Another Precious Week in the Market

Last week I tried to explain the theory that gold wasn’t actually that high, the dollar was just weak.  So as to stop the hate mail, chair throwing, death threats and broken windows (how did you find my address?) I’d like to point out that this is not a reason for not holding gold.

In fact, it is one of the three reasons for holding gold. It is still not really that expensive, its just that paper money is getting progressively cheaper – as any trip to the supermarket or the gas pump will confirm.  The reason is that it’s still a minority taste, and if this is a bubble you’re safe to buy until the shoe shine boy is talking about it.  If you can’t find a shoe shine boy look for a project manager – when they start talking about gold coins then maybe it’s time to short gold.  The third reason is the optional one that we’re all doomed.  But we’ve been all doomed for the last forty years, so just concentrate on the first two.

And gold has done OK this week.  Ben Bernanke has talked about more easing and gold went up.  Towards the end of the week it dipped down again.  One of the interesting things is that the idea of currency wars has come into the open, where the large currencies all play beggar thy neighbor.  There has been no evidence of central government selling of gold.

However, gold is relatively subdued compared to silver.  Due to Nelson Bunker Hunt, it will be a long time before we can say “record highs”, but although second best may not sound so great these “30 year highs” are a big deal due to the fact that this is not some mad Texan billionaire with too much oil money.  These are diverse consumers worried about inflation.

Let’s put this in another way, silver has risen by 45.8% in dollar terms from the start of the year.  One thing that has been noticeable with silver this week has been the amount of articles from places like the Motley Fool.  Could be the chance to take a breather?  Silver has been priced weakly compared to gold in the last couple of years, but 9% in a week is looking essentially unsustainable.

Another Precious Week in the Market

I know we’re among friends here and I know that saying that Gold isn’t going up is not only just short of insulting a person’s religion, and at the same time it’s pointing at the price just below this paragraph and saying that black is white.  Well, you’re thinking, good luck crossing the road with that attitude.

But here’s the thing, gold is going up in dollar terms.  And what’s the dollar been doing?  Weakening.  That’s right.  Gold is going up in relation to a weakening dollar.  A lot of things are doing that.  The price of cotton is going up against the weakening dollar.

So Kitco decided to do introduce an index which looked at a “weighted basket of currencies”.  Now there’s probably a lot wrong with their methodology (the prime point I’ll come to later) but the basic story is something that should make you sit up.  Their gold index has a 30 day graph and you see the price of gold going up against the dollar and marginally falling, yes falling, against the weighted basket of currencies.

It’s different over longer periods, where they basically follow the same direction, and this is a bit of an aberration.  But the aberration is what really matters.  The gold story in the last month, including its new records (which were reached this week) is really a dollar record.

But there’s still the killer flaw, and that is that the gold price is still being measured in comparison to fiat currencies.  And fiat currencies are being printed like there’s no tomorrow.  Competitive devaluation they call it in the fever swamps.

In the real world of precious metal, where you can’t simply print more of it, silver is the real winner.  Again.  Some of this is a catch up on gold, but a lot of it is because silver is seen as a clearer anti inflation play than gold at the moment – as all the wedding jewelery and end of the world types are creating so much white noise on the gold price.

One interesting fact about who’s selling gold is the gold mining companies are not selling gold.  Now that may sound like the second (really) stupid thing I’ve said in one post, but this is what’s happening.  One of the biggest gold miners, AngloGold Ashanti, has “eliminated its hedge book“.  Now this is the fact that they used to sell some of their gold in advance, before it came out of the ground.  This would go on to the futures market and Anglo would get the money, minus the pseudo-interest, early.  It kept them stable and less exposed to the turbulence of the spot markets.

Now Anglo’s going all-in.  No more future selling (which in itself meant a temporary shortage on the market as there’s less future gold being sold) and full exposure to the gold price.

Governments and Central Banks are being very quiet at the moment.  But Vietnam has started to allow some importing of gold, just in time for the wedding season.  In itself it will be a pinprick, but it’s a timely reminder of one vital support over the next few months.

