Useless for pretty much everything except storing wealth (its economic value is social, not industrial), gold acts as inflation-proof money when investors need it most — right in the middle of an asset-price deflation.

At least, that’s how people choosing to buy gold amid today’s global deflation in risk assets see it. Why else do you think German coin and small-bar dealers are being emptied, even at 5% (and worse) premiums to “melt” value? Why else did gold-hoarding deliver secure, rising purchasing power amid the Great Depression of the 1930s…?

Given central banks’ default response to any level of financial stress, it’s a unique and appealing attribute. Because rather than leaving cash hoarders alone, sub-zero real rates of interest — plus the ever-present threat of massive devaluation — force sleepless nights on cautious savers. (The risk of banking collapse is an extra, but non-government-inspired threat.)

So when there’s a dash for cash, it’s little wonder that “worried wealth” finds gold better even than Dollars. Because gold cannot be inflated, nor destroyed. And it has 5,000 years of human use as a secure store of value behind it.

Yes, last month’s flight from everything into cash (which still means US Dollars worldwide) has knocked the gold price 6% off its recent record high vs. the greenback. But compared with all other assets bar Treasuries, however, gold shows phenomenal strength so far. Oil is down 20%. Platinum is 15% off. Aussie Dollars have dropped 10%, despite paying 450 basis points above cash deposits at the US Fed.

And should the slump continue, investment demand for physical gold is likely to put a floor under gold prices much sooner than other “risk assets” find their floor, just as it did during the Lehmans Crash.

Amid financial stress, physical gold hoarding creates a source of deep and widening demand that no other asset class enjoys. Not even silver comes close, because institutional and high-net worth buyers would rather get gold’s significantly deeper wholesale liquidity and much lower storage costs.

Indeed, it’s hard to class all “precious metals” together — in terms of price behavior — when the inevitable hits the fan.

Gold unlike platinum and silver, commands a “safe haven” premium that industrial commodities can’t — a critical point when credit dries up and risk assets are converted back into cash.

Compare gold’s price-action with any other raw material, in whatever currency. When confidence and economic demand sink, gold attracts capital. Whereas crude oil, copper, soybeans, even silver and platinum…they’re all vulnerable to risk aversion, because their bull markets tend to rely on economic growth, whether or not it’s fed by money-supply inflation.

Gold, in short, is not merely the “inflation play” that most analysts and journalists think (if, indeed, they’re thinking at all). Hoarding physical metal may not seem a “sophisticated” reaction to current events. Hedging your move into cash may not even outperform an all-Dollar position, short or long term. But it is perfectly normal, historically evidenced, and sane response.

It also remains a minority sport at present.

Regards,
Adrian Ash
BullionVault
Whiskey & Gunpowder

June 3, 2010

Gold Is an Inflation-Proof Deflation Hedge was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Eurozone’s problem? In short, it’s history…precisely what the single currency was supposed to neuter, of course.

Greece’s still-pending €110bn bail-out has already cost three lives in Athens’ riots yesterday. More bloodshed inside Western Europe would make a horrific end for this grandest of grand post-war projects…the crowning achievement of Europe’s longest-ever period of peacetime.

But thanks to history — and the very same history that built the Euro, as well — Germany cannot inflate. The rest of Europe, however, cannot do anything else. Sharing one printing press was always unwise. Now it makes UK prime minister Gordon Brown look smart for staying outside. Which really is saying something.

No “single currency” could ever reconcile history, however, because Europe’s monetary politics over the last 100 years is cleft right in two. Germany suffered first hyper-inflation…and then madness…before banishing the shame of cattle-trucks packed full of people by promising “Never again!” to wheelbarrows overflowing with bank-notes.

The rest of Europe, in contrast, and especially the PIGS of the south (but also Great Britain, you’ll note), got things the other way round. Deflation came first, thanks to the interwar Gold Standard. Victory in Europe was then followed by the victory of soft money. Time and again, devaluation worked magic to rescue over-spent nations from ever settling their debts.

So, where Germans look back and see catastrophic inflation…followed by the sins of the Führer…and finally a five-decade boom built on sound money (not to mention cream-laden lunches)…Greek, Spanish and Italian civil servants fondly recall an insane scramble for cash, only redeemed — repeatedly, and for the next 50 years — by default through debasement.

The hyper-inflation of 1919-1923 is scorched onto Germany’s collective conscience and Germany’s alone. To the west of the Rhine and everywhere south of the Alps, a very different 20th century applies. Their only memory of tight money was the disaster of the Great Depression. Spared hyper-inflation in the 1920s, Europe outside of Deutschland slipped instead into chronic deflation the following decade. Come 1931, the world’s monetary anchor — the international gold-exchange standard — was cut loose from the Pound, forcing everyone else to do the same sooner or later.

Sooner was better, as well. Inflation worked. So did the war. Just ask Paul Krugman or Ben Bernanke.

