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Gold Is Up, But Still a Ways Off Its True Peak

May 04, 2011 | About:
The Daily Reckoning

The Daily Reckoning

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Gold has shown more resilience this week. At last check, it’s still higher than it’s been anytime up until … hmm, let’s check the chart … two weeks ago.

Still, the known big buyers and sellers of the yellow metal are making for an interesting trading environment currently.

The gold price is being pulled down, for example, by news that George Soros is cleaning out some of his considerable position.

The trade hasn’t shown up in a 13-F filing — because that will be issued later this month — but The Wall Street Journal claims “the Soros fund has sold much of its gold and silver investments over the past month or so," according to “someone close to the firm.”

As authoritative as that sounds, the story the WSJ tells is that Soros loaded up on gold to guard against a collapse in consumer demand after the crisis. Gold, the theory goes, would buy more if prices were falling. But now that the Fed has loosened the monetary spigots, and will keep dribbling even after QE2 wraps up in June, Soros does not fear “deflation” so much.

Likewise, if he’s selling his gold, he doesn’t think “inflation” is much of a threat either.

Alan Fournier of Pennant Capital is unloading some of his gold too, most likely to take profits as the market gets jittery near this false peak.

Meanwhile, John Paulson is happy to take the other side of the trade… which is helping keep a floor under gold.

The man who made his fortune shorting subprime told investors yesterday that lax monetary policy from the Fed, and the Bank of England, has him convinced gold will head to $4,000 an ounce over the next three-five years.

Mexico’s central bank added 93.3 metric tons of gold to its reserves in February and March.

We haven’t seen a number like this since November 2009, when India happily snapped up 200 metric tons of the International Monetary Fund’s gold stash. Most of the Mexican purchase — 78.5 metric tons — came in March, marking the single largest one-month accumulation by a central bank in 10 years, according to the World Gold Council.

Combined with steady purchases by China and Russia since 2003, the news “seems to confirm there’s an appetite now among emerging economies with large forex reserves to add to their gold reserves,” says Matthew Turner, precious metals strategist at Mitsubishi.

Central banks worldwide became net buyers of gold last year for the first time since 1988.

Using the government’s current CPI calculation, gold would be priced at $2,442 today. And using the government’s 1980 CPI methodology, we’d be looking at $8,331 — a tad more ambitious than John Paulson’s $4,000.

Addison Wiggin

for The Daily Reckoning

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