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Guest Opinion: Show me the money (gold) so I can be my own Federal Reserve
November 6th, 2009By Damien Smith
Kiwis may be looking on in awe at the rise and fall of the Kiwi dollar and the global stock market re-bound, but spare a little time for the rise of Gold.
Gold as hit a record above US$1,095/oz. It’s back centre stage, re-monetising as the balance of economic power in the global financial system shifts to the East.
Gold has de-coupled from the US dollar and is appreciating against all paper based currencies. The person on the street in New Zealand would probably never look at having Gold (the “hard asset”) in their portfolio for security to add to cash, shares and property. But we are now in an era whereby individuals in the 21st century should be acting as if they are their own Federal Reserve.
The latter half of 2009 has been an exceptional time for those wanting to hedge against the US dollar using Gold. The NZ Mint website has this chart showing the large role the US dollar has – affecting the gold price and the NZ dollar. (The lower line in the chart shows the NZ dollar value of gold, while the upper line in the US$ value of gold).
A real benefit to New Zealanders as they hedge and gain uplift in buying the “hard asset”.
Gold is now poised to target the psychological $1,100 an ounce. Today, across the Eastern world and elsewhere; people are buying gold as their own “reserve asset” to preserve wealth as part of their asset portfolio and to fight inflationary forces.
Gold futures have made a new high. Simply, Gold holds and preserves wealth as nations globally have enacted strategies to devalue their currencies to remain competitive as producing nations. So as we head into 2010; it looks as if Gold is on a march.
India has payed US$6.8 billion for 200 tonnes of IMF gold; a long planned sale by the IMF. The Indians have made their choice/ India’s central bank is now owns 557 tonnes of gold.
That gives it the tenth largest gold holdings among central banks. India & China could double (and then double again) its gold reserves and gold would still make up less than 10% of its total forex reserves. So lots of potential buying still to go.
Michael Lewis, Head of Commodities Research at Deutsche Bank states “India has (prompted) new speculation of pent – up demand for gold diversification for central banks. He goes on; “There is a long list of central banks which have very low gold ratios, and in aggregate central banks should be net buyers of gold over the next year for the first time in 20 years. It’s hard to know what’s going on at the IMF and the Euro central banks; they have a mandate to sell down gold reserves and give the money out as loans to governments.
Experts at the Daily Reckoning in Australia predicted earlier this year, the European central banks would rather hoard their gold than sell it in a rising market. They maintain there may be a price at which they do have to sell it, in order to pay down sovereign debts.
As we enter a period of further stimulus and quantitative easing activities, the spectre of probable sovereign debt crises scenarios will see the definite uplift in the re-monetisation of gold.
Have a look at the asset class and consider it in your asset allocation strategy. Right asset Right timing, perhaps? Be careful about buying Gold at top of the market as crowds and nations purchase at a central bank and household level.
A correction in the Gold price is when to acquire the precious metal.
* Damien Smith is a Company Director & Merchant Banker and heads the House of Smith. He is a gold fan and believes in its role as a wealth preserver.
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November 6th, 2009 at 6:15 pm
Good thing you put that disclosure statement at the end , ‘cos I was picturing you in skimpy gear , and with pom-poms , going ” Gold gold gold , oi oi oi ! ” . Not a pretty sight ! When cold hard reality bites , gold will be seen for the useless ” asset ” that it is . Were it not for the introduction of gold ETF’s , tradeable in the USA , I doubt that it would have ascended these giddy heights so rapidly ……….. When the $US sharply trades up , and it will , you gold bugs are gonna be left bereft !
November 6th, 2009 at 6:53 pm
Roger,
You sound like a rabid paperbug. May I suggest you do some research on a longer historical perspective.
I wonder for example what your view is on the Marginal Productivity of Debt situation for the US.
Re the article,
I’m going to get a reputation. I even have criticism of a “goldbug” article !
First, here’s a chart of all the major currencies plotted against gold since 2003. IMO that gives the clearest picture:
http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Gold_and_Silver_Versus_Major_Curren.jpg
I’m not sure what is meant here by “inflationary”, as that’s an oft miss-used word.
If it is as I think, then I strongly suggest a bigger danger is deflationary forces. And in such a situation, the flight from leverage and risk will result in a flight towards gold, the base of all.
This suggests that gold has not been money. I suggest it has always been money, but simply not as visibly. Perhaps it is more accurate to say that gold is now more prominent in its role, and will become more so as the paper currency bubble becomes ever more precarious and unsustainable.
