Investors to Speculate on Gold Instead?

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The market has metal on its mind. Shares are wandering without much conviction as we look at the flickering green screens this morning. But metals? That’s a bull market with some conviction, or at least a lot of momentum.

February gold traded above $1,218 yesterday and closed at $1213. Gold has closed higher 20 of the last 22 sessions. In that time, according to Dow Jones newswires, it’s up 15% – nearly double the return of the S&P 500.

Does this mean investors are starting to give up houses and shares and speculate on gold instead? The U.S. government has been forced to suspend sales of American Gold Eagle coins, according to Javier Blas in the Financial Times last week. It’s the second time the mint has had to suspend sales since Lehman went belly up in 2008.

There’s a bit more to the story, though. The mint has sold 1.19 million ounces of gold this year. That’s a 75% increase over last year. Hmm. But it’s also sold 26 million ounces of silver coins – the highest level of sales in 23 years.

What does this tell you? Well, the rational answer is that bullion or gold and silver coins are assets without counterparty risk. True, the value of gold and silver coins fluctuates with metals prices and liquidity. But your payment does not depend on someone else’s credit quality. Your payment is in your pocket.

That rational answer presumes that investors are now showing a preference for tangible assets that are…real. But is it more fear than reason? After all, a rational investor might prefer the leverage you get with gold stocks as the best way to profit from rising gold prices. That would be the easier investment strategy.

But that suggests to us the move to gold isn’t so much an investment strategy as it is a financial survival strategy. Investors are less and less worried about capital gains and more and more worried about the preservation of their purchasing power and capital itself. Gold is the ultimate expression of that worry – a flip side of the lack of confidence in modern monetary policy (or just modern money).

Gee. It’s soooo kooky to distrust central bankers, isn’t it?

Morgan Stanley appears to distrust UK central bankers. Morgan released a report yesterday, according to Ambrose Evans-Pritchard in the UK Telegraph, which highlights the risk that capital will flee Britain and the country will be plunged into a debt crisis because of a mix of political and economic factors.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK’s AAA status,” report Morgan’s Ronan Carr, Teun Draaisma, and Graham Secker.

“In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” the analysts wrote.

Hmm. No wonder gold is making new highs. And not just in U.S. dollars either. If the GFC really has become a sovereign debt crisis, the UK may compete with Dubai to see which political entity is the first to put to the fiscal sword (made, probably, of gold).

Of course those are American and British problems. So what if Australia will have $120 billion government debt in five years? That’s as small as a percentage of GDP. Why worry?

Well, frankly, there is a lot to worry about in a global financial system still weighed down by debt. You wouldn’t know it judging by the performance of stock markets this year. But we can feel it (psychic like that). And we can see it in metals prices.

We’re off to Sydney and then South Africa next week. We’ll have more to report on the outlook for precious metals then.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. “If the GFC really has become a sovereign debt crisis, the UK may compete with Dubai…”
    Correct me is I’m wrong, but aren’t these completely different scenarios? The UK has a monopoly in issuing sterling, and so couldn’t default. As Dubai doesn’t issue its own currency, then it potentially could default.

    Norfolk Enchants
    December 3, 2009
    Reply
  2. Yes a country issuing soverign debt cannot default. They can inflate. Zimbabwe has NOT defaulted on any of its loans.

    As for gold protecting your wealth.

    What if I bought Gold on Jan 21 1980? Would it have protected my wealth?
    AS all gold bulls know the inflation adjusted price of 1980 – 850 gold is $2306.

    So again. How has gold protected my wealth when I bought 100 ounces on Jan 21 1980?

    Any gold bugs care to answer?

    The answer is that gold is just another investment vehicle. No better or worse than others. It happens to be popular at present but may not be in the future.

    For interest here is the inflation adjusted Jan 2009 price for gold since 1975. All dates are Jan 21. Using real data from Kitco and Inflationdata.com

    (format: year, jan 21 price, Jan 2009 inflation adjusted price)

    1975, 175, 709
    1976, 124, 471
    1977, 132, 476
    1978, 173, 584
    1979, 230, 711
    1980, 850, 2307
    1981, 578, 1403
    1982, 376, 842
    1983, 485, 1047
    1984, 307, 636
    1985, 307, 614
    1986, 356, 686
    1987, 407, 773
    1988, 477, 870
    1989, 405, 706
    1990, 408, 676
    1991, 378, 593
    1992, 357, 546
    1993, 329, 487
    1994, 386, 557
    1995, 383, 538
    1996, 399, 546
    1997, 354, 470
    1998, 291, 380
    1999, 287, 369
    2000, 287, 359
    2001, 264, 318
    2002, 282, 336
    2003, 353, 410
    2004, 407, 464
    2005, 423, 468
    2006, 567, 604
    2007, 629, 656
    2008, 871, 874

    Reply
  3. In the DR’s defense the have described it has the trade of ‘the decade’ not the last 35 years.

