people in motion

people in motion

jeudi 21 février 2013

Gold : From the Situation Room

 Gold Back to Fundamentals...
Buy Low and Sell High !
Implications of a world floating on fiat currencies, and that government “solutions” to debt and deficit spending will significantly — perhaps catastrophically — dilute the value of currencies, the fallout of which has yet to materialize. And that’s how a number of prominent investors and institutions are viewing the price action right now. None of these parties think the gold bull market is over, nor that the price is too high.  As for me, I think that the longer the malaise continues, the more likely the breakout is to be both sudden and dramatic. 
It’s a tad puzzling that gold hasn’t broken into new highs, despite enough catalysts to move a herd of stubborn mules. But that’s the hand we’re dealt right now. We can’t get up from the table until the game reaches its conclusion. Besides, I think the stall in prices is giving us one last window to buy before prices break permanently into higher levels for this cycle.

We can all speculate about when the next leg up for gold will kick in, but the point for now is to take advantage of the weakness. When the price breaks out of its trading range, are you sure you won’t wish you’d bought a little more?

Gold Remains An Historically and Academically Proven Safe Haven. 

It remains very important that investors and savers understand gold’s importance as a safe haven asset and form of financial insurance.

There remains a significant lack of understanding regarding gold and gold’s role as a diversification, a store of wealth and a wealth preservation asset.

Some continue to focus solely on gold’s price and not its value as a diversification for investors and savers. Many have been suggesting that gold is a bubble for a number of years and few have ever admitted how wrong they were with regard to predictions that gold prices would fall sharply.

Whether gold is a bubble or not is not the fundamental question. What is far more important is that there is now a large body of academic and independent research showing gold is a safe haven asset. Numerous academic studies have proved gold’s importance in investment and pension portfolios – for both enhancing returns but more importantly reducing risk.

Conclusion – Gold in 2013

Some market participants and non gold experts tend to focus on the daily fluctuations and “noise” of the market and not see the “big picture” major change in the fundamental supply and demand situation in the gold markets.

This is particularly due to investment demand from high net worth individuals, from hedge funds, from China, the rest of an increasingly wealthy Asia and of course creditor nation central banks. Macroeconomic, systemic, geopolitical and monetary risks have abated somewhat but remain and could intensify rapidly in 2013. 

The eurozone debt crisis is far from over and will become an issue again in the coming months as will debt crisis’ in Japan, the UK and the U.S.

Support for the price of gold should also come from the rising global money supply coupled with increasing investor and central bank purchases which have been driven by falling real interest rates and concerns about the euro, the dollar and other fiat currencies as stores of value.

Tighter monetary policies, as seen in the late 1970s, would likely help alleviate fears of further currency debasement but it is extremely unlikely that this will be seen in 2013. Indeed, ultra loose monetary policies, negative real interest rates, debt monetization, competitive currency devaluations and global currency wars look set to continue – if not intensify. 

Relationship between gold and interest rates

Geopolitical risk remains very underestimated. Geopolitical tensions are particularly evident in the Middle East between Iran and Israel and many western powers.
There are also tensions between western powers and Russia and indeed China and these could intensify in 2013. 

These macroeconomic, systemic, geopolitical and monetary risks are leading to increasing investment and store of value demand from the smart money such as Bill Gross, Jim Rogers, George Soros, Marc Faber and hedge fund managers such as David Einhorn and Kyle Bass.

Prudent pension funds and central banks will continue to diversify into gold.

The precious metals of gold and silver will again be essential diversifications for anyone wishing to protect and grow wealth in what will be a volatile 2013 and in the coming uncertain years.

Owning physical bullion will likely reward in 2013 and in the coming years as it has done in recent years.

What kind of Gold investor are you ? Define your profile and the corresponding strategies

Here’s a sampling of this year’s “gold bug” and what he has to say about precious metals recently. 

Eric Sprott's latest interview with Eric King deals with the 'trench warfare' of investing in gold after the latest FOMC minutes and the dichotomy between paper selling and physical buying of the yellow metal, as well as the recent trend for repatriation of bullion by central banks. As always, if you're at all interested in the precious metals markets, Eric's insight is invaluable.

But institutions, governments, and others are participating, too... 

Central banks around the world bought a total of 351.8 tonnes of gold (11.3 million ounces) in the first nine months of 2012, up 2% from a year ago.

See The World Gold Council Report

Even Argentina added 7 tonnes last year (225,000 ounces), and Colombia 2.3 tonnes (almost 74,000 ounces).

And then there is India...I tire of the reports that proclaim something like, “Indian buying dropped this month!” Let’s be clear about India and gold: Imports have more than doubled in three years (through 2011), and investment demand has climbed almost fivefold. And all this occurred while prices were rising and from a nation that already has a strong cultural predisposition towards the metal. Further, silver demand is taking off: sales have jumped 24% this year over last. 

And of course there’s China. While nothing official has been announced by its central bank, the size of its gold imports and buying habits are mind-boggling.

 Gold, renminbi and the multi-currency reserve system

These data suggest in and of themselves that dips in the gold price are likely being bought — and will continue to be bought — by central banks. They’re not exactly short-term traders. Remember, central banks were net sellers as recently as 2009, so this reversal will likely play out for years. 

