste your money on junk bonds and penny stocks rather than getting your hopes up that gold may rise. Deal?
    Reply | Link to Comment
  •  
    Nov 30 11:00 AM
    Some thinkers consider the deflation argument a hoax and a cover for inflationary policies.
    Reply | Link to Comment
  •  
    Nov 30 11:18 AM
    I think gold is manipulated and wont really pop until it can't be manipulated anymore. I do hold AUY as its beat up and I figure its will recover short term.

    I wouldn't put any stock in what Citigroup says. They are up against a wall and staring at the firing squad. They will say anything, anything at all.
    Reply | Link to Comment
  •  
    Nov 30 01:05 PM
    Well then..go buy yourself some treasuries for Xmas. Backed by the full faith and credit of the USA. That seems like a real safe bet.
    Faith in who? Credit as in debt? You betcha!
    Reply | Link to Comment
  •  
    Nov 30 03:30 PM
    I'm one of those Dean! We've had so much inflation in the past 100 years... no way are we back tracking all that all the way down to undue all the inflation they've put us through. I highyl doubt I'll be able to buy a coca cola for a nickel anytime soon - the same coca cola my grandpa could buy, I now must pay almost 50x more money. The government is using the short-term deflation that is happening (ONLY IN CERTAIN ASSETS!) to give them a reason to give money to the Federal Reserve banks in unprecedented numbers. The power is being centralized in the hands of a few banks. Either way, inflation will be the long-term threat they aren't talking about. Deflation will happen in the short-term in certain assets... I doubt most of the items you buy will come down in price. They come out and say, "OMG, you might get deflation!!! It's really bad!" and then they start doign things to increase inflation out of the ballpark. If you buy gold to store wealth - the price goes up in USD terms because the USD falls, not because gold rises. Then when you sell you have to pay capital gains? What? SUre the gold price went up, but other things went up in proportion and you can still only buy the same amount of stuff you could earlier, except you must give some of the money to uncle sam becuase you have "gained".

    I don't know abotu you, but the prices of everything I buy (besides stocks, houses, and other long-term assets) is up!! Go to the local store and see hwo many prices decrease. My bet is not many. Go see how many lawyers, doctors, mechanics, etc, etc, etc, lower their rates... Not many! But the long-term things we need to buy, like homes, is decreasing. That is actually good for people just starting out in the game of life and will make them have more discretionary spending since they will spend less on accomadations...

    Why should the price of a fixer-upper be half a million dollasr in some areas? Why should people go in to debt and spend a lifetime to pay for their home? Why should it be that way? Wouldn't it actually be better if Americans could buy homes and have the home paid off in 10 yeras instead of 30? Wouldn't that increase discretionary spending for other things and enable Americans to save money for retirement?

    The government has two tools to use to take our money - taxes and inflation. Don't worry about deflation - the government will ensure that never happens with the policies you see them already implementing. Everyone keeps screaming about deflation. They've encouraged us to take on debt of massive proportions so that we FEAR deflation and beg for inflation - the same inflation that has made it so that every home must have 2 full-time wage earners just to get by - when it used to be 1 wage earner. The same inflation they purposefully UNDERSTATE in official figures - so that wages never seem to keep up over time. Inflation is a robber - It is the slow theif that steals just enough so you barely notice it each year - but when you look back 20 years later you wonder why you aren't any better off...


    On Nov 30 11:00 AM Dean Plassaras wrote:

    > Some thinkers consider the deflation argument a hoax and a cover
    > for inflationary policies.
    Reply | Link to Comment
  •  
    Nov 30 05:39 PM
    Hey Jimmy Lathrop, I disagree with you. I wont bother to explain The goldbugs at this site have worn the arguments down without saying much thats new and you wouldnt listen anyway. What I would like to say to you goldbugs is how about your opinions on the warning of Warren Buffet about the dirivitive market. Or would you prefer to redundently explain to Jimmy Lathrop the error in his logic? It gets kind of old and he, others like him wont listen anyway. I've heard we have a $516 trillion dirivitve bubble about to burst. I'm just a rook so please help me out and give me your opinion.
    Reply | Link to Comment
  •  
    Nov 30 10:43 PM
    i am not sure how anyone could argue against owning some gold. i question whether it will make you rich over time, but it does not give you bad haircuts (unless you buy high) either.