Another Precious Week in the Market

I know that this may be a bit of a shock for a few of you, but large governments aren’t concerned about inflation.  They are so scared that any move to seriously cut down inflation will kill their economies stone dead that inflation is allowed to run wild.

The Euro may be gaining on the dollar, but that’s not the real story.  The Euro and the Dollar are a see-saw at the moment, when one starts climbing against the other, then the other will start to panic and tell the market that they are a really bad buy and go down again.  The other large currencies are also playing around.  A governor of the Bank of England has told savers to do their patriotic duty and spend their savings, while the Japanese are selling off Yen to stop the currency climbing.

But this is all a sideshow.  Competitive devaluation just means that more paper gets printed.  Sure, it has different colors and pictures, but it is still paper.  It’s the barbarous relics of precious metals where the real action is.

And gold hit another dollar record, or we should say that the dollar hit another all time gold low, on Friday.  The interference that is happening with the comparative currency values is obscuring the fact that we are going through a general inflation, and when there’s inflation then it seems like the price of gold and silver rise, because the value of the dollar as it is objectively measured is falling.  This in turn means that people want gold in order to protect their wealth and the actual price of gold starts rising.  We’re nowhere near that stage yet.  After all, how many of your work colleagues hold gold?

There’s not been much to go on with the central banks, apart from a move by Iran to sell off gold to support their currency.  The Europeans seem to have also hit a temporary halt, according to the “Central Bank Gold Agreement”, something we’ll come to at another time.

Gold may not have been on the main street radar in the same way as buying rental property was, but it has been on many investors for a while.  Silver has been rather neglected.  But silver is starting to gather steam.  It’s ratio to the gold price has gone below 60 for the first time in the last year.  It is starting to hit thirty year highs, when that mad Texan billionaire Bunker Hunt almost cornered the silver market. It’s still less than half of that crazy price ($48.70).

And platinum and palladium are also joining this devaluation party, with palladium going to a two and a half year peak, having risen 45% since May.  These are seen as great catalytic converters, and the China market is often quoted, but in the end it looks like gold and, increasingly, silver are pulling the prices of these metals up.

Another Precious Week in the Market

Gold is breaking records ($1298) and silver has set a thirty year high ($21.35), in dollar terms at least, and we’re all on tenterhooks – or perhaps we shouldn’t be.  Precious metals will be around long after their latest price spike, and it’s all about storing value.

The main thing that’s been driving the gold and silver price recently has been the weak dollar.  You may not think that, but all the currencies are currently in a competitive printing championship.  The Federal Reserve, the Bank of Japan, and the Bank of England are all talking about more money printing to stave off (more) recession while the European Central Bank is making similar noises if you could hear them over the screeching of Portugal and Ireland, although the Euro has done quite well, in comparison.

There’s no new gold selling action from governments, yet.  The governments shot their bolt somewhat in the early part of the decade, but they still do have some gold that could seriously depress the market.  However at the moment a gold sale looks like it’s not on the cards. Governments are desperately trying not to increase the value of their currencies.

The action is in the buying.  Not so much governments.  Recent buyers like Russia, China and India are keeping quiet at the moment, but in Asia the wedding season is coming.  And that means retail buying of gold.  There’s usually an uptick in the gold price around now.  Despite what we’ve all seen with the floods in Pakistan the monsoon’s actually been good for most of the Indian sub-continent and the Chinese economy is still powering ahead, so there will still be sales.  Even George Soros is talking about buying gold, as is John Paulson.

There’s something more sinister.  Congress is talking about legislation to “protect” precious metals investors.  Like in 1933 when all the gold, apart from some collectible coins, was taken out of the hands of private investors?  We’ll have to keep an eye on that.

As for silver, this is a far straighter inflation hedge than gold – which also thrives on political instability.  At this price it’s likely that less than the often quoted 50% is used in industrial production.  It pays to remember that silver has gone up 27% since the start of the year, so it may be the Cinderella metal, but we all know what happened to her.

Platinum ($1645) and Palladium ($562) are, like silver, also climbing up due to the combination of industrial demand and inflation worries.