“You owe us €70 billion for the ruins you left behind,” spits the mayor of Athens, Nikitas Kaklamanis.

Deputy prime minister Theodoros Pangalos cuts nearer the heart of the matter by adding how “The Nazis took away the Greek gold that was in the Bank of Greece. They took away the Greek money and they never gave it back.”

Germany should cough up, in short, for the sins of the Führer. Which is kind of correct, since Hitler’s greatest achievement today is a welfare state that neither the Allies or Axis could ever afford.

Compare and contrast with the crushing demands made after WWI. Denied a knock-out blow on the battlefield, the French and British sought victory at Versailles instead…squeezing the Hun for more money than yet existed in the form of gold bullion. Whereas today, “Greek civil servants are suffering because of a crisis they didn’t cause,” reports the BBC. Only they did cause it, of course — or rather, their parents did…like everyone else who survived or was born after WWII…by voting themselves a cradle-to-gravy-train welfare state that hasn’t stopped paying ever since.

The irony of Greek civil servants demanding 16 months’ wages each year from German taxpayers runs deeper than it seems at first glance. The inevitable response by central banks takes us straight back to Weimar, as well.

“What might therefore take place in the long term?” asks French economist Patrick Artus at Natixis of the single Eurozone project. The options he sets out are nigh-on impossible:

• the launch of a federal system (taxes, spending and central control), “which is highly unlikely given Germany’s stance”;

• a continued gap between permanently depressed member states and high-growth prosperity elsewhere — “difficult to accept both politically and socially”;

• withdrawal from the Euro, ignoring the costs, by “irrationally populist governments in the countries experiencing the greatest difficulty…”

Option 1 would force that political union which Helmut Kohl first sought, but the rest of Europe refused to accept. A pan-Eurozone council would hardly help German politicians cool tabloid demands to reinstate the Deutsche Mark, either.

Option 2 is also too ugly to bear, since ignoring the growth-gap only prolongs and worsens the anger, delaying the catastrophe that is Option 3. Watching the Eurozone project — the end of history, no less, for the people who built it — collapse into social unrest inside Western Europe would be just too ironic at best. It might end six decades of peace at worst.

So what about Option 4 — which Artus ignores — by re-opening Germany’s print-shop in Frankfurt?

To date, the plan for bailing out Greece, and thus preserving the Euro, means giving Athens enough money to save it asking the markets for funding until 2014. That sum, so far, is put somewhere near €120bn. But to date, Greece’s Eurozone partners have offered up diddly squat. Italy and Spain, in particular, have gone very quiet.

Wheeling out the printing press in Frankfurt, however…and getting the European Central Bank to do precisely what Havenstein did in 1920…means Europe can pay its pensioners the same way the Weimar Republic tried to pay Britain and France after Versailles, and with the same inevitable outcome, as well.

Just like British and French pride in 1919, today’s heroic welfare promises are just too expensive. Whether sooner or later…and with or without a hyperinflation to try and pay off the victorious pensioners and civil servants…these costs from the past cannot be paid from tomorrow’s money. They’re simply too big.

Regards,
Adrian Ash
BullionVault
for Whiskey & Gunpowder

May 6, 2010

Gold, the Euro, and German Hyperinflation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The WORLD GOLD COUNCIL’S excellent new 74-page report on Chinese gold demand – Gold in the Year of the Tiger – contains many graphics, tables and charts.

Time-pressed investors should focus on just two…

“Gold has a low-to-negative correlation with mainstream financial assets,” reports Eily Ong, author of the WGC’s report.

But note how the chart splits in two. And note where mainland China’s domestic stock markets sit.

Over the last 5 years – and correlated against the Shenzhen and Shanghai stock markets – gold has in fact been more tightly linked with the “China story” than with either crude oil or the GSCI commodities index.

Put another way, if you’ve wanted to buy China, buying gold would have got you a good way there, and with lower volatility than other proxies such as Hong Kong’s Hang Seng index, too.

The second notable chart shows pretty much the only thing to have risen faster than the gold price in Yuan since the start of 2005 – the money supply.

Over the last year, China’s GDP rose by perhaps 12%. Yuan gold prices have added 15%. Helping to fuel them, China’s M2 money supply rose well excess of them both, swelling by 26%.

“Today, China’s gold market is enjoying the benefits of liberalization and deregulation,” writes Ong. But more than lower dealing costs and reduced import tariffs, gold is benefiting from rapid growth in the volume of cash and bank deposits.

Yes, the People’s Bank of China has repeatedly warned that it will tighten monetary policy to curb inflation and stem banking lending. But the Yuan’s Dollar peg effectively imports US monetary policy, imposing sub-zero real interest rates on Chinese as well as US households.

So both US savers, and their wealth-hoarding counterparts across the Pacific, are thus likely to seek inflation-beating returns outside “risk-free” cash now that “risk-free” means a guaranteed loss. Rare, tightly supplied gold looks a clear choice in China to date.