    Reply
  4. very funny ratings for my post.

    typical gold bug response. Anyone who questions the “gold to the moon” theory is an enemy.

    Reply
  5. Joe,

    but they will tell you gold protects your wealth and has done for the last 5000 years.

    So my point is valid.

    If I bought on Jan 21 1980 – i am STILL 48% down. Which I guess is a bit better than the 86% inflation adjusted loss I was making in 2001.

    It doesn’t protect your wealth any better than any other asset.

    In fact I could easily argue in the long run it is doing very poorly aginst buying the dow.. which on Jan 21 1980 was around the same as 1 ounce of gold at 872.

    My real point is that gold is just like any other trade. If you get it right then it will do well, but get it wrong and it can burn you just as bad as a company going bust.

    Reply
  6. Inflation/deflation – Me real dumb an dunno bigtime! (Good chance of inflation if bigpella bwanna boss sahib get im way though this dumby reckons … :) )

    Anyhow, for the average poor stupid dumb dork like me it still comes down to:
    * Own your house and car and crud
    * Have a job (and/or gubment [taxpayer!] handout is plenty good)
    * Have some of ya gubment’s munnie in da bank (in case gold begins ta stink)
    * Have some gold under ya floorboards (in case da gubment’s munnie begins ta stink)

    And just maybe if you iz old and tired and lazy but in the process of becoming like that, yiz had da opportunity to acquire same, then have some morgtage free property earning income.
    While if yiz iz young and energetic and inspired – Aspire to having same for when yiz ain’t young and energetic and inspired. And no longer feel to swim with the sharks.

    Reply
  7. Lachie – Wasn’t you who was checking out energy alternatives – Noted – My mistake obviously! Have had a cursory look at same here. Nothing at all positive really? A bit of wind type stuff could be of vague help is all. Apart from wood burning and a Cooldardie safe that uses evaporative H20 – Not quite sure WHY Krudd inspires such responses in me – Suspect it’s just that I HATE being told what to do by a megalomaniac.

    Reply
  8. Ned,

    I agree. I am no property bull. But.

    For 99% of people the best investment they can make is to pay off their mortgage as fast as possible (if they have one) and own their house outright.

    Not everyone agrees with this and some people prefer to become a debt slave to live in a slightly nicer area… who is happier? The debt free person in say…. turramurra… or the indebted person in mosman?… I know where I’d put my money for that bet.

    Back on topic…..

    The more canny might take a bet and lock in interest only in anticipation of high rates and inflation – but obviously there are risks, I imagine a few people got burnt playing this game in 2007.

    I could also add that there is no history of government confiscating (excluding Zimma) property on a mass scale like there is with shiney things.

    Reply
  9. Prozak – I’m not a property bull either … I just present long term investment in Oz re same as an option that still seems somewhat sane for them that like me aren’t skilled traders.

    Reply
  10. Gold is so mysterious and misunderstood Mr Prozak! That’s why only the precious few get it .. (and have it).

    It’s all a matter of perspective and intention.

    Just one moment ago, my gold was worth somewhat more or less what it is … in this moment now. Who cares?

    A good starting point is this. Forget about your floating counterfeit imaginarium instruments of confidence and greed. Think about purchasing power.

    Sure we had an odd 30 or so years with gold prices vs paper instruments. There are a lot of theories why this is so. But why don’t you zoom out with your mental graph to lets say… oh 50 years? 100 years? 1000? even 3000 years. You might see a bit of a trend there sonny jim.

    Reply
  11. in the past, gold seems to be a storage of value but now, it seems to move with the market which moves in the opposite direction with the USD. May be the world thinks the USD is hopeless and all commodity prices should be priced in another currency.

    I think gold is used to protect your wealth as in, if you sold it, you’d ALWAYS get something back for it. Whereas for other investments, there will always be a risk of getting nothing back.

    remember – gold doesnt yeild any income and the only way to make money is for price appreciation.

    Reply
  12. Prozak,
    And wasn’t it that mass property confiscation by Zim that caused the inflation, by massivley reducing productive output, rather than the issuing of money? I’d have thought that the UK would have more than enough spare capacity at the moment to worry about their deficit causing inflation.

    Norfolk Enchants
    December 7, 2009
    Reply
  13. Glad to see you are going to South Africa. I spend a lot of the year between South Africa and Italy and have a home in South Africa but I don’t think you guys are covering Africa properly.

    I really feel it is the next big story but all the world sees are the negatives and there are plenty of positives. Fortunes will be made here in the next twenty year and it is a little like the old wild west but opportunities abound like nowhere else.

    Reply

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