Gold continues to demonstrate its true strength.
One month ago, Christopher Ruddy, chief executive officer and president of Newsmax, inquired as to the direction of the market.
My response: Equities are poised for a decline, as I have anticipated for some time.
The result: Equities dropped nearly 2,000 points in nearly two weeks, a 15 percent fall.
At that time, I suggested to Mr. Ruddy that gold will experience further appreciation during the following decade (secular gains), but I anticipate short-term, cyclical declines of up to 10 percent during any given three-month period.
The result: Gold declined roughly $160 per ounce, or 6 percent, the following week. It recovered half of this loss during the ensuing week to recently close at nearly $1,820.
"Increased global risk, U.S. dollar weakness, growing inflationary fears, the U.S. debt downgrade and continuing sovereign debt risks in Europe have increased investor appetite for gold, triggering recent price strength," Citigroup said in a recent statement.
The World Gold Council (WGC) reported very strong gold demand data for the first quarter of 2011. It expects demand to remain strong through the remainder of the year.
According to the WGC, demand by India and China grew 38 percent and 25 percent, respectively, despite the higher price of gold. These two markets account for 52 percent of total bar and coin investment and 55 percent of global jewelry demand. Economic expansion, inflation, and upcoming gold purchasing festivals suggest strong future demand.
WGC expects investment demand to rise over the foreseeable future due to weak economic prospects for Western economies, lower U.S. debt ratings, global inflationary pressures, and the ongoing European sovereign debt crisis.
In addition, central banks are increasing their level of net gold purchases to further diversify their reserve asset portfolios. In the first quarter of 2011, this figure was 69.4 tons.
Hugo Chavez, the Venezuelan leader, recently announced the nationalization of the entire Venezuelan gold industry, while repatriating 99 tons of gold held by The Bank of England. In June and July of this year, the South Korean Central Bank purchased 25 tons of gold, its first purchase in 13 years, since the 1997-1998 Asian financial crisis. Furthermore, in May, the Hong Kong Mercantile Exchange began trading 32 Troy Ounces Gold Futures contracts.
Several weeks ago, the Chicago Mercantile Exchange increased its margin requirements for gold purchases by 22 percent. This abrupt increase may have contributed to the short lived price decline of 6 percent. As previously stated, gold has recovered half this loss, and future prospects seem quite strong.
The gold bullion continues its bull run.
Reaching $4,000 per ounce in the next decade seems more probable.
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