Regards,
Adrian Ash, BullionVault
for Whiskey & Gunpowder

April 1, 2010

Buy China By Buying Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

How to fill the days, hours and minutes? It’s now seven decades since John Maynard Keynes peered into the future and declared that, one day, trying to scratch a living would cease being “the permanent problem of mankind.”

On the contrary, the moustachioed baron said in 1930; the problem ahead was that people would have too much leisure, too much free time, and not enough to do.

Keynes was bang on of course, as ever. His vision, detailed in Economic Possibilities for our Grandchildren, has in fact come to pass 30 years early, despite those very wars and conflicts he thought would impair it. By 2030, and “for the first time since his creation” Keynes wrote, ”man will be faced with his real…problem — how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

And lo!

“Shoppers on a North Tyneside high street [in the UK] could be forgiven for thinking that a new business has moved into an empty retail unit in the town,” says the local council.

“The vacant Select store in Whitley Road, Whitley Bay is the first [empty shop] to benefit with a design treatment that gives the impression of a high quality delicatessen…”

Yes, the United Kingdom — seat of the industrial revolution — is now so advanced, so highly developed, it doesn’t even need real shops anymore.

Welcome to the Potemkin High Street. The mere illusion of commerce will do. How’s that for a Keynesian possibility…?

“The economic climate has forced many businesses to bring down the shutters. We need to ensure that…our high streets look attractive to both shoppers and potential business investors,” says Judith Wallace, the town council’s deputy mayor. “The colourful graphic designs — which can feature a whole range of different shop types — are either taped inside the windows or screwed to the fascia so they can be removed and re-used as required,” gushes the council on its jolly little website.

Whitley Road’s fake-shop was just one of 60 announcements North Tyneside’s government press team have put out in the last four weeks. Three press releases per day might seem a bit much for the local population of 191,000. But you’ve got to keep people busy, right? Otherwise, “Must we not expect a general ‘nervous breakdown’?” as Keynes asked back in 1930.

“We already have a little experience of what I mean — a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-to do classes — unfortunate women, many of them…who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing.”

Just how has mankind (and his bored, unfortunate wife) attained this evolutionary step change three decades ahead of schedule? Besides assembly-line production and labor-saving devices, Keynes thought the lower orders would be “deprived of their traditional tasks and occupation by their wealth.” But not quite. Hardly the wealthiest people in Britain today, even the long-term unemployed enjoy “conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages” (as Keynes once wrote of London’s upper-classes on the eve of WWI). Yet it is other people’s wealth, not their own — plus two billion low-cost workers quitting communism since 1989, of course — that has freed what used to be called Britain’s “working class” from work.

As in the West Midlands, cradle of the industrial revolution and thus another early entrant to Keynes’ brave “Post Employment” future, unemployment amongst the north-east’s ex-coal-mining population has risen to 9.8% according to the latest official data. Yet a further one-in-four people of working age on Tyneside has opted out of the jobs market entirely. Whether through choice or not (national data says only 7% of the eight million souls deemed economically inactive have taken early retirement), the welfare state — built in Keynes’ name after the Great Depression led to a second Great War — promises to feed, clothe and house people, whatever comes. So it’s little wonder that, according to one analysis, more than two-thirds of north-east England’s economy came from state spending last year, up from 59% in 2004. Nationwide, the total jobless figure has now risen to 27%, just below the historic peaks of the mid-80s, but only because the public-sector payroll has risen by 950,000 since the current administration came to power a little over a decade ago. Take away those jobs, and the horrific worklessness of 25 years ago would be back, but without the hope of falling inflation and interest rates, plus de-regulation and broadening free trade, to reduce it.

“If the gross domestic product of the entire world were distributed evenly, each of the world’s inhabitants would have more than enough to bring everyone out of poverty,” notes Nobel-winning Joseph Stiglitz, writing one of several essays recently published to commemorate and examine Keynes’ Economic Possibilities. The reason so many of us are working more hours than ever before, he guesses, is that financial rewards have been spread out unevenly. “Keynes ignored distributional issues, and failed to appreciate the extent to which global inequity would increase in the second half of the twentieth century,” as a review in the Times Literary Supplement puts it.

But what Keynes’ economic model didn’t miss, however — or at least, what the constant intervention built on his theories guarantees until the money runs out — is the chance to nip here and give away there…putting up a shop-front of busy-busy bees, just like Whitley Road’s fake delicatessen.

• “Unemployment in the UK has fallen for the third month running,” says the Financial Times of the January statistics, “but the workforce shrank sharply as young people took refuge in education instead of seeking jobs…”

• “A package of tax breaks and highway spending cleared the US Congress Wednesday,” says Reuters, “the first of what Democrats hope will be several efforts to bring down the 9.7% unemployment rate…”

• “Demand for labor has been falling steadily for decades as higher productivity has eviscerated the job count in agriculture and manufacturing,” says Edward Hadas at BreakingViews. “Leisure, healthcare and other service industries have taken up some of the job slack…but the ageing population will not necessarily change this overall trend very much.”