    the only asset class doing well over the last 6 months was cash. i, for one, see the instability being caused by the government bailout programs. i would not be stupid enough to predict how this will play out - but the potential of a very large currency debasement looms. so for people in cash, yah gotta get out if that happens - and gold will be one of the avenues of escape to preserve your wealth.
    Reply | Link to Comment
  •  
    Dec 01 01:58 PM
    I agree with one caveat: *they* are not solely responsible for the inflation that has made us require 2 wage earners to get by -- we chose to jump into that. Women decided to not stay home, but instead, have a career...and then we started buying more extras with that additional "discretionary&qu... income...that has brought prices up. Also, do not underestimate the role of taxation in this!!! The current systems of funding government via income & property taxes are completely unjust to those doing the earning and owning. You ask if it isn't better to be able to pay off a home mortgage in 10 years instead of 30, and then have more discretionary spending going on? Of course!! But that is even short-sighted -- why should we have to have a mortgage at all? That wasn't the norm until the last 2 (maybe 3?) generations! My grandparents saved a few years and bought their (very modest) home outright! Our tax code allows the government to have a preemptive claim on our earnings -- and it is an ever-growing share of them. THAT is a huge culprit in all this. If you want to really unwind the problems with our economic system, abolishment of income and property taxes is a crucial element. Then and only then can the average American regain the preemptive ownership of their money and have a chance at living on savings instead of credit. By the way, I'd include cap gains too...why should the government get a part of the proceeds from the payoff of every good investment one makes? That money was already taxed as income...and if income taxes are abolished, cap gains should be too, so that only when it is outlaid in discretionary spending would it be liable to taxation.

    fairtax.org
    Reply | Link to Comment
  •  
    Dec 01 11:51 PM
    "Socialism cannot Compete"... very true. Therefore a good long-term investment must be shorting U.S. equities because we are rapidly becoming France.

    There are three long-term inevitables (not two): Dealth, Taxes & Inflation.
    Reply | Link to Comment
  •  
    Dec 02 12:17 AM
    We are rapidly moving into a depression.

    The problem with old generals is that they always fight the "last" war instead of the present one. The coming depression will be very different than the 1930s depression in America.

    The last depression was an easy one. If one did not gamble with his/her money, the person was a winner keeping money in cash.

    Now, the situation is very much different: we have a fiat-money bubble. Cash is just a piece of paper. The present depression in USA will resemble more the German depression in late 1920s and early 1930s before Hitler came to power.

    Shortly, after US unemployment exceed 12-15%, US social instabilities will resemble the present financial markets instabilities.

    As for gold, it did quite well for the last 3000+ years.
    Reply | Link to Comment
  •  
    Dec 03 02:55 AM
    Go buy Superfund gold funds. They're up 17-20% ONLY IN NOVEMBER. Their other funds are up 33-70% YTD.
    The MD said gold is gonna double to $2000 coz of hyperinflation.
    www.youtube.com/watch?...
    Reply | Link to Comment
  •  
    Dec 03 06:37 PM
    I agree. Get rid of death taxes too.


    On Dec 01 01:58 PM Socialism cannot compete! wrote:

    > I agree with one caveat: *they* are not solely responsible for the
    > inflation that has made us require 2 wage earners to get by -- we
    > chose to jump into that. Women decided to not stay home, but instead,
    > have a career...and then we started buying more extras with that
    > additional "discretionary&am... income...that has brought prices
    > up. Also, do not underestimate the role of taxation in this!!!
    > The current systems of funding government via income & property
    > taxes are completely unjust to those doing the earning and owning.
    > You ask if it isn't better to be able to pay off a home mortgage
    > in 10 years instead of 30, and then have more discretionary spending
    > going on? Of course!! But that is even short-sighted -- why should
    > we have to have a mortgage at all? That wasn't the norm until the
    > last 2 (maybe 3?) generations! My grandparents saved a few years
    > and bought their (very modest) home outright! Our tax code allows
    > the government to have a preemptive claim on our earnings -- and
    > it is an ever-growing share of them. THAT is a huge culprit in all
    > this. If you want to really unwind the problems with our economic
    > system, abolishment of income and property taxes is a crucial element.
    > Then and only then can the average American regain the preemptive
    > ownership of their money and have a chance at living on savings instead
    > of credit. By the way, I'd include cap gains too...why should the
    > government get a part of the proceeds from the payoff of every good
    > investment one makes? That money was already taxed as income...and
    > if income taxes are abolished, cap gains should be too, so that only
    > when it is outlaid in discretionary spending would it be liable to
    > taxation.
    >
    > fairtax.org
    Reply | Link to Comment
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