Starting at the time of China’s last official announcement, we’d need to add another 2,873 tonnes to China’s “official” holdings, just to account for imports and domestic production alone. That would put China’s current “known” holdings at 3,927 – well above Germany as the second largest gold holding nation in the world.

And do you think Germany’s ears are starting to burn? You betcha! Why do you think we saw that news earlier this year that Germany is auditing its gold holdings and repatriating some of its gold held out of country? It’s all about the Chinese math!

When you start adding up the stealthy, hard-to-track sources of gold – black market gold from Africa and South America (and maybe Iran) exports, global gold mining from semi-national Chinese firms or buyouts, and the idea that China is urging their own citizens to hoard gold – you’ll notice that China’s gold hoard is closer to 7,000 tonnes, or more!

As China aspiresto take the lead politically and economically, it is unlikely to be satisfied with storing its wealth simply inliabilities of other countries.

So what are the consequences and the perspectives for the Chinese currency ? Here are some thoughts by the renowned economist and financial analyst Alasdair Macleod :

Lars Schall: The Yuan in China, there’s now a lot of talk about the Yuan being the next reserve currency and we see the Chinese buying gold like crazy. Do you think they have something in mind with backing up their currency with gold?

Alasdair Macleod: Yes, I do. I think they do have a plan, and we don't know what it is, but we can guess. My starting point in this is that all the Chinese and Russian Marxian economists were taught that capitalism destroys itself. Now, whether you believe that or not isn't the point, but the Chinese economists actually have this in mind. And they can see the dangers of the way the US dollar is going. We must also understand that the dollar is for security reasons not something they want to use for their international trade settlements. Remember that every dollar transaction done in the world is reflected in a bank account in New York. So, the Chinese want to get away from the potential control and the intelligence information that it gives America. They want to use a different settlement medium.

Now, they agreed about 10 years ago with the Russians to set up the Shanghai Cooperation Organisation (SCO), and the last unsatisfied objective of the SCO is to have a common trade settlement system between the members of the SCO, which at the moment are Russia, China, and the various "stans" in middle-Asia. But interestingly, the next wave of members who will join are India, Iran, Pakistan, Mongolia and Afghanistan (as soon as NATO has left). So you've really got the bulk of Asia's four billion people, and they're going to be settling cross-border trade not with the dollar but with something else. They need to be gold-rich to give confidence to their currencies.I suspect that the Chinese Yuan will play a big role in Asia. What they're doing with Iran is interesting. They're settling net balances in gold, and gold is being re-monetized in that sense.

And I think that China has accumulated a lot more gold than they officially tell us. So they have the potential to use gold as money. I can see gold being re-monetized in the loosest sense for the largest internal market the world has ever seen. Believe me, it's happening now.

L.S.: Okay, let me then connect another thing with this question. Do you think the Chinese will get paid in gold for perhaps helping out in the Euro crisis? So they're helping to prop up the Euro, and they get in turn some of the European gold?

A.M.: I don’t think China is going to get sucked into supporting the Euro, no, I don't see that at all. What I think is possible is they would very much like to cash in Euros for gold. I am sure they would consider taking physical gold as collateral for Eurozone loans. But for now, every time a Eurozone country goes to China and says "We'll be very grateful for some of your money," the Chinese listen very politely and then just show them the door. China is not in that role as they've got enough of their own problems.

A.M.: And look at it also this way, the average European has a standard of living perhaps ten times better than the average Chinese. China is not interested.

L.S.: Let us then talk about the three big stories in gold this year, and I think the one thing out of the different campaigns for repatriation of gold reserves into the respective countries.

A.M.: Yes. That was going to be my overall story for 2012, and that owes much to the work that you have done. Teasing out of the German authorities exactly how much gold they think they have got and where was a great achievement, a journalistic scoop. And what I particularly liked was not only did you manage to do that, but you have encouraged others to do the same thing elsewhere. The journalist in Mexico who has got the Mexican central bank to talk. We now discover from Austria that the bulk of their gold is in England, and not only that, but they earned 300 million Euro in leasing fees. What a mistake to tell us that!

L.S.: Yes, but can you elaborate on this. Why was it a mistake?

A.M.: Well, I think it was a mistake because the sensible thing for a central banker to do when asked questions about this, given that a lot of the gold has probably disappeared through leasing, is actually to say as little as possible. The real reason for having gold as part of your foreign reserves is to have the ultimate protection of it for your country and currency. Are you telling us, central bankers, that you have compromised that role by leasing it with the risk that it won't come back? You know that must be the next question you journalists will ask.

And of course, to that they all clam up. So I think it was a mistake for the Austrian central bank to admit it. And the most recent story has been the Netherlands where it has just been revealed by the central bank after lots and lots of pressure that they have got 50 per cent of their gold in New York, they've got 20 per cent in Canada, 20 per cent in London and 10 per cent — only 10 per cent — in Amsterdam.

L.S.: So we come to the question, what is a gold reserve. I would say a gold reserve is gold that you have in your possession and at your disposal at any time?

A.M.: Yes, a central banker has actually got to be able to go down into the basement, into the strong room, and count it.

It's as simple as that.

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