The ‘Wealth Effect’ Is Positive for Gold

Monday, 01 Apr 2013 07:47 AM

By Mike Fuljenz

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Last week, the National Association of Realtors reported that the volume of housing sales rose to their highest level in four years. More importantly, the median home price rose 11.6 percent in the past 12 months, reaching $173,600, making Americans feel good about their real estate investment for the first time in years. In addition, the Dow Jones Industrial Average just reached a new high and the Standard & Poor’s 500 might reach a new high soon.

As a result, we now have over 9 million U.S. families worth over $1 million, excluding their primary residence. At the end of 2012, according to Spectrem Group, there were 8.99 million millionaire families in America, an increase of 400,000 in 2012 alone. In the first quarter of 2013, with the rising stock market and rising real estate values, the 9 million mark is surely surpassed by now. We have to wait for the official tally for this quarter, but we might surpass the 9.2 million peak of millionaire households set in 2007. In addition, there are 117,000 super-rich U.S. households with $25 million or more in net worth in 2012.

The first wave of gold demand in the current bull market came during a time of rising asset values, from 2002 to 2007, when real estate soared and the stock market reached new highs. Rising wealth is good for gold demand, since it makes average Americans feel like they can afford luxuries and investment hedges like gold and rare coins.

Then, in 2008 and 2009, we had a financial crisis that sent investors to gold out of fear for their assets in other areas, like housing, bonds, cash and stock. Gold reached its all-time high during the panic over the funding of the U.S. government in the summer of 2011, but the next surge in gold and, collectibles like rare coins, may come from the rising affluence of Americans in both their housing and stock market assets.

23 Global Bullion Experts Predict a 5.3 percent Gold Gain and 10 percent Silver Rise in 2013

The London Bullion Market Association is populated with metals market experts with no inherent bias for a rising market. They study the metals’ fundamentals and make an educated guess on the future price based on those fundamentals. They don’t always predict higher prices. In 2004, they predicted a decline, which didn’t happen. They have been right in their prediction of the direction of the gold market in every other year since 2001.

In their recently released survey of metals price predictions for 2013, the 23 analysts — who work in major gold markets around the world — polled predict a 5.3 percent gain, on average, in gold this year, to a closing price of $1,753, and a 10 percent gain in the price of silver to $33.21.

These analysts cite the continuing positive fundamentals for the gold price — expansion of the U.S. money supply through quantitative easing, a slow erosion of the value of the U.S. dollar, increased demand from China, India and global central banks, along with a slow growth in new gold supplies.

For silver, these experts see limited supply growth, along with higher industrial and investor demand in 2013.

The Twice-Daily London Price Fix is not Really “Price Fixing”

Last month, there was spate of news articles about an alleged conspiracy in the price fixing of gold. An article in The Wall Street Journal said that the U.S. Commodity Futures Trading Commission (CFTC) was examining whether the process of determining prices for gold and silver in the London “price fix” is sufficiently “transparent” to investors. This is a bizarre allegation.

The “London fix” has been going on since 1919, when gold was under $20 per ounce. The daily fix originally involved a morning meeting between bankers (now, they telecommunicate), in which they set the price for the day. The five banks are currently Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Societe Generale. The morning prices prevail for the business day and the afternoon price setting fixes the price for overnight trading.

These prices are not permanent. They change twice a day. It is highly improbable these London bankers could control the free market in gold. The price in New York and Hong Kong and elsewhere will shoot up or down, based on market supply and demand, no matter what the price in London might be.

On the day gold peaked in 2011, for instance, the peak London fix was $1,895, even though the intra-day high in New York, later that same day, reached well over $1,920. London cannot set the price for the rest of the world.

This system has been in place since 1919 for gold and since 1897 for silver. Just because the London Interbank Offered Rate (a much newer invention) was subject to manipulation doesn’t mean that the gold price is manipulated.

About the Author: Mike Fuljenz
Mike Fuljenz is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the NLG award winning Michael Fuljenz Metals Market Weekly Report. Discover more by Clicking Here Now.

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