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Forecast: Gold at $2,000 in 2012 — Maybe $10,000

Written by Gary North on December 27, 2011

An amazing prediction: gold at $10,000 by the end of 2012. Frankly, I don’t think this is likely.

The forecaster begins with an assumption: central banks own 80% of the gold, and they are buying.

I think it’s important to keep gold in perspective when we look at gold and how much central banks own vs what is out there in the private sector.  It totals less than 20%.  Yet, clearly, treasury ministries around the world and central banks that control the flow in the stock of global currencies continue to hold gold and are becoming net purchasers of gold.

I am not sure of this. Gold leasing is in fact the sale of gold. It continues. Are we sure that central banks are net purchasers? We need hard data.

So, in a world where we have collapsing sovereign debt, that is denominated in baseless currencies, suddenly gold takes its global sovereignty without regard for any other policymaker because that’s what the marketplace is starting to recognize.

Again, I do not see this. The central banks continue to hold dollars. There is no indication that any other asset is close to the popularity of dollars in central bank portfolios.

The issue that gold, being priced in currency terms, has not appreciated as many current gold holders think it should have already, is understandable.  I think we are going through a period of transition and we have to put up with fits and starts and two steps forward and one step back as we go through this transitional period.

Fair enough. But why is 2012 a sure bet to take two steps forward?

Physical gold is meeting demand. The price of gold is down. Where is this physical gold coming from? The forecaster does not know.

I honestly don’t know where the physical gold is coming from.  I’m not so sure that futures prices, on a daily basis, reflect the flow of physical gold.  It’s more likely they reflect the day to day sentiment of paper gold holders, and as you and others have discussed, we’re not quite sure whether all of the gold can be settled or certainly all of the silver for that matter.

I think this is true. Commodity futures markets rarely deal in physicals. So, there is nothing new here. The issue of physical gold applies to central banks. Yet gold is down from $1,900. If the central banks are buying, they are either buying from each other (likely), not from the public.

When we look at the actual numbers they are actually pretty telling.  Only about half of one percent of long positions in exchange traded gold futures contracts actually take physical delivery.  Exchange inventories, available for delivery, are less than 5% of outstanding contracts.

This has always been true.

So, let’s just say that 7% or 8% or 9% of all futures contract holders wanted delivery of their bullion, we would see a situation where the exchange couldn’t come up with the gold.  Also, if they put out margin calls to those that were short, then there would be a scramble and suddenly you would see the bullion price rise for physical delivery.”

But this is always true of every commodity. They don’t want delivery, and more than ETF holders want delivery.

The forecaster says that he and his partner are very bullish

We think precious metals are going to appreciate as central banks in Europe, and the Fed as well, are going to be forced to print more money and dilute their currencies.  There’s just no way around it, we have to deleverage the global financial system.

As far as price goes, certainly over $2,000 (for gold).  It’s not out of the question that it could get to $10,000 if there’s a formal devaluation.”

As I have said for 40 years, the term “devaluation” is meaningless in a world of floating exchange rates and fiat currencies. There is no legal exchange rate that is enforced by law. Once currencies float, there is no such thing as devaluation. What could “formal devaluation” mean? Devaluation from what? By whom?

Physical gold is an important part of any portfolio. But we should ask for verifiable evidence when we hear scenarios that do not seem to add up.

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