A keen eugenicist, Keynes once shocked his upper-class chums by demanding assisted suicide for bond holders…the “euthanasia of the rentier” in his phrase…so that taxes didn’t go on repayments, and savings could be more wisely spent by clever chaps such as himself.

How long before some new wit, faced with the economic impossibility of the West’s post-work society, suggests the same for the lower orders instead…?

Regards,
Adrian Ash, BullionVault
for Whiskey & Gunpowder

March 24, 2010

The Economic Impossibility of John Maynard Keynes was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

SLASHING the Bank of England’s base interest rate to an historic low of 0.5% was supposed to “rebalance” the economy…tipping it away from galloping consumption towards an export-led recovery.

But all that the Pound’s slump since rates began sinking in March 2008 has done so far, however, is gift a 50% gain to UK gold owners.

“While we were hit with a great recession, we now know that the world has indeed avoided a great depression,” said UK prime minister Gordon Brown at a Reuters press conference in London this morning.

Just as with the war in Iraq, however – another “shock and awe” campaign planned with little thought for the collateral damage – we’ll never know how things would have panned out if brave men like Brown hadn’t done “whatever it takes”. And just like in Iraq, victory has been declared way too early.

New data today showed industrial production in the UK sinking to 1991 levels. The employment rate has sunk back to 1996 levels, meaning a net loss of private-sector work when you allow for Brown’s intervening civil-service jobs jamboree. And despite the collapse in Sterling, the UK’s trade deficit has been widening for more than a year, verging at last count on the record 3% of GDP hit at the very top of the credit bubble, 2005-2008.

“Let us be clear,” says Brown, “the economy is growing, but remains fragile.”

And the cost of this success…?

• The interest paid on the average cash ISA account now lags retail-price inflation by 3.3 percentage points per year – the worst real returns to cash in over three decades (source: Bank of England and ONS data);
• Annuity rates have fallen by 6p in the pound, offering barely £6,000 per year on pension savings of £100,000 (source: WilliamBurrows.com);
• Real wage growth – on average, and after inflation – has gone negative for the first time since 1974, falling well over 1.5% since March 2008 (source: ONS data).

Not quite depleted uranium. But just as insidious.

“In the medium to long term, inflation has to come through,” says Nouriel Roubini’s latest fixed-income hire at RGE Monitor, former Citi managing director and wealth-management strategist, Arun Motianey.

“Just allow it…just admit it. It doesn’t matter where the inflation comes from. It doesn’t have to be through monetization of public-sector deficits, although at a pinch we may need to do that. What I am saying is that if we do get cyclical [demand-driven] inflation, then let that inflation stay…allow it help to write down the real value of debt.”

Naturally, Motianey was talking to CNBC this week because he’s got a book to promote. (We’re all shills in the end, remember.) And naturally, so as to make a few a sales, his policy prescriptions conclude with handy tips for investors on “How do you preserve purchasing power, how do you preserve savings?” amid the inflation which Motianey says we should (and shall) get.

We can have it both ways, in short. Debt can be inflated away, while creditors are somehow protected. I can’t say whether gold bullion is part of his saver’s solution. But when fixed-income economists beg for inflation…and pretend that savers won’t get screwed in the process…you’ve got to wonder where else you can hide.

Regards,
Adrian Ash
BullionVault
Whiskey & Gunpowder

March 11, 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Collateral Damage in the War on Depression was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Isn’t Greece marvellous?

Paying income tax, or any kind of tax it would seem, has been entirely optional. Which should have powered its economy like 1960s’ Hong Kong.

But public spending, however, accounts for 40% of GDP. So who financed that spending if so few people paid?

Last year, only 15,000 of Greece’s 11-million population declared an income above €100,000. The government only got round to making shop receipts mandatory this week. Tax evasion is thought to cost the Greek purse €15 billion per year ($20.5bn). The untaxed “shadow economy” accounts for some 25% of annual output.

“The Greek issue is a Eurozone issue,” wrote Athen’s finance minister in a letter to the Financial Times this week. Which is true, and not just with regard to taxation – and not just with regard to the 16-state currency zone.

Yes, untaxed business accounts for one Euro in five generated in Spain, Portugal and Italy, or so reckons one Austrian economist. But this is nothing next to the gap between income and spending now looming for pretty much the entire Western world.

Greece, in short, is but Northern Rock in this farce. The first bank to collapse – and thus the first to get rescued – it now looks a mere footnote to the historic crisis which followed. Neither the cause nor a “domino”, the Rock was more than a warning. It announced the crisis was on.

The scramble for tin hats began…

On Weds 12 Sept. 2007, Northern Rock– the biggest employer in Newcastle-Upon-Tyne…sponsor of the city’s football team…and the fastest-growing of the UK’s fast-growing mortgage banks – ran a banner advertisement across the front-page of the national press.

