Uh oh. What’s this? Armed robbers have stolen 100kg of gold from an Australian-owned gold mine in Tanzania. That’s about $4.4 million in gold. Resolute Mining (ASX:RSG) says the robbers overpowered its guards at the mine about 750km from the capital of Dar es Salaam.
Notice they didn’t rob a bank, at least not in the conventional sense. Besides, there’s no point in robbing a normal bank if the government is going to systematically ruin the money anyway.
Speaking of gold, the U.S. gold price jumped up $14.10 to trade back over $900 again. It was the first time old yeller metal has traded there in three weeks. The World Gold Council reported that inflows of gold into exchange traded funds were 456 tonnes for the first quarter of the year. That compared to 321 tonnes for all of last year.
ETF demand for gold is definitely one of the short-term drivers of the gold price. Gold is far more investable to retail and institutional investors than it was five years ago. Of course owning shares in a gold ETF is not the same thing as owning gold bullion or gold coins. But as a driver of the gold price, there’s no doubt investment demand is a big contributing factor.
Of course the big question for Aussie investors is what the Aussie gold price is doing. It bounced of $1,200 on April 17th and is up about $60 since then. That’s down from the 52-week high above $1,500. But the question we hear most often is what happens to the Aussie gold price if the U.S. dollar weakens and the Aussie dollar strengthens?
The simplest argument we can make is that the Aussie gold price is going to be driven primarily by the bull market in gold and not weakness in the Aussie dollar. It can get confusing. But the thing to remember-whether you agree with it or not is another question-is that we’re forecasting competitive devaluations in global currencies. This is bullish for gold in any currency.
Here in Australia, it’s true the government has a good credit rating and that it’s begun its borrowing binge from a position of relative fiscal strength. But we have a hard time imagining that recurring fiscal deficits and more stimulus plans are bullish for the Aussie dollar.
What would be bullish for the Aussie dollar-and thus negative for the Aussie gold price-is a rebound in the Aussie economy or a big increase in Aussie interest rates that attracted foreign capital back to Australia. We don’t expect either of those things to happen, given how stingy capital flows seem to be getting. But if either of both happened, it would cap the rise in gold in Aussie dollar terms.
Mostly we would tell readers that the month to month variations in the gold price have no real bearing on our long-term forecast. If you think the current financial system is a lot less stable than it appears, you should have some portion of your assets in gold bullions or coins. Gold shares give you leverage on the rising gold price.
Mind you, gold is not a fail-safe investment. The deflationists argue that the collapse of the credit bubble cannot be prevented by fiscal stimulus or monetary excess. The argue that as trillions in credit and phony money drain from the global economy, all asset prices (including gold) will fall lower. They could be right.
As we’ve said time and again, the time-tested preferences for governments is to inflate their way out of debts. This has always been for gold. It will be again. But remember, gold is a way to store and preserve your wealth until you can convert into something that’s an actual medium of exchange.
It’s possible, of course, that people will begin using gold and silver as a medium of exchange for large transactions. But for smaller ones? Who knows? In post-Soviet Russia, vodka and petrol became a kind of currency. You could barter with them to get what you needed.
The point is that what people have used as a day-to-day medium of exchange has changed all over the world over time, depending on the benefits of that medium (liquid, stable, convenient, storable, non-counterfeitable.) What’s also true is that ownership of physical gold has been one way to store a portion of your abstract wealth in tangible form until you convert it into something else or trade for goods and services.
If you think it’s crazy or impossible we’ll ever get to a world where people have more confidence in the gold in their safe instead of money in the bank, fair enough. But just remember, this whole experiment with fiat money is not even one hundred years old. Just because it’s all we’re used to doesn’t negate that for 5,000 years of human history, people have been using gold as money.
Are you ready for today’s instalment of tortured English? Good. Here we go! The Prime Minister (Kevin Rudd) said yesterday , “The first home owner’s boost, as you know, we have indicated that will conclude within a very fixed and finite time frame…It’s had strong, useful results so far, but I have got to say all good things must come to an end.”
Can time frames ever be anything but finite?
