Lately I have heard some interesting contrarian reasons for shorting gold, but there are also good reasons for buying gold. Today I will list some of them from both sides of the camp. Depending on what elements you have faith in, you’ll perhaps finish more bullish or more bearish than when you started!

Reasons For Being Bullish On Gold

1. Monetary policy: A lot of people think that the rapid creation of money (Treasury sells bonds to the Fed in return for the cash which they then give to Congress to spend etc.) and the effect of market stimulation will cause inflation. During periods of inflation gold truly holds its own, it is the ultimate inflation hedge. In Roman times an ounce of gold would buy you a really good tunic. Today an ounce of gold will buy you a really good suit, nothing else holds value over millenia like gold and that has raised the interest of many investors seeking true value.
2. Hard commodity market: The hard commodities in general are performing well. Copper is up by over 30% this year and gold is remaining stubbornly over the $900 mark. Other noble metals are also seeing strong growth, silver, platinum and palladium are all up too. In fact, the secular bull market in commodities seems set to continue. When you don’t trust fiat currency you can still trust physical goods that you can hold and utilise.
3. Chinese gold holdings have doubled: China recently revealed that it has doubled its gold holdings to over 1,000 tonnes. Granted that represents less than 2% of its reserves but it is important to ask ‘why’? Simply put, China is in a spot of bother regarding the amount of US Treasury notes and bills that it is holding. They can’t offload or they may kill their own investment and equally, if they stop buying, then the US (their man export consumer) will stop buying. So China has started to hedge this by buying up commodities which can then be utilised in the future. Don’t be surprised to hear about China buying huge consignments of both hard and soft commodities in the near future. They will store them and use them like a big money reserve. Asians know and appreciate gold. In Vietnam gold purchase was banned last year (for fear it would replace local currency).
4. Perth Mint shut to new orders: Several times in 2009 the Perth Mint has had to shut their doors due to the massive demand for their physical gold and their certificates (which are bullion backed). This means demand has out stripped supply. The margins on bullion transactions are often 10% and more which means a huge premium is being placed on the metal. The actual gold taken out of the ground each year is a meagre 3,000 tonnes and all the gold in circulation is less than 200,000 tonnes. To adjust the gold high of 1980 into 2009 terms the price would need to be in excess of $2,200 so breaking the $1,000 and even $1,200 mark is not unrealistic. The positive correlation of gold to oil and inverse (on both) to dollar means that if you believe in oil you believe in gold.
5. Dollar depreciation: The dollar has fallen over the last decade by a third. Also, the interbank yield curve is showing higher rates in the mid-term and when matched with a weakening dollar means gold is primed for a price increase.
6. Jim Rogers is buying and holding gold: He is the Warren Buffet of the commodity market and for many people this point alone is all they need in order to be convinced. Suffice to say, people who have listened to Jim Rogers in the past have made out very well on his advice.
7. ‘Gold vs the Dow’ ratio: Peter Schiff talks about the ratio based on past gold bull markets. In the last big bull market for gold the Dow Jones went to 850 and gold rose to $850. That would place gold at around $8,000, and based on that, he feels that gold is set to rocket higher. Many COMEX traders see gold trading above $1,500 by the end of 2009.
8. Gold/Oil correlation: For a while people said gold would fall because gold was trading above the oz=14 barrels of oil mark which is the historic norm. However, oil rose and now they are in line. If oil rises further, gold may then catch up by rising higher. It seems in any case that gold wasn’t trading too high; rather oil was trading too low.
9. Governments might contract supply: The US has shocked the gold market several times, in the 1870’s, again in the 1930’s via ruling 6102 (confiscation) and then by dollar re-evaluation on the gold standard from $20 a troy oz. to $35. If the US sees gold rising they might help it along by not selling and then waiting until a further peak occurs to start selling. With a deficit the size of the one the US is carrying at the moment this would certainly be a good choice in order to help balance the books.

Reasons For Being Bearish On Gold

1. The man on the street theory: Joe Kennedy (JFK’s dad who was a very successful investor) said he knew the crash of 29 was coming when he got stock tips from a shoe-shine boy. Today gold is being flogged on websites, by investment advisers, and on the tele (my sister in North Carolina saw a recent infomercial touting gold!) When something gains that kind of traction the words ‘crashed shortly thereafter’ tend to feature prominently in discussions about the investment in the near future.
2. Gold/Silver ratio: It’s all out of whack. Typically gold is worth 31 ounces of silver but silver is currently trading at around $15. Does that mean silver will double or gold will fall? The tendency for a reversion to mean has gold as the target rather than silver rising to a steady $30+.
3. Central banks can drop gold prices: Part conspiracy, part fact, the manipulation of the gold market is fun to research. Youtube it and you’ll hear all sorts of theories. The reality is that with gold, the biggest holders are still central banks, and if they sell, it can move prices. The British government recently saw the error of their ways when it was revealed they sold between 1999 and 2008 and missed out on nearly a billion in profit which they would have had they sat tight.
4. Recovery: If the markets don’t go into a W-shaped recession then gold will likely take a stuffing in the process. Gold is the hedge against uncertainty and inflation. If we don’t see further uncertainty or evidence of inflation it may fall right back.
5. Contrarian outlook: Sometimes it pays to do the exact opposite of what the crowd is doing. Personally I was piling into bank shares from December onwards! The move has gained over 400% in some examples and over 100% in general on the financial share sector of my portfolio. The same can go for any investment option; it may pay to short gold. Obviously you’ll want to make sure you have your stop losses in place whatever you end up doing!
6. Gold has had its day and other commodities matter more: When you consider the secular bull market in commodities and the fact that there are 6bn+ people who need food and water daily it means that gold might not make sense when it come to making returns. Certainly buying in at what is a nominal historic high is an argument against finding profit in it at this point. People still need to eat and portable water is becoming a scarcity on a worldwide basis, so making profit is probably easier elsewhere. For instance, the 100% gains on finance shares in recent months were not remotely matched by gold performance. Granted you would need timing and luck etc. but being a gold bug is over rated. Anything above a 10% holding is over-exposure.

To Sum It All Up
So after all of this there are no answers. Obviously if somebody had an accurate crystal ball it would be much easier! However, the point of this is to show that at any given time on any investment that there are two totally polar opposite arguments at play.

Where I Think Gold Is Going
Personally I think gold is likely to break the $1,000 mark. Gold certainly has the limelight for the moment and is benefitting from a huge amount of momentum. Supply doesn’t seem to be keeping up with demand, new entrants are buying up even with higher margins on small orders and it seems to stick stubbornly above the $900 mark as of late. The other possibility is for gold to tank, but personally I’m bullish on gold. I also think that with the dollar weakening, that it will drive gold higher, as the weak dollar was inversely correlated to the high gold/oil prices of 2008. If gold breaks the $1,030 high it set last year then it will probably be a quick run to the eleven or twelve hundred dollar mark.