It offered 6.30% interest on new deposits, then more than 250 basis points above the average return offered by High Street savings accounts. Clearly, the bank needed cash in a hurry! And come Thursday it had to arrange an emergency loan from the Bank of England. By 9am Friday, queues were forming at its branches across the country, and Northern Rock’s stock promptly dumped 20%.

On the following Monday, the government effectively rescued the bank’s savers, guaranteeing their deposits in full. And from then until Feb. 2008, when it finally came, nationalization was only a matter of time.

The Rock’s demise wasn’t the first sign of trouble. August ‘07 saw inter-bank interest rates jumped to a near-nine-year high. Both Bear Stearns and BNP Paribas had already closed certain mortgage-investment funds to withdrawals. A handful of smart-arses pointed to the 40-to-1 leverage at leviathan banks such as Lehmans.

Fast forward to early 2010, and the US and UK are running record peacetime public-purse deficits. Dubai last month suspended (and then restructured) repayments on a chunk of its debts. The cost of insuring government bonds against default has risen sharply for more than a month.

So…who gets to play Lehmans in this comedic repeat?

For all London’s dithering and dawdling, saving the Rock was never in doubt. No politics or ideology stood in the way. But making German savers pay the wages of Greek civil servants is another thing altogether. Either the Greeks take a wage cut, or somebody stumps up, or the central bank simply prints money, or Greece will default on its debts as bond-buyers vanish.

Writ large across the developed world’s spending, we’ll thus need the Martians to help…or perhaps we’ll ask God for a loan…if the ever-greater cradle-to-grave promises made after WWII aren’t wound back before they come due. Alternatively, we could just keep printing more money.

After all, it worked to stem the crisis in banking.

“A sovereign debt crisis in the West is coming sooner or later though it is probably not right now,” says Christopher Wood in his closely-followed Greed & Fear analysis for CLSA.

“This is why the recent correction in gold is an opportunity to buy more bullion and more gold mining shares” – a defense, says Wood, against the “almost inevitable Western currency debasement which will be the consequence of the increasingly untenable welfare states and related social security systems.”

It wouldn’t be the first time a sense of impending doom sparked a fresh move worldwide into physical gold. And until the next crisis in debt is resolved, it might not be the last either.

Regards,
Adrian Ash
BullionVault

February 16, 2010

Greece a Canary in the Deficit Mine was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Okay, this is getting weird. Too weird, in fact.

And weirder still, no one else has yet noticed…

It might just be me…if not my nicotine D-T’s.

But every time I look, there they are. Gold and the S&P500. Right at the same level. Minute by minute, session by session…

What in the Simon Cowell can this mean?

“It is easy to see why the Euro fell [last week] and one could then say that the Dollar is the obvious alternative,” writes Phillip Coggan in his Buttonwood blog for The Economist.

“But what about gold? Hasn’t that been rising on fears that spendthrift governments would debase their currencies? Yet when these fears started to look real [with the Eurozone crisis], gold fell 4% on Thursday…”

Well, yes and no. Gold always rises on fears of default or debasement. Because that’s what it’s for – hiding out when everything else falls in value, not least money itself.

But as gold has tripled and more over the last decade or so, it has also been rising thanks to that very debasement itself. Or rather, it’s risen on the leverage which debasement enabled. Any pause or reverse in that leverage thus means the gold price can slip, whether or not debasement unwinds.

To recap: Gold began rising last decade because a handful of people saw deep trouble ahead in the race to slash rates. Also known as debasement, that race – led by the Fed, which then feared deflation in the face of untold corporate-debt burdens – took the cost of money below the rate of inflation pretty much worldwide.

Thanks to those record-low rates, global stocks all found their floor by March 2003. Yet the Fed waited another two years before teasing rates higher…and by then, this historic flood of cheap money had found a new use in finance:

Paying for leveraged bets against the Dollar itself.

Hedge funds, prop’ desks…even retail investors and the weekly financial press…everyone saw that the Dollar was falling, yet the Fed refused to step out and catch it. Because the falling Dollar was also funding go-go days for home-builders, plus 10% year-on-year gains in the Dow.

Gold, naturally, was a prime mover in this bear market for cash. But with everything rising, gold’s singular value seemed to offer just one more “risk friendly” trade.

You selling Dollars or Yen…swapping them for Euros or crude…? Then get yourself long of gold futures! Because that stuff’s the ultimate carry trade, mate – a pure speculation on repaying your finance with devalued cash.

“Gold’s sharp run is a case of mistaken identity,” wrote Tocqueville’s John Hathaway in 2006. Barring what proved a blip in mid-summer that year, gold rose with everything else for 5 years ending in 2008. And it was never fuelled faster than when fresh “carry trade” dollars poured in thanks to the Bernanke Fed’s record Dollar-rate cuts as the banking crisis broke…

See how the geared-gold position leapt ahead of the price in late 2007…? See how it sank when Lehmans went down?

