Read some news last Thursday about Gold being bought up in mass in India. The large purchase of gold coming from India late last week seemed to stem from two key areas. First, the Rupee was down, and so too were citizens’ sentiments towards their currency. Because of the decline in Rupee’s people jumped ship and sunk their money in gold.

The second reason for the large purchases of gold from India was the strengthening US dollar. Say what?! Yes, the dollar improved during the week. Gold seems to move opposite to the dollar – when the dollar improves, gold goes down, when the dollar falls, gold goes up. This normally makes sense. Gold is money, it is a standard or way to compare any country’s currency/value to another. So as a currency improves, so too does the physical amount of gold that currency can purchase. Additionally, gold is measured in US dollars.

So, both worries about the Rupee as well as the price decline (brought on by the stronger dollar) sent gold purchases flying in India.

BUT (and it’s all caps because you know it’s serious – I have a finger waving in the air as I write this)…

Why did the dollar go up?

Because of improved financial data. The country is doing phenomenally! Woopee, we can all go back to partying again.

Or not!

Living in one of the most damaged real estate markets in the country, where everything has suddenly become depressed, it is clear that this is no where near over. There are lots of other markets (California, Nevada, just to name a few) that are going through a similar crisis (and other crises). Jobs in virtually every arena are down, even in Silicon Valley (god help us). The truth is the dollars growth is BS, based in large part on government spending (cough cough propping up) of jobs and industries. We’re spending borrowed dollars on stuff that isn’t actually making our economy grow, creating jobs, etc. eventually this house of cards will fail. Gold will probably tumble from time-to-time as the dollar weakens and strengthens but is the ultimate protection for when the house falls down.

Sri Lanka purchased 10 metric tons of gold from the International Monetary Fund today.  The purchase was made with SDRs, the IMF’s currency denomination, but the price is equivalent to about $375 million.

Sri Lanka is cointinuing the trend among Central Banks this year, who are snapping up gold as soon as it becomes available. India and Mauritas have also purchased gold from the IMF this fall, and China and Russia have both increased their gold reserves substantially this year.

The Reserve Bank of India (RBI) is in talks with the International Monetary Fund to purchase the remaining 201.3 tons of gold that the IMF has offered for sale. However, there may be some competition as other Central Banks look to strengthen their reserves.

An Indian government official stated

RBI is an independent body, and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered.

The RBI purchased 200 tons three weeks ago from the IMF and already has seen a gain of $800 million from that investment!

The Reformed Broker has put together this graphic to determine just how much gold the Man Who Made Too Much owns. The data is extrapolated from World Gold Council statistics and Paulson & Co’s SEC filings. The Reformed Broker provides a disclaimer about the accuracy of the claim, but his analysis sure provides a fresh way of looking at the concentration of wealth John Paulson’s hedge fund holds in gold.

Dr. Marc Faber

In an interview with CNBC, Dr. Marc Faber, economist and investment strategist, stated that gold’s shiney new price label is here to stay:

Basically we had a good move in gold whereby we had fluctuated for two-years between USD 800 per ounce and USD 1000 per ounce and now we’ve broken through the USD 1000 per ounce level with quite conviction and heavy volume. I believe that whereas in the past the USD 1000 per ounce level was kind of a resistance level, now it becomes a support level. I don’t think that you’ll see gold below a USD 1000 per ounce probably ever again So I’m actually quite positive. Maybe gold at this level is a better buy than it was at USD 300 per ounce in 2001.

Now, Dr. Faber predicted the 1987 crash and safely herded his clients out of the market. He is known for his uncanny insights and investment prowess. In the same interview he warns off the stock market, which may drop another few hundred points. Faber also is short on the US dollar.

Paulson's Winnings (Portfolio Magazine)

John Paulson, who’s 2007 paycheck of $3.7 billion was one of the largest of all time, is now betting on gold. Why should this matter? He is one of the most brilliant investors actively involved in the market today.

After the news leaked last week of Paulson’s plan to develop a hedge fund that exclusively invests in gold we recently re-read Portfolio’s article on Paulson, titled the Man Who Knew Too Much, which examines the choices he made betting against the sub-prime crisis and making billions of dollars for himself and his clients. One interesting piece is the above chart, which shows Paulson outperforming everyone else since the year 2000. Paulson is clearly a highly gifted investor, and right now he’s betting on gold.

