Posts Tagged ‘Gold’


It was November 2012 when Jens Weidmann, President of the Bundesbank, likened quantitative easing, or QE, to a Faustian pact with the devil.  But it was even earlier, back in 2010, when Brazil’s finance minister talked about currency wars.

It was during that era that QE was seen as leading a kind of race to the bottom, as countries fell over themselves to try and achieve a cheaper currency.  It didn’t work out like that, of course. It is no more possible for every country to have a cheaper currency then it is for every Premiership football team to win on the same day.

The critics of QE were legion. They said QE was behind currency wars, and that the inevitable result would be hyperinflation. And they saw the words of Jens Weidmann as a kind of official endorsement of that view.

It was in this environment that the buy gold bandwagon got moving. BUY GOLD, they said. It was the only safe refuge in a world gone mad under QE.

They overlooked that across the world there was a chronic shortage of demand, a savings glut and that the west was suffering from a balance sheet recession.

There are lots of things wrong with QE, the main critique might be that it is a blunt weapon. But it was never likely to lead to hyperinflation, not in a world starved of demand.

But what it did do was lead to a cheaper dollar. And when the dollar fell, so gold rose.

Back in 1999, when UK chancellor Gordon Brown sold the UK government’s gold supply, the yellow metal was trading at less than $300 an ounce. In the summer of 2009 it was trading at just shy of $900. Those two years stood either end of the great gold market, when it rose in value by around 300 per cent.

Gold continued to rise in the aftermath of the crisis of 2008. In September 2009 it was trading at $1,000 and in August 2011 it finally passed $1,900. That was when the gold hype was at its peak.

But in 2015, currency wars has turned to currency normality and inflation stands at close to zero across the developed world. QE didn’t create hyperinflation, it was not even enough to fight the threat of deflation.

In 2015 the US economy began to improve, the Fed made noises about increasing interest rates, the dollar rose, the euro fell, and gold went out of fashion.

As of this moment (21 July 2015) it is trading at $1,108 an ounce.

Why didn’t gold rise above $2,000, or even $3,000 as was once predicted? The reason is simple. QE was the not the devil’s tool it was made out to be, the global economy suffered from lack of demand.  The risk of hyperinflation was built upon a myth.

The recent falls in the price of gold have been a puzzle; contradictory forces are at work.

The main trigger for recent falls has been talk that Cyprus is set to sell gold holdings. Yet the rationale behind Cyprus’s move is that it is virtually bust, and usually when countries go nearly bust, gold rises in price. A number of media reports has suggested that even money in our banks accounts is no longer safe, and that governments across the world are effectively insolvent. These are usually seen as reasons to buy gold.

Maybe the truth is that markets don’t believe all those predictions of doom. QE is usually associated with gold rising in price, but if markets think Japan’s QE will lift its economy, then that may be a reason to sell gold.

This article is really worth a read: 12 Rules of Goldbuggery  It’s a touch ironic. The bottom line, if you want the précis, is that gold bugs, as they call out-and-out fans of buying gold, are not totally rational . If gold falls in price they say it is because of market manipulation. Indeed they say if the markets were left to themselves gold would only ever rise. And they add that it is inevitable that the world will return to the gold standard.

Here is a thought about all this so-called goldbuggery. If the world did return to the gold standard, the global economy would soon afterwards descend into depression from which it would not exit until the gold standard was ditched. It is not true that inflation does not occur when the gold standard is in place. And it makes no sense to limit the money supply to the stock of gold, which is totally unrelated to innovation and economic potential. A return to the gold standard would kill innovation, crush change, and protect the status quo, making it easier for the rich to stay rich and harder for the poor to gain wealth.

Finally, Warren Buffet had something good to say about gold. “What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” or so said the wise man of investing last year. He added: “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”

He also once said: “If you put your money into gold or other non-income- producing assets that are dependent on what someone else values that in the future, you’re in speculation…You’re not into investing.”

