Is the Bull Market in Gold Over?

gold bullionThe London Metal Exchange (LME) has been operating for 135 years. When it was first established in 1877, Britain was the world’s superpower and the sterling the currency of choice.

Today, the contracts for commodities and metals (and gold bullion) that trade on the LME are settled in U.S. dollars, the euro, the U.K.’s sterling, or the Japanese yen. Now that a large part of the trading occurs with Asia, the exchange is considering adding the Chinese yuan to the list of currencies it settles in and removing the sterling completely.

The growing power of the East and the yuan is now moving in and putting itself on par with the euro and the U.S. dollar, while the sterling could be officially moving out, as its “day in the sun” comes to a close.

China didn’t stop there. The People’s Bank of China announced that, within the next year or two, the China International Payment System will be established to settle cross-border trade and investments in yuan for countries and banks worldwide.

Currently, Asia and most parts of the world use the U.S. dollar to settle cross-border trade and investments. Move over U.S. dollar, because here come the yuan!

These actions are irrefutable proof of China’s intention to make the yuan a reserve currency on par with the U.S. dollar and the euro. As such, China’s insatiable demand for gold bullion will continue to rise, as China has only a fraction of the gold bullion to back its currency compared to what the U.S. and eurozone have.

There is another misconception about gold bullion that I want to clarify, dear reader. Ever since exchange-traded funds (ETFs) for gold bullion have come into existence, investors have been pouring money into the ETFs as a means to invest in gold bullion.

Lately, some analysts have stated that the bull market in gold bullion is over, because demand for gold bullion has fallen. That statement is false. As I’ve mentioned in these pages, there is the paper gold bullion market and the physical gold bullion market.

Gold ETFs offer shares that represent gold bullion; but, as any investor knows, these shares do not deliver the physical gold bullion to your door.

Here is the annual amount of money that has poured into these ETF gold bullion contracts (source: World Gold Council):

2008 – $9.0 billion

2009 – $19.3 billion

2010 – $14.5 billion

2011 – $7.8 billion

Demand for gold ETFs is clearly falling. Now let’s look at the demand for actual physical gold coins and gold bullion (source: World Gold Council):

2008 – $24.3 billion

2009 – $24.3 billion

2010 – $47.2 billion

2011 – $75.1 billion

Looks like serious gold bullion investors may have been selling their ETFs to purchase physical gold coins and gold bullion. If China is to back its yuan, it certainly wouldn’t use ETFs to do it.

As the numbers show, the demise of the gold bullion market is greatly exaggerated. China will continue to purchase gold bullion to back its yuan. Is the bull market in gold over? Not a chance. (Also see: Two Major Countries Join in China’s Quest for Gold.)

Michael’s Personal Notes:

I was in downtown Toronto, Ontario, Canada, last Monday to see firsthand the city the housing market of which boasts more condos under construction than any other city in North America. There was someone else there as well attempting to muster up some home buyers for the unsold units of the hotel condos that bear his name: Donald Trump.

Trump lauded Toronto’s housing market and said he believed in the city so much that he would be willing to do a second project. Of course, it is important to note, dear reader, that Trump has none of his own money invested in the tower. The owners simply license Trump’s name from him (paid him for it): Trump International Hotel & Tower.

(I wanted to ask him whether, if he had to put his own money in Toronto’s housing market, he would then be willing to do a second project, but I digress.)

Trump International Hotel & Tower is Toronto’s housing market’s tallest luxury residential complex, which holds a combination of condos and hotel suites. It is currently 60% sold, which may explain Trump’s presence.

When asked if he was worried about what could be an overheated housing market in Canada, Trump brushed it aside, saying that he worries about nothing.

Talking to people today in Toronto reminds me of the U.S. housing market in 2005 and 2006. If I even suggest to someone that the housing market could drop 10% to 20% and/or interest rates could rise significantly, they look at me like I’m crazy.

There is “no way the Toronto housing market can go down” is what they claim. Famous last words, as, unfortunately, many Americans discovered in 2007.

Since 2008, Canada’s housing market has yet to feel any type of correction. This resource-based economy was able to weather the financial crisis, because of its exports toAsiaand due to the fact that its banks were not caught up in the mortgage mess in a significant way.

Since 2008, Canada’s housing market has gained considerably. In 2011 alone, the housing market in Toronto experienced a price gain of 10%!

In Toronto last Monday, Trump said that rates could move higher, which is why home buyers should take advantage of low rates to buy some of the condos that bear his name right now.

Of course, with the U.S. economic recovery nonexistent, with Asia slowing and with Europe in a recession, the export-based economy in Canada will experience slow growth, exposing the overheated housing market to a correction.

The Bank of Canada (the Canadian central bank) is suggesting that it needs to raise rates. If interest rates move higher, home buyers will not be able to call on Trump to tell him that, although they bought condos at low rates, they are sitting on property that is losing value, which is typical as interest rates rise. Of course, Donald never experienced anything like that in the U.S., did he?

Don’t worry about it…

Where the Market Stands; Where it’s Headed:

More of the same, dear reader…

One day the Dow Jones Industrial Average is up 100 or so points; the next day, it’s down about the same. We are going nowhere fast now. The market keeps toying with the 13,000 level.

I continue with the belief that we are getting close to the end of a Phase II bear market rally in stocks that started in March of 2009. The stock market is putting in a huge top here. The upside potential may not be worth the risk for the majority of my readers. (See: The Makings of a Classic Bear Market Trap.)

What He Said:

“Investors have been put into an unfair corner. Those who invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now those who have leveraged heavily to play the real estate game, because it is the place to be [2005], could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.