That’s what happens when prime brokers, i.e. investment banks, throw money at hedge funds, only to blow themselves up. But then note how gold found its floor sooner – one-third off its top – while the “net long” held by leveraged gold bulls shrank by more than one half.

Where did the gold price find this support? After all, at the margin, it’s gold futures trading which sets the price of the stuff. A higher (or lower) bet on prices next month of course means a higher (or lower) gold price today.

But the global meltdown in stocks sparked by the meltdown in banking brought in a flood of unleveraged gold bugs, all demanding metal – not paper – and standing in line to buy coins and small bars as well as physical gold from safer, low-cost providers not a million miles from where I sit here at Bullion Vault.

Yes, gold ETF demand also shot higher, reversing the 12% drop of July to Sept. 2008 before swelling by more than three-fifths. But that trust-fund exposure was also cash paid, in full. Because leverage was dead…and didn’t revive until the tail-end of last year, when it drove the gold price once more, up to new record highs even as coin sales flagged and the ETFs shrank.

To repeat: There was no palpable crisis driving new money to gold as 2009 ended. Yet the price jumped above $1200 an ounce – and hit new all-time records in Euros, Sterling and pretty much everything else – even as gold ETF demand barely touched its previous peak of six months before. That big move, very much like the spike of May 2006, came instead on leveraged bets, powered by the Fed’s all-too cheap money, rather than because of it.

Might the “physical floor” rise up once more now that prices have sunk alongside gold’s erstwhile bull-market chums? That weird daily lockstep with the S&P index runs deeper than the mere nominal price. In fact, gold’s daily changes this week – on a rolling one-month basis – have been more tightly correlated with stocks than with either the Euro or silver.

I’d guess that connection will break, one way or other. It’s hard to imagine a genuine Euro-currency crisis doing anything but sending new cash into gold.

Regards,
Adrian Ash
BullionVault

February 8, 2010

Gold’s Bull Market Companions was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

So the last decade of rising gold prices simply mirrored the US Dollar’s steady decline. Right…?

Well, no actually as I have repeatedly noted…and never less than when clutching a whisky and ginger this past Yuletide…typically to a fast-emptying room.

Gold’s tripling-and-more since Tues 4th Jan. 2000 came against all major currencies, let alone the minor ones. In fact, when judged against a truly globalized basket of the globe’s truly basket-case currencies — those various monies issued by the top 10 economies in terms of Dollar-GDP — gold turned decisively higher in mid-2001…looking back only a handful of times and never for more than a 20% drop.

All about the Dollar? Don’t you believe it.

Yes, volatility and violence rose together as the gold price pushed higher. And yes, the Dollar-price gains outstripped those in the Euro (292% vs. 180%) and commodity-led Canadian Loonie (179%).

But your local fund managers, financial advisors and op-ed pundits would have been hard-put to beat those returns with anything else. And as gold remains (at least in the view of die-hard, gloating and lone-drinking “gold bugs”) the only viable one-world currency, it’s worth glancing at just how it performed against the last decade’s various top 10 monies by economic weight…

* NB: The GGI is rebased for the top 10 currencies by economic output each year. The 13 gold-lagging currencies above all made one appearance (or more) in the last decade’s data. 2009 positions given here, courtesy of the IMF. The US accounts for 32%, the Eurozone 27%.

Of course, no one much cares for the last 10 years of data, however — not outside the relative performance tables of mutual fund sales teams.

But whether you think gold warned of trouble ahead when it first doubled to the start of 2006…or you feel it merely worked-as-prescribed when it almost doubled again during the financial crisis that then followed…it’s clear that the decade of gold just ended was a long way from a “Dollar down” story alone.

And all this without the much-fabled price inflation which newcomer pundits believe is essential for a long-term rise in the gold price. Just imagine what the price might do from here if a true surge in the cost of living now shows up worldwide.

Regards,
Adrian Ash
BullionVault

January 6, 2010

One Golden Decade and 13 Decayed Currencies was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Say like Coca Cola re-launches New Coke, but people actually like it. Would that mean the laws of physics had been repealed? Or would you need to change what you think…?

“Gold and bonds do not usually go up or down together. But try telling that to the markets over the last two months,” writes Mark Hulbert at MarketWatch.

“Since early August, in fact, gold bullion has risen by around 10% and the Treasury’s 10-year yield, which moves inversely with Treasury prices, has fallen by nearly 15%.

“These moves are substantial, in other words, and more than just day-to-day noise in the data. What’s going on?”

Put another way, “If the gold price is so high, why are 10-year Treasury yields so low?” asks a columnist at EuroWeek, the capital markets newspaper.

To repeat: Rising gold says people fear inflation. Or so both Hulbert and EuroWeek reckon, along with pretty much the rest of the planet. But inflation fears would mean rising interest rates and falling Treasury bonds…and that’s the very opposite of what’s actually happening to government debt.