I can’t remember in 20 years so many respected investors focused on a single strategy. Some of these people are icons of the industry with at least 15-year track records. It’s a losing proposition to bet against guys like that. They aren’t billionaires because they make bad bets.

said Bradley Alford in Marketwatch today about the hedge fund and mutual fund managers entering the gold market en masse.

Last month David Einhorn, head of Greenlight Capital who was long bearish on gold, has surprised himself by making an about face on the metal and moved all his positions into physical gold, citing its “cheapness” and that it is more-certain and more-liquid than gold ETFs and other gold-backed paper assets.

Kyle Bass’s Hayman Advisors has moved at least 15% of the fund into gold. Hayman warned investors off of futures and ETFs because COMEX warehouses only have enough physical gold to meet 15% to 30% of the open interest on futures and options contracts. This is a real problem many people aren’t aware of, and why many advisors suggest their clients actually hold the physical metal.

Paul Tudor Jones, chairman of giant hedge-fund Tudor Investment Corp., became very bullish on gold in October and it now is the most heavily held commodity in his fund. Tudor Jones has an internal financial model they have used to forecast the future growth of gold and determined that the metal is at least 20% undervalued over the next two years.

Paulson & Co, one of the world largest hedge funds, is of course opening a dedicated gold hedge fund January 1.  Investors will see their returns in gold troy ounces rather than in dollars, euros, or other currencies. This way if currencies lose value, which is extremely likely with the impending inflation, investors can still realize their gains through gold.

Paulson had created a dedicated fund for the subprime trade, just like the one planned for gold. That fund, the Paulson Credit Opportunities Fund, generated 600% returns in 2007 in the midst of a global financial collapse.

In an interview with London’s Daily Telegraph, an analyst for French investment bank Societe Generale stated that gold could reach $6300/oz as a result of inflation created by the Fed. Societe Generale released a report last week that was a self-described “worst case scenario” which examined the consequences of all the cheap liquidity Central Banks are producing. As you can see from the chart, governments are overleveraged. This is already creating rapidly rising fears of multiple currency crises.

Dylan Grice is the analyst who explained the projection:

The U.S. owns nearly 263 million troy ounces of gold (the world’s biggest holder) while the Fed’s monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap — at current prices, the USD is only 15 percent gold-backed.

While a return to a gold-backed dollar may be unlikely, gold’s ability to self-correct to match the money supply already happened once, as Rolfe Winkler of Reuters points out. The 1980 spike in gold was an attempt to keep up with the increase in the money supply after Nixon ended the Bretton Woods system.  Gold holds its value through the ages, while the value of paper money always falls towards zero.

The best that can be said for paper is that if you lend or invest it, tomorrow someone will give you more paper in return. This is fine so long as its purchasing power is maintained. But it isn’t. A 2009 dollar is worth a 1914 nickel.

A number of new reports are coming out next week despite the holiday that may affect markets. Existing home sales will be reported on Monday. Economists are betting that the extension of the tax credit may lead to an increase in sales. New home sales will be reported on Wednesday.

The big data coming is the Consumer Confidence Index, which will be released on Tuesday. President Obama recently spoke about the importance consumer confidence plays in the economy. Last month the numbers came in lower than economists expected, which contributed to the spike in gold’s price as more investors feared pullbacks in the stock market.

Gold prices are holding well above $1100/oz right now. At the time of this post, today’s gold price is at $1152.80/oz.  Gold’s support remains broad, with large and small investors alike strengthening their positions in the market.

Dr. Marc Faber, economist and Swiss fund manager who predicting the financial crisis, sees the metal continuing to rise far into the future. Gold’s strength is its ability to hold value while paper currencies weaken under the weight of mass printing. The US Budget is nearing the debt ceiling allowed by Congress and the administration is petitioning to be allowed to raise the debt ceiling another $1 to $1.5 trillion. For this reason, Faber says that he can’t even predict how high the metal’s price will rise. As long as the government continues to inflate away its debt, gold will increase in value.

What will continue to happen is that the S&P 500 and the Dow Jones will go down relative to gold. I think gold will go up more from its support level.

Will it go $2,000, $200,000 or $2 trillion? I don’t know. But if you have money printing in the world, then the price will over time rise. It will go up more for things that you just can’t increase the supply, and the supply of precious metals is very limited.