Is Gold a Disappointing 'Safe Haven'?
What is a "Safe-Haven"?
It should be defined as a long-term investment that holds its value internationally, in extreme financial times. Is gold one of these? After all, it has fallen from $1,921 at its peak to $1,344 at its trough. This is a 30% fall over the last year plus. At one time George Soros described gold as the "Ultimate Safe-Haven", before saying it was a "disappointing Safe-Haven". Alan Greenspan described gold as being "money in extremis."
The SPDR gold ETF
In the "Bear Raid" we have seen over the last fortnight when gold was smashed down $200 after declining $100 before that, the physical gold sales came almost exclusively from the SPDR gold ETF before being accompanied by a massive 400 tonne gold short on COMEX. In addition, two large U.S. banks, Goldman Sachs and Merrill Lynch appeared to act 'in concert' to ensure the raid was successful.
Until this year the holding of the gold ETFs did not move except slightly as its shareholders were long-term investors not traders in the gold price for profit. They hold gold for wealth protection in the long-term.
By long-term we mean just that. In India for instance gold is passed down from mother to daughter through the generations. There, gold is used as collateral for loans and usually not sold. Some sell when the price is what they consider too high, but sold with the intention of buying back on a price retreat.
Serious gold investors take their savings and financial successes and put them in gold to weather the storms we have seen over the last century. Europe in particular has done this and survived two World Wars and two currency collapses, so far in the last century, provided they held their gold in Switzerland.
These long-term gold holders agree with Alan Greenspan that gold is held for extreme days.
But into the SPDR gold ETF came traders who wanted to hold gold until the price rose, so they could make a 'profit'. Hedge funds and names like George Soros were among these. The very nature of their investment attitude was different from those we have just discussed. When they bought gold it was in the expectation of a currency crisis in the dollar. If they had bought it as a "Safe-Haven" they would not have sold. It was bought as a short to medium term hedge against a dollar collapse. This did not come.
The Dollar Collapse Didn't Come
Because the dollar has not collapsed has in no way discredited gold as a "Safe Haven". It remains one.
We must point out that if a dollar collapse had come, gold would have acted as a "Safe-Haven" and retained its international value and risen in the dollar. Because it did not come, gold did not fail as a "Safe-Haven" because it was not tested as one. What has happened is a successful "Bear Raid" which gave such investors the profit they wanted.
You may well reply, "but the fall in the gold price of late defeated it as a Safe-Haven." Not so! Take a look at the seventies performance of the gold price and right through to the year 2000.
Gold through the Last 45 Years
Between 1968 and 1980, gold rose from $35 an ounce in 1968 to $195 an ounce on December 27, 1974, only to fall back violently to $103.50 an ounce on August 25, 1976.
This represented a 43.4% drop in price during this period. Twenty months of price declines were too much for most gold investors, and many exited vowing never to return. Then it reversed and continued to climb right up to $850 over the next three years. Then the U.S. in conjunction with developed world central banks mounted an attack on the gold price through an acceleration of the production of gold, by financing mining operations with leased bullion and threatening the market with gold sales. Then the venerable Mr. George Brown established the "Brown Bottom" in the gold price at $275, just before its 10-year rise through to $1,921. Now take the long view from the date it was $35 at the end of the sixties. Even now at $1,400 it has risen 40 times in 42 years. I would call that a "Safe-Haven"!
Two features are worthy of note when considering whether gold will fail to hold its price, long-term:
Firstly, even if they wanted to accelerate gold production, it can't happen again because the easily-mined gold resources are used up.
Secondly, inflation in the mining industry has pushed the price at which it is profitable to mine gold on average on a third of world gold mines to over $1,100 (allowing for a small profit only). So if prices were to fall lower than the bottom of $1,344 a substantial proportion of the world's gold mines would become unprofitable and would be closed. This would reduce supply considerably. Figures of a drop of 900 tonnes to 1,900 tonnes are possible.