November 6th, 2009 at 6:55 pm
@ Roger
You think do you. Maybe you should tell that to the governments of India, China and elsewhere.
You take your chances with fiat dollars, and I’ll take mine with physical gold.
November 6th, 2009 at 7:13 pm
Steve : A graph that goes back a whole 6 years ! No gummy bear just yet . I got one that traverses 1781 to 1981 . I think that 200 years tells a deeper story , don’t you ?………..Hmmmmmm , annual appreciation of gold , averaged across those 200 years , 1.58 % ……. Oh , dear . I’ll give you a gummy out of sympathy for your plight !
November 6th, 2009 at 10:08 pm
Roger – you conveniently forget that over those 200yrs, hundreds of fiat currencies ended up in various graveyards. Millions of people have had their life savings wiped out by inflation over that time period – all over the world. I’d rather have a small return on real money (gold), than the chance of a good return on something that has a good probability of being rendered worthless. How many fiat currencies that were around 200yrs ago are still around???
November 6th, 2009 at 11:17 pm
Roger,
Cycles. It’s all about cycles.
You didn’t answer my question about Marginal Productivity of Debt.
Steve
November 6th, 2009 at 11:28 pm
Sorry , gotta go , the 4 y.o. is up and scotty ( lucky for me , ‘cos unlike the great Professor Fekete , the concept of ” marginal productivity of debt ” , eludes me . ) Good night , one and all !
November 7th, 2009 at 7:52 am
RT
I have done very nicely by following Steve’s advice about 18 months ago – well … it’s balanced other losses at least. The writing was on the wall way back then. It’s been the longest eighteen months of my life, I am not fond of roller coaster world we are currently living in.
November 7th, 2009 at 8:10 am
Roger, do you have a link to the chart showing the 200 year price of gold?
November 7th, 2009 at 8:17 am
Roger Thompson Says:
“Steve : A graph that goes back a whole 6 years ! No gummy bear just yet . I got one that traverses 1781 to 1981 . I think that 200 years tells a deeper story , don’t you ?………..Hmmmmmm , ”
Everything that is going to happen is already in history…repeated
RT there is somewhere on the net that does have these numbers, and does go back to at least early 1700s
I also has recessions, boom cycles the early yrs mainly covering Britain and Eur city states…simply because the rest of the world sort didnt really exist till around then
Sry I dont have link…I found it a while back and since then reloaded my machine…I think it was UK based???
November 7th, 2009 at 8:59 am
Roger,
The Marginal Productivity of Debt is quite simple.
Simplified and written quickly:
If you borrow $1000 to invest, and the result is a 10% increase in productivity, you have made a sound investment.
If later on you repeat the process, but this time your productivity increases by 5%, you are still on a winner, but you should start to question the trend.
Later on you repeat, but this time you only get a 1% gain.
At this point you really need to ask what will happen next.
Suppose you borrow $1000 and your productivity reduces!
Borrowing has become a net loss-making process.
That is currently (or imminently) the situation in the US.
Extra debt results in the country becoming poorer.
Antal explains it better than I:
A Critique of the Quantity Theory of Money. Further Evidences of the Onset of Great Depression II by Antal Fekete 15th Apr 2009
http://www.neuralnetwriter.cylo42.com/node/2307
====
You may be thinking of this one:
http://www.measuringworth.org/gold/
November 7th, 2009 at 9:39 am
POG went over $1100 last night .. looks like it hit $1102…
November 7th, 2009 at 9:41 am
We Are Stuffed : Sorry , I am not computer literate enough to do ” links “. The graph I am looking at is on page 131 of ” The Wall Street Waltz ” ( 1987 ) by Ken Fisher . Title page to graph : Long-Term Gold Holders Get the Cold Shoulder.
November 7th, 2009 at 4:37 pm
It’s interesting to note that our Reserve Bank has ZERO reserves of gold. A “young” country with a “young” and inexperienced mind I fear…
November 7th, 2009 at 4:46 pm
Interesting book Roger, thanks.
I’ve made a note of it. It’s got a lot of charts in it.
I also have a lot of charts though
Beat this
The Long-Term Investment Haven View of Gold – Lots of nice charts
http://neuralnetwriter.cylo42.com/node/2057
November 7th, 2009 at 4:52 pm
Ludwig,
That is an interesting point. I think one must ask whether the people have gold though. From my reading I get the idea that it’s better for the people to be in control of the money.
