Too Late to Buy Gold?

By: Adrian Ash | Fri, Jun 27, 2008
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"...Turn up the gloom! Investors will do well merely to preserve wealth from here..."

IT'S HARD TO BE BULLISH on gold when there's so much bad news in the world.

After all, Gold offers a refuge against bad times ahead. Like all good insurance, it's best bought before trouble arrives - not during or after.

And just how much worse can the news get from here?

  1. The Dow's on tracks to close out its worst June since the Great Depression, down almost 10% for the month;
  2. GM's stock is trading at a 54-year low, taking it right back to when CEO Charles Wilson declared "what was good for the country was good for General Motors and vice versa";
  3. US Dollars - the bedrock of world forex reserves - now buy one-third less against the rest of the world's money compared with 2002;
  4. The price of crude oil has risen more than five times over since US and UK troops liberated the oil fields of Iraq in 2003;
  5. Libya is threatening to cut its oil production in protest at US anti-terrorism laws; Tehran just pulled $75bn worth of investments from Europe to avoid sanctions against Iran's nuclear program;
  6. Global inflation has risen from 3% last June to more than 5.2% per year today; analysts at Barclays Capital believe US inflation will hit 5.5% by August;
  7. Real estate prices have turned sharply lower in the US (down 15% year-on-year), Ireland (down 13%) and the UK (down 3.6%) as well as in Spain, Australia, South Africa and the emerging economies of east-central Europe. Price in Riga, Latvia dumped 38% in the year to May;
  8. Western consumer confidence has sunk to multi-year lows; emerging-market consumers face the worst rates of inflation in more than two decades, rising 25% year-on-year in Vietnam and more than 13% in India; surging fuel and food prices have sparked protests and riots in Asia and now unionized strikes across Europe.
  9. Investment and lending banks are being forced to take back "securitized" debt onto their balance sheets, destroying their capital adequacy ratios and halting new lending as pension & insurance funds try to flee risk. In the UK alone, new lending fell 95% in May after allowing for such "de-securitization";

Watch out below! It's every man for himself - women and children included! Or so the financial pundits now claim.

Makes you wonder where they've been during the bull market in Gold starting in 2001. But with inflation surging and new credit shrinking, "we're in a nasty environment," said Tim Bond, head equity strategist at Barclays bank in London, this week.

Above all, "there is an inflation shock underway," he said in Barclays' latest Global Outlook. "This is going to be very negative for financial assets. [So] we are going into tortoise mood and are retreating into our shell.

"Investors will do well if they can preserve their wealth." And investors who choose to Buy Gold are usually looking to achieve just that.

Indestructible, un-inflatable, and instantly priced in the world's only true globalized market, gold bullion stands apart from all of those boom-time investments. Stocks, bonds, securitized debt, real estate...you can keep 'em when the end of the world strikes.

These happy assets promise to pay you income. They also rise in value as the economy grows. Whereas gold, in sharp contrast, just sits there - neither smiling nor frowning, and never paying an income. Its value comes from, well, from its gold-ness alone.

And as the spike above $1,000 an ounce showed in mid-March - just as Bear Stearns collapsed - you need the end of the world to make Buying Gold worthwhile.

Right?

Well, perhaps not.

Because the value put upon gold - as BullionVault has noted all-too often before - should also be expected to benefit from sub-zero real rates of interest. War and terror be damned! The only sure push that gold prices need is low interest rates colliding with rising inflation.

And right now the world's got that in spades.

"Figure 8," notes Michael Lewis of Deutsche Bank in a recent paper for the London Bullion Market Association (LBMA), "illustrates the strong performance in gold returns as US real interest rates decline. We find that when real interest rates in the US move below -3%, gold returns have tended to be significant."

Listen up at the back! Because the Federal Reserve's key interest rates stands at just 2.0%, scarcely half the rate of US consumer-price inflation. And with a real return paid to cash of minus 200-basis points, you really should doubt the Fed's true intent towards the value of money from here.

Even with the Euro trading above $1.57 on the foreign exchange markets, however - and even with the European Central Bank (ECB) promising to raise interest rates to defeat inflation next week - the Eurozone's 320 million consumers are also suffering a 12-year record rate of wealth destruction. Here in the United Kingdom, after inflation and tax since the middle of 2003, the real returns paid to cash savings have stuck right on zero since mid-2003.

The fast-growing economy of India, meantime, offers negative real interest rates of 3% and worse. Taiwan's real interest rates sit slap bang on zero after a rate-hike this week. And Chinese cash savers are way under water with inflation running at 7%.

Any wonder that "the number of credit cards in circulation jumped 93% in the year ending March 31 to 104.7 million," as the Asia Times quotes the People's Bank of China this week...? Central banks everywhere want you to spend money, not save it, forcing the issue by destroying the value of money itself.

So any wonder that the world bid for Gold - a tangible asset that can't be inflated and can't be destroyed - just keeps rising higher...? "The purpose of money is to be a store of value," said Dr. Marc Faber - the infamous fund manager behind the Gloom, Boom & Doom letter - to CNBC today.

(He kept laughing for some reason. No doubt he's long gold...)

"When interest rates are negative, it destroys the wealth of honest depositors who have their money in the bank and don't want to speculate," Faber went on. "Now what people should do, basically, is to Invest in Gold. Because when it comes to action, the Fed show no concern about inflation...

"The policies pursued by Mr.Bernanke have damaged the American public enormously by pushing commodity prices - specifically food and oil prices - much higher. And so real incomes are going down and discretionary spending is being hurt very badly."

Gold represents wealth, in a word. Just remember that it won't actually grow wealth, because it's not a productive asset. Whatever else you might want from a metal, wealth preservation is the gold buyer's best hope.

And that might prove all investors can ask if the news on inflation and rates, stocks, bonds and jobs, doesn't start getting better.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

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.

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