In any event, the Prime Minister didn’t exactly, in a fixed and finite way, say that the FHB grant would be extended beyond its June 30th expiration date. If you were the suspicious or sceptical sort, you might think the PM is doing his best to “bring forward” even more future housing demand now. There’s nothing like a vague warning that this deal can’t lest to push those young fence sitters out of the rental market and into debt.
Or maybe the PM is having night terrors about a whole new generation of “homeowners” who lose their jobs and then lose their homes as interest rates rise from their historic lows. Then he’d have a whole heap of angry voters wondering why they got suckered into the housing market right at the top just so the PM could look like he was doing something to make homes more affordable (when he was really just throwing a bone to the construction and real estate industries and propping up prices for investors.)
How will it all end? A prediction: RuddBank will end up buying these FHB mortgages from the banks over the next few years. The government will directly negotiate mortgage payment moratoriums and foreclosure prevent programs to keep people in houses they simply can’t afford at these levels. Just a guess…
How about some reader mail?
One topic that is bothering my mind, we always hear about debt and how much each of the country has to borrow to pay for the Stimulus, deficit budget etc., Who is going to lend us (or leave it to the banks to worry about it) ? China may be the only country in the world that has some reserves. Or, are the countries going to print more money and lend it to each other hoping that the future earnings will be able to offset it. When 90% of the countries are in recession, how will this work?
–It won’t work well. The creditors will be calling the shots.
Setting up an online forum for DR Australia readers would result in some excellent content. There isn’t a good libertarian forum in Australia that I’m aware of, and judging by the responses to your “send me your plans” request in today’s newsletter there are people wanting to be heard, and people who want to hear what they have to say!
–David, check out www.dailyreckoning.com.au. There is a lively comments section there. We tried a message board last year. It got hammered by Russian spam and porn.
–“You guys would have some credibility if DR wasn’t also a well designed sales channel.
Does it ever even occur to you that you could be wrong, like completely? I’ve read as much as I can assimilate and I see your point of view but I can also see ways that this (GFC) can be changed. I suspect you have a vested interest in this not being the case.
Can you live with being wrong because you, in part, have the ‘wrong’ motivations?
–The ‘wrong motivations?’ Please explain. It sounds like you’re suggesting we have a secret agenda that is uniquely designed to profit from global financial apocalypse, and are speeding the world along to that very result with our daily missives.
Sorry to disappoint you, but we have not used subscription revenue from out two newsletters to build a bomb-shelter here at the Old Hat Factory and stockpile it with jars of canned green beans and powdered milk. And really, if you are sceptical of our motives, then our four hours of daily work is probably not worth your time.
But for the record, we’ll explain exactly what our motivations are…we’re in business to make money. We do that by writing free daily e-mails here (this and Money Morning) in which present our best ideas each day and give you a viewpoint on the markets that you don’t get elsewhere. If you like it and the ideas good or valuable, we hope that at some point you’ll buy one of our investment newsletters in which we lay out the actual strategies and share tips we think will work if we’re right about the market.
Of course we could be wrong. It’s happened before. It’s going to happen again. But we’re not cheer-leading for a collapse in the global economy because it would be good for the gold shares we’ve tipped in Diggers and Drillers or good for our business. Exactly how many people do you think would be buying financial newsletters if the global economy enters the kind of Depression we’ve been talking about?
It always amazes me when people question our motives. Of course we’re in business to make money. We’d be stupid otherwise. But at least in this business, our interests are completely aligned with yours. It’s completely transparent. You read the free e-letter. If you find something valuable, you buy the newsletter. If the tips do well and you like the ideas, you keep it. If not, you don’t.
There are no management fees or transaction fees. We’re completely at the mercy of subscription income revenue, which means we’re completely accountable to our customers (not shareholders or advertisers). This is just the way we like it, of course. It gives us the freedom to publish analysis and criticism or investment ideas that we could never publish working for a mainstream paper or and stock broker.
That’s what’s great about this relationship. We get to do what we love full time, which is find investment ideas and analyse financial markets. And if you benefit from that work, then we both make money (or these days, avoid losing it). Our only vested interest is making sure that we do what we say we’re going to do each day: tell you what we think and why we think it, even if you think it’s crazy!
for The Daily Reckoning Australia