I suspect we are typical of “western” countries, and not as sensible as the “east”.
Oh dear.
November 7th, 2009 at 4:56 pm
You gotta twin brother , ‘cos I saw 2 photos in the top left corner………..Ye gads ! One of them is ” her , indoors “. My dear fellow , have a gummy …….bugger it , have the whole packet . ( pretty wild graphs , too )
November 7th, 2009 at 5:58 pm
“The gold market is an accident waiting to happen
Basically, the gold market operates on a fractional reserve basis. On average there are several claims of ownership on each gold bar conforming to London Good Delivery (LGD) standard on the “pool” of gold which acts as liquidity for the massive OTC gold trade based in London. Similarly, there are several claims of ownership on the gold bars in Comex warehouses. If a sufficient number of market participants become concerned about this (which is happening) and there is a stampede to take delivery of physical bullion, the entire gold market will come crashing down, taking most of the global financial system with it. Market failure isn’t a risk, it is a certainty. The unregulated gold market is an accident waiting to happen.”
From Gold Market Reaching The Breaking Point
http://www.marketoracle.co.uk/Article14818.html
November 7th, 2009 at 6:17 pm
neil c: Thankyou man ! A brilliant link , and a super argument , against this ” all that glitters is gold ” thread . As I quoted above , from 1781 to 1981 , gold appreciated at an average of 1.58 % p.a. It did not even match the inflation rate across that 200 year span . Many here say that I’m wrong , and a fool . Fair enough . I may be . But the charts do not lie ! And the 6 year or so memory of these bloggers , highlights their disregard for history , and long term trends . I follow the great Buffett , and feast where the fools faint ! ( bombast 101 )
November 7th, 2009 at 6:40 pm
All the more reason to buy shares in a good copper producer. Even better if it comes with gold and silver. I smell a bull run backed with easy FED loot and almost zero rates for a long time. If Ben is waiting for an uptick in USSA employment he will be a grey old dude when it arrives.
November 7th, 2009 at 6:43 pm
Ah , get glasses , Wal : Ben is a grey old dude now . He just ain’t wrinkly , ‘like Grandpappy Greenspan .
November 7th, 2009 at 7:29 pm
Great link, neil c. The markets are like a good soap opera – you just have to tune in everyday as you think you might be ’shocked’ beyond what happened the day before.
Once I was worried, now I’m just entertained.
November 7th, 2009 at 8:09 pm
The Jackass speaks (and he’s got a pretty good track record, and colourful language…:)…..):
“Debate is really stupid on whether gold is caught in a bubble. The big bubble is USTreasurys, but of little recognition. With money being created from nothing to support fiat currencies on a global scale, with central banks justifying their near 0% official interest rates, with governments continuing to authorize more bank rescues and bailouts under the table, debate should be centered upon the destruction of the monetary system and global currencies. Instead, they actually raise the question of a gold bubble. What will these same quacks say when gold hits $2000 and silver hits $50? Who knows? Who cares? They are not the source of wisdom or prudence. Their voices come from the bowels of the syndicate, many of whom are being forced to fall on their own swords. May they bleed freely and die off from the planet!”
http://www.321gold.com/editorials/willie/willie110609.html
November 7th, 2009 at 9:08 pm
Meanwhile back in the US – the rate of unemployment and underemployment (by the U6 measure) hits a staggering 17.5%
http://www.nytimes.com/2009/11/07/business/economy/07econ.html?_r=1
Its a given that unemployment will rise in the US in Nov and Dec – and then in Jan there should be a BIG jump as the ridiculously wrong Birth/Death model of company failures in the US is subject to its major annual revision (amazingly the model has been supposidly predicting job gains from company formations during the recession). U6 may get perilously close to 20% in by Q1 of 2010……..
At the same time (more ammo for the deflationistas), consumer credit in the US continues to plunge:
http://www.calculatedriskblog.com/2009/11/consumer-credit-declines-sharply-in.html
The US consumer is still petrified it seems.
November 8th, 2009 at 1:52 pm
For those people who are interested in gold and its long term appreciation check out this comparison. Its a little something I put together.
The you need to step aside and look at what gold is. Gold is not an investment. Gold is money. We have been brainwashed to believe that gold is a commodity by the same people who are pushing the rancid debt laden paper