“Either way you look at it then, recent trends are unsustainable,” says Hulbert. “Something’s got to give” apparently. And it won’t be his assumption that gold and bonds shouldn’t rise together.

“If central banks take the punch bowl away at the wrong time,” says EuroWeek, “those who have bought Treasuries will have been on the right track and we will face deflation. Whereas if they let the party go on for too long the gold hoarders will have been right…and we’ll be wheeling our cash for bread around in wheelbarrows.”

The key assumption that makes these two things impossible, of course, is that gold only goes higher on strong inflation…a demonstrably idiot claim given a quick glance at the 1930s. Or this decade’s four-fold gains. Or the 50% surge of fall/winter 2008.

Back to gold in a moment, however. Because while bonds say deflation, “Equities say reflation” as the Pragmatic Capitalist notes, together with David Rosenberg at Gluskin Sheff and pretty much everyone else. “The stock market is telling a very different story from the bond market,” TPC explains, and “unfortunately for equity investors, they have a poor record of forecasting the future when compared to bond investors.”

Yet again, these two things “don’t typically rise alongside” each other. Yet stocks have risen more than 11% since mid-June, while the 10-year Treasury yield (which moves inversely to bond prices, remember) has dropped nearly 0.7%.

“There have been 4 famous cases of such bond and stock divergences in the last 20 years. The most famous is the summer of 1987. We all know what occurred then.  The other three cases were fall ’94, summer ’98 and winter 2000. All three preceded declines in the market. Of all 4 instances, three of them preceded 15% declines in the S&P 500.”

Now throw in rising gold prices, and we’ve got rising stocks…rising bonds…AND rising gold. Hell, since Wednesday this week they’ve even pulled back together, too!

Is the moon made of cheese or what?

The curve-ball in all this – or so we guess here at BullionVault tonight – is not gold, nor stocks, nor even bonds. It’s the underlying guess-work, intuition, assumptions.

That gold only rises when the cost of living soars…or bonds only rise when stocks go down…or that a flood of money, created at zero per cent rates, can’t drive all things higher together, even the promise of cash redeemed in the future…lapped up by a pensions and finance industry faced with $11 trillion in Treasury-debt supplied, but a central bank vowing to step in if buying fails and cap any rise in rates.

Because right alongside, hedge funds are buying futures and options with virtually free finance. What’s not to love in this über-Reflation Rally redux…?

Regards,
Adrian Ash
BullionVault

October 21, 2009

Inflation, Deflation and Reflation at Once was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A short series of secret memos, published and dissected at ZeroHedge, provide the “smoking gun” of gold-market manipulation. Apparently.

And given this little slew of dusty archive-digging – throwing up three documents from 1968 to 1975, each one declassified within thirty years – then “If over 40 years ago the Fed and the members of the gold ‘Pool’ were openly intervening in the gold market, one can only imagine what the situation is now…”

Go on, just imagine. Because imagination is what you’ll need if you’re going to nail type-written notes from before the Moon Landings as primary, original-source evidence that the United States’ official gold reserves – variously sold, lent, swapped or simply given away since the early 1990s – have been mobilized to suppress prices, pushing gold down from $250 an ounce a decade ago to, ummm, more than $1000 today.

These memos fret about shrinking gold reserves and the world’s gold-driven money supply…Britain’s failed deflation policy of the late ’60s…whether South Africa will sell its new mine supply on the open market…German border taxes…and the “gold-like” qualities of the proposed Special Drawing Right (SDR). Such prehistory matters, yes. But it’s a world away from demonstrating what newcomers to gold today may mistake for good cause to steer clear.

The little history these scattered notes sketch does echo today, however faintly. Are central banks buying gold at market prices – then France, now Beijing through via its domestic gold output? How to replace the abiding monetary standard – then gold, now the Dollar? And like the Fed memos reviewed on blogs elsewhere this year, the notes republished by ZeroHedge certainly prove one thing, at least:

Just how awkward gold became long before the collapse of the Bretton Woods monetary system. Bluntly put, it was a pain in the arse – and not only for Washington.

“Gold was causing such a rumpus that most authorities wished it would go away and stop bothering them,” as the late Peter Bernstein wrote in his 2000 history, The Power of Gold. But with so much of the world’s gold stacked up in their vaults, slipping away was impossible, and the world’s monetary system instead “lurched from crisis to crisis” says Francis J.Gavin, University of Texas at Austin’s professor of international affairs, in his 2004 monograph, Gold, Dollars and Power.

“There was not one year between 1958 and 1971,” Gavin finds, “when the Dollar and gold problem was not the most pressing issue of American foreign economic policy.” Or as President Kennedy put it in August 1962, “My God, this is the time…

“If everybody wants gold, we’re all going to be ruined.”

