Gold: The Market Has Already Decided

Reddit

Editor’s note: Today’s Reckoning comes from Money Morning Editor Kris Sayce, currently up in Sydney at The Gold Symposium talking about all things shiny and yellow with your regular editor Dan Denning…

Live from the Gold Symposium in Sydney…

There are six keynote speakers, including Eric Sprott, chairman of Sprott Asset Management. And our old pal, Daily Reckoning editor, Dan Denning.

Plus there are 15 company presentations… Ranging from unlisted Tamar Gold Ltd and $2 million market capitalised Invictus Gold Ltd [ASX: IVG] through to $134 million Gold Road Resources [ASX: GOR] and $657 million Silver Lake Resources [ASX: SLR].

Tomorrow’s line up is similar. Four keynote speakers, including Alf Field from Gold Chartist, Ben Davies from Hinde Capital, and an end-of-day panel chaired by your editor. On top of that there are another 20 company presentations.

It’s a lot to get through. But if the standard is even half as good as it has been so far then we’re in for a bumper couple of days.

But what we want to know is: how high will the gold price go?

Gold Set for 2,677% Gain

Opening speaker David Evans, founder and managing director of GoldNerds Ptd Ltd, was the first to put his neck on the line. His forecast for the gold price?

$50,000 an ounce… by 2028.

But what if you can’t, or don’t want to wait that long? How does $3,800 by 2015 take your fancy?

Now, before you get too excited about a 2,677% gain over 17 years… or a 111% gain in four years, just remember real gains will only make up part of the price rise. The rest is inflation.

For instance, David Evans says $50,000 in 2028 will be the same as $8,400 in today’s money.

Even so, that’s not a bad return in a world when all other asset values are likely to fall in real terms.

Because looking ahead, it will be just as important to protect your money as make money.

But as we say, it’s always good when a speaker puts their balls on the line with a price prediction. But we could tell the crowd was looking forward to the next speaker – the first of the international big guns spoke – Eric Sprott from Sprott Asset Management…

Where is the Gold Coming From?

Mr. Sprott didn’t have his own specific gold price target. Rather than talking in dollar terms his focus is more on the gold/silver ratio. But more on that in a moment.

Because the important thing to remember is predicting the gold price isn’t the whole story. Just as important is the supply of gold. And it prompted Mr. Sprott to ask himself two questions:

“Who is not buying gold today who was buying it in 2000?”

And:

“Where is the gold coming from?”

In other words, is there a whole bunch of investors or organisations selling the stuff… happy they’ve locked in a big gain? No. In fact there are more buyers today – many more – than there were in 2000.

Central banks are now net buyers of gold. In 2000 they were net sellers.

Exchange traded funds (ETFs) barely existed in 2000. Today, the SPDR Gold ETF is one of the biggest holders of gold – fifth largest behind the U.S., Germany, Italy and France… and ahead of China and Switzerland.

So where is the supply coming from to meet the demand? After all, the increase in gold holdings can’t come completely from new production. As Mr. Sprott said:

“Mining production has hardly gone up for 10 years… we’re only adding 1.4% to the pool of gold each year.”

Mr. Sprott says he has the answer to his own question:

“I would argue very strongly that the central banks are surreptitiously leasing their gold. Gold lease implies they lease it to the bullion dealer, the dealer sells it in the physical market. [And] it gets consumed in the sense savers like you buy it.”

Mr. Sprott is effectively arguing that some, many, or all central banks don’t hold the physical gold they claim to hold (this is a view held by another gold guru, James Turk). And that the central banks have leased out their gold to bullion dealers or speculators.

In return, the central bank earns a small fee. Trouble is, if those organisations that leased the gold then sell it on to someone else, suddenly the central banks don’t hold the physical gold… and nor do the firms they leased it to. All the central bank holds is a claim to the gold.

It’s no wonder there’s a concerted effort by the banking establishment to talk down gold… to deny it’s money.

Gold is Money

Remember U.S. Federal Reserve chairman Dr. Ben S. Bernanke’s comment that gold isn’t money? That the only reason central banks hold gold as reserves is because it’s “tradition”.

Can you imagine what would happen to the gold price if Dr. Bernanke said, “Sure, gold is money.” The price would take off and the scramble would be on for central banks to reclaim the gold they’d leased out.

Perhaps they’re already doing that – hence why central banks are net buyers of gold.

Now, while Mr. Sprott didn’t offer his own gold price prediction, he did quote someone whose view he respects – James Sinclair.

At the recent Gold Anti-Trust Association (GATA) conference in London, attendees asked Mr. Sinclair for his next price target. The reason they asked him was because in 2000 Mr. Sinclair had pinpointed $1,650 as the target.

But now the price has breached that level, investors wanted to know where it’s going next. His reply cheered attendees of the GATA conference:

“Well, if it goes through $1764 my new target will be… $12,000.”

This morning the gold price is trading at USD$1,794.

Despite the efforts of governments and central bankers, the gold price climbs higher. If you want to hold real money, it’s not about choosing between U.S. dollars… or Aussie dollars… or Japanese yen and Swiss francs.

Forget all that. The only choice is gold. Mr. Sprott said:

“I believe the market has already determined gold is the reserve currency. The markets decided that. Not the central banks. Not the Treasuries. The markets made up their mind that gold is the reserve currency. It’s up 600% versus almost every currency…

“The stuff we have to listen to every day: the dollar versus the euro, the yen versus the dollar… they’re all crap. It’s like, who’s the prettiest horse in the glue factory!”

Look, we know. We’re at a gold conference. Asking attendees and speakers to be bearish on gold is like expecting a central bank convention to admit they’ve screwed things up.

The key question you have to ask yourself is this: who do you believe?

Central bankers who have a vested interested in keeping the current fiat money system going (expanding credit, stoking inflation and bailing out banks), or the vested interests in the gold camp who believe the current money system is broken and can’t be fixed (and who just want governments and central bankers to stop stealing individuals’ wealth).

We’ve seen and heard both sides of the argument. And we know which camp we’re backing.

As Mr. Sprott said about current central bank policies:

“I bet we will look back ten years from now and say that [Zero Interest Rate Policy – ZIRP] was the most ridiculous policy. It does not exist in any text book. It is the creation of this decade.”

More from the Gold Symposium tomorrow.

Cheers.
Kris.

Editors note: Kris Sayce is editor of the Money Morning free daily email. He also puts together the monthly Australian Small Cap Investigator newsletter. Kris is a fully accredited adviser in shares, options, warrants, and foreign exchange investments. He began his financial career 15 years ago in the City of London as an equities broker specialising in small stocks listed on the London Stock Exchange. After that, he moved to Australia to work for one of the country’s leading private wealth management groups, before joining us in 2008.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Reddit

Leave a Reply

4 Comments on "Gold: The Market Has Already Decided"

Notify of
avatar
Sort by:   newest | oldest | most voted
Pete
Guest

Thanks Kris! :)

Kevin Rowney
Guest

Kris if central banks are leasing gold, is that analagous to fractional reserve banking and lead to isolvency?

Ross
Guest
Ross
Guest

Let’s try that again …

Nah, it isn’t US grease on the wheels of EU debt is it?

http://www.zerohedge.com/news/ron-paul-it-estimated-us-banks-have-over-trillion-dollars-tied-risk-german-and-french-banks

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au