Forty percent of the world's gold supply comes from what is termed "scrap sales." This represents around 1,600 tonnes annually. The bulk of this scrap supply ceases when the gold price falls substantially, leaving the market mainly supplied by newly mined gold.
Hence the 'natural' fall in supply to the market would force the gold price back up to well over $1,400 and with central bank demand alone taking the gold price, much, much higher.
Central Banks to Control the Gold Markets
Central banks are now buyers of gold, not sellers. Last year they bought 545 tonnes of gold. We believe that not only Kazakhstan will retain its entire local production for reserves, but suspect that China is doing the same. This removes around 450 tonnes of gold from the newly-mined gold number of currently 2,800 tonnes (when the price was higher) to 2,350 tonnes. This figure is before the cut backs due to lower prices.
What must concern the central banks, which all consider gold as an important reserve asset, is the fact that institutional investors can play around with the gold price like this. It is in their interests to ensure that controls are placed on the buying and selling of gold so that private markets don't play havoc with the gold price this way.
We see this concern as being another reason why Roosevelt had U.S. citizen's gold confiscated in 1933, making gold dealing at all levels illegal and U.S. gold in the sole domain of the Fed.
We believe the confiscation of gold can and probably will happen again when instability hits global foreign exchanges as the Yuan makes its presence felt at the expense of the U.S. dollar. Even now, owning gold is deemed a privilege, not a right, by the U.S. government. As such, an important reserve asset now and more so in the future, gold will become a nationally strategic asset and should be removed from the reach of those who undermine its credibility by ramping its price up and down.
Please note the thinking behind central bank buying. The Chairman of the Kazakhstan when he said, "The three traditional centers of the world economy, the US, Japan, and Europe, are three huge pools of uncertainty, and that the need for diversification is stronger than ever. The central bank locked up domestic supplies of bullion in 2012 and plans to buy all gold mined in the country this year, or as much as 30 tonnes," Mr. Marchenko said. "As currencies lose value, money must be invested somewhere."
With the Chinese Yuan waiting in the wings of the global currency scene gold is destined to become a "pivotal part" of the global monetary system (see www.gold.org report from the OMFIF). In that role it becomes too important to be the victim of profit-seekers as we have just seen. In that environment, we would expect to see at least one central bank swoop down on the 'bear raiders' and buy all the physical gold they are selling. It would be better if the 'raiders' are prevented from raiding then.
Global Gold Market
As we have mentioned already, the recent sell-off of gold from $1,650 to $1,344 was the result of a well co-ordinated, "bear-raid" by at least two leading U.S. banks and their hedge fund clients driving the gold price down. They were the only sellers in the global markets. By moving quickly and relentlessly against the gold price, they achieved their gold through massive short positions on COMEX (which does not need physical gold to be used) and sufficient physical gold to overwhelm the physical gold market (an 11 tonne a day market) over just a few days. Sales from the SPDR gold ETF supported their attack. These increased as the gold price fell. Then as their price objectives were achieved and signs of buying from other facets of the gold market stirred to life, the selling by the 'raiders' stopped. Selling still persists from the SPDR gold ETF, but we believe will soon stop.
The much slower reacting physical market sprang to life at the sight of the gold price below $1,400. In the developed world and the emerging world, the demand for physical coin and bar leapt as though they were given discounts consistent with Christmas sales.
We have no doubt that the invisible but ever-present central bank gold buyers swooped in too, but this can only be confirmed when their purchases are disclosed at the end of the month.
Thus the attempt to label gold as a 'disappointing Safe Haven' seems only to be given credibility in the U.S. We see that as being so, only momentarily. The rest of the world, as it has for the last 5,000 years continues to believe it is a 'Safe Haven' as shown by their actions in buying gold in all parts of the globe after the 'raid'.
So let's not confuse safe haven with profitable. The safe haven is always there when all else fails. The 'extreme times' that test such have not yet arrived. But history shows they will. Until then, wealth is protected by it in the long-term. The day that gold is tested as a safe haven will be when the monetary system buckles and currency values decay to the point where currencies will be valued by gold and not gold by currencies.
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