Luckily for JFK and the Dollar, not everyone wanted gold. Like Washington, the British government would have quite happily seen its former “badge of honor” turned to dust and swept away, too. Their private citizens were barred from owning gold, with strict controls applied across most of the rest of the developed (and communist) world. Yet with so many new US Dollars flooding the world…and with the Dollar-exchange clause of the 1944 Bretton Woods treaty still in force…less pliant friends increasingly asked for, and got, gold over dollars.

One nation actively sought to bring on the crisis. “There can be no other criterion, no other standard, than gold,” announced French president Charles de Gaulle at a press conference on February 4, 1965 – “gold that never changes, that can be shaped into ingots, bars, coins…that has no nationality and that is eternally and universally accepted as the ultimate fiduciary value par excellence.”

De Gaulle spoke in French, naturellement, in the gilded Salle des Fêtes of the Elysées Palace. But the White House’s least Francophone staffers could get the message loud and clear when, six days later, de Gaulle’s finance minister – future French president Giscard d’Estaing – announced in a lecture at the University of Paris that, from now on, France would swap every new Dollar it accumulated for gold bullion from the Federal Reserve.

The major powers, he said, should “make a solemn and unequivocal declaration” to likewise settle all their international payments in gold. Which was an easy thing for France to declare, given its large balance-of-trade surplus.

To drive the point home, France then made headlines around the world by announcing it would not only swap all new Dollars for gold…but immediately ship that new gold straight to France, too.

What could the United States do? As we’ve noted time and again, the final collapse of the Gold-Exchange Standard – put out of its misery in Aug. 1971, when Richard Nixon canceled America’s gold-for-dollars obligation – came because the US government wanted to keep hold of its gold. The legerdemain of then “demonetizing” it through occasional sales and amendments to the IMF treaty only hid this plain fact; it didn’t deny it.

The international promise signed after the Second World War made defending that hoard impossible given America’s domestic Dollar-inflation. Producing more dollars than the rest-of-the-world needed to finance its trade, the United States also invited a drop in the Dollar. That in turn invited withdrawals of gold from its vaults, effectively sparking a “run on the United States” as one advisor called it in the mid-60s’ phase of the crisis.

“The kind of transcending value attributed to the Dollar,” Charles de Gaulle had said at that 1965 press conference “has lost its initial foundation, which was possession by America of the greater part of the world’s gold.” Never mind that de Gaulle himself knocked out that support. What mattered was the abiding idea – gold equals power. Thus US dominance was clearly ebbing away.

“The French this year have been cashing in dollars for gold at a $54 million-a-month rate,” reported Time magazine in mid-1966. “Last week the Bank of France reported that as of Aug. 1, France had hoarded $5.13 billion in gold. Gold now constitutes 86% of all French reserves, compared with 73% at the end of 1964.

“Moreover, the [French] government is squirreling away the precious metal at such a rate as to account for the entire net US gold drain so far this year.” Hence de Gaulle’s jibe at the Dollar’s fall became self-compounding. By demanding gold over dollars, he proved the value of metal, not paper. But only on the old tattered Gold Standard logic. Losing its dominance as the gold-hoarder par excellence, the United States still retained the supreme currency. The “exorbitant privilege” of which de Gaulle’s advisor, Jacques Rueff, had complained, would now take America’s economic power as its foundation. Depriving the US of its bullion backing, the promise to redeem Dollars for gold was replaced with the promise to redeem Dollars with interest.

Fast forward to the fall of 2009, and the United States remains the world No.1 holder of physical gold (the potential for secret sales, swaps, loans and outright gifts to Wall Street notwithstanding), but while France and the rest of Europe turned seller, Russia and emerging Asia began re-stocking this decade. Moreover, “The United States would be mistaken to take for granted the Dollar’s place as the world’s predominant reserve currency,” as World Bank president Robert Zoellick told an audience at Johns Hopkins University in Washington this week.

“Looking forward, there will increasingly be other options to the Dollar…The future for the United States will depend on whether and how it will address large deficits, recover without inflation that could undermine its credit and currency, and overhaul its financial system.”

Zoellick naturally mentioned the Chinese Yuan, noting that “Over 10 to 20 years [it] will evolve into a force in financial markets.” He just happened to speak on the very same day, as Reuters observes, that Beijing issued its first Yuan-denominated bond open to foreign investors. Yet all the World Bank chief did, however, was confirm today’s abiding idea – that monetary power builds on an economy’s strength.

Maybe a new or even old idea will emerge in the next two decades or so. “The manner in which [this crisis] is resolved may well determine the shape of the world’s monetary arrangements, and therefore our economic and political interests over the next generation,” as then-Fed chief Arthur Burns memo’ed President Ford in June 1975, but the problem of excess Dollars was never quite fixed.

Still, we guess it’s more than coincidence Beijing is now buying gold – as well as frantically powering its non-stop economy – as the world’s monetary standard slides into crisis mode.

Regards,
Adrian Ash
BullionVault

October 2, 2009

Gold, the Dollar and Smoking Guns was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.