Big Players Get Physical with Gold

By: John Browne | Wed, Nov 25, 2009
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Over past years, we at Euro Pacific have taken an increasingly jaundiced view of paper currencies and written repeatedly about gold as an alternative. Along the way, we have urged investors to consider both the security and physical accessibility of their gold investments, and have advocated for at least some holdings to be in physical form. There are those who may have felt our views were overly cautious, even alarmist. Now, however, it is increasingly clear that major investors, including even central banks, are following our advice. Meanwhile, we continue to set the curve by calling for an even greater share of investors' portfolios to be in physical bullion or secure equivalents.

Despite the trials Western economies have already experienced, worse economic times still lie ahead. The current administration appears unable to accept the pain of deleveraging and has instead set upon a course of limitless public-sector spending, financed by increased taxation, deficits, and the covert debasement of the U.S. dollar. Obama's acolytes haven't acknowledged the threat that their policies could cause the dollar to lose its privileged position as the world's reserve currency, which would devastate the relative value of the U.S. dollar and many paper investments denominated in dollars, including Treasuries. Indeed, it would likely trigger a second financial collapse, this time with accompanying hyperinflation.

To protect their wealth from inflation and financial panic, big players like hedge funds, sovereign wealth funds, and central banks are turning not just to gold, but to physical gold.

Many investors are demanding and prepared to pay for physical delivery. This indicates an intention to remain invested for a significant period of time, removing considerable selling pressure from the market. More concerning, the willingness to finance physical delivery and storage indicates a fundamental decline in the credibility of paper contracts.

For centuries, gold has been the bane of profligate governments. For decades, Western governments, led by the U.S., have sought to demonetize the 'embarrassing' metal. Most recently, the U.S. led other central banks into the secretive Central Bank Gold Agreements (CBGA). These were designed to coordinate, through the IMF, the sale of some 500 metric tonnes of central bank gold into the market each year. The covert aim has been to make gold less attractive by concealing its appreciation and, simultaneously, create maximum price volatility to destroy gold's legitimacy as a monetary instrument.

Since 1980, when gold reached $850 a fine ounce (or some $2,330 in today's debased dollars), the CBGA has been successful at disparaging gold investment. To this day, most Wall Street commentators reflexively opine against gold whenever the conversation turns to it. Displaying staggering ignorance or bias, they cite the lack of interest paid on gold and its storage costs. They ignore completely gold's total return, through capital gain, which is up by over 100 percent in the past five years.

In keeping with the CBGA, it has long been considered taboo for major central banks to be seen buying gold. But the pacts are losing their grip.

China, now the world's largest gold producer, has quietly increased its gold holdings by some 75 percent in just 7 years, while remaining a 'loyal' CBGA player. Cleverly, she has sidestepped the unwritten CBGA non-purchase rule by quietly diverting part of her domestic production into the central bank's vaults before it enters the global marketplace.

Publicly, China has led international calls for the replacement of the U.S. dollar as the privileged reserve currency by a basket of currencies and gold.

Unable to tolerate the continued debasement of their dollar reserves, other developing countries are now taking defensive moves. Earlier this month, India bought 200 metric tons of gold from the IMF at market rates, increasing its reserves by 50%. Then, just today, Russia announced that it will be shifting reserve ratios in favor of commodity currencies, like the Canadian dollar, and gold.

Far more distressing than the flight of central banks from the paper dollar are recent reports that certain governments, including Germany, Hong Kong, and members of OPEC, are now removing their gold holdings from the Federal Reserve and the Bank of England. If true, these reports could portend the risk of a gold run on the world's two key central banks.

The actions of foreign central banks expose the most confidential views of their top government officials concerning the outlook for the U.S. dollar and the possibility of renewed panic throughout the global financial system.

Once again, I will go on record as saying that counterparty risk is rising, and the safest metal investment is either to take physical delivery or hold title to actual bullion in a stable country. Euro Pacific has long offered the Perth Mint Certificate Program for investors that don't want the cost and risk associated with keeping gold 'under the mattress.' By holding title to gold in Australia instead of America, investors get better legal standing than with an ETF and the added comfort that the regime securing their holdings has among the world's longest track records of stability and brightest growth outlooks for the next decade.

I hope - as we all do - that we are being 'too cautious.' But most investors are erring on the side of caution after witnessing half of their wealth disappear overnight. The problem is that investments traditionally considered safe might not be so, as the very assumptions built up over the last thirty years have been upended. During the October '08 crash, many fled into Treasuries and cash. All signs indicate that, in the case of another crash, a repeat of that behavior could wipe out much of our middle class. Those of us who still have doubts about this stimulus-laden 'recovery' are hedging our bets with history's ultimate hedge - gold you can hold.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

More importantly, don't let the great deals pass you by. Get an inside view of Peter's playbook with his new Special Report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years." Click here to dowload the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.

 


 

John Browne

Author: John Browne

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne

John Browne is the Senior Economic Consultant for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

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