©2013 Investment and Business News.

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There is something very contradictory about the fall seen in gold over the last few days.

As of Friday, gold was down 22 per cent from its highs set in the autumn of 2011, when it passed $1,999 a troy ounce. That was the worst bear run since the early 1980s.

Yesterday gold fell 9.2 per cent, suffering its biggest one day fall since the early 1980s. At the time of writing, the pretty yellow metal is trading at $1361 a troy ounce, and is now 29 per cent off its 2011 peak.

The contradictions are many, however.

Markets have often bought gold when QE is increased. Yet in Japan, QE is being launched that will make previous programmes look like a warm–up. The markets are celebrating and in the process selling gold for a complex reason. The economy is not so good, therefore QE will be increased, and therefore the economy will improve, ergo buy gold.

Except the markets did not celebrate at all yesterday, and the Dow lost 265 points. Gold is usually seen as a contrary asset. Buy gold in times of peril. It is unusual for gold and stock markets to fall in tandem.

One explanation is that stock markets fell for transitory reasons, gold for more fundamental reasons.

Yet consider Cyprus. It is selling gold, and that has helped push down the price. But why is it selling gold? Answer: because the government is all but bust. Governments not having any money is usually seen as a reason to buy gold.

The last few days has seen worrisome news on the economy. Bad news on the US, and bad news on China have compounded fears over the European economy. Yet gold has fallen too. See: Has US economy hit a spring time wobble, or something more serious?  and China sees growth disappoint as India sees some promise 

In part gold has fallen as other commodities dropped. Brent crude oil, for example, fell to a nine month low this morning.
Capital Economics said: “None of the fundamental explanations being discussed for the slump in gold prices really holds up.”

Unless that is the explanation lies with inflation. Despite all that QE, and despite warnings of hyperinflation, right now global inflationary pressures are very modest. Maybe the penny has dropped. QE, at a time when banks don’t want to lend, is not likely to lead to significant inflation. That may explain falls in gold.

But here is another reason: gold’s allure is purely psychological. It does well because people expect it do well. It does badly because people expect it to do badly.

Impressions matter more than fundamentals. On the BBC this morning, David Buik called gold trading a spiv’s market. It rose a few years ago, because the global banking sector went into meltdown, and some feared a kind of race to the bottom in currency markets, and hyperinflation to be the result. Many of those fears now look hysterical. The mood has changed. Gold does not glisten like it did. And when investors think gold has lost its sparkle, it will fall regardless of what fundamentals say.

©2013 Investment and Business News.

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Do you remember when Gordon Brown sold much of the UK’s gold reserves? Not a good move that, since the yellow metal soared in price soon afterwards.

Then again, back then gold was not fashionable. Keynes called it a barbarous relic, and for a while during the noughties, that description seemed about right. Could Brown have known how much things were going to change?

They did change, and gold became many investors’ best friend.

The thing about gold is psychology. You can’t do much with it, other than look pretty when you wear it – although it is a good semi-conductor. But because of gold’s history, and its presence in our psyche, it is seen as safe, really safe, safer than houses, as safe in fact as gold.

But the yellow metal has not being doing as well of late. Back in the summer of 2011 it was trading at about $1,900 a troy ounce, now it is down to around $1,560.

Maybe it is not so safe.

In recent years, the price of gold has been correlated with expectations of US QE. It was seen as a hedge against the dollar as much as anything. The Fed is not so QE friendly these days. The latest minutes revealed that many Fed members felt QE needs to slow down.

But consider this point of view. If gold can’t do much, in times of really big trouble when we need money, why hold on to it?

The combination of austerity, lack of QE and sovereign debts in the Eurozone is combining to tempt many countries to sell their gold.

Cyprus is selling 400 million euros worth. It needs the cash, for obvious reasons. For almost as obvious reasons, it may have timed the sell-off perfectly.

Will other countries follow suit? Is gold going back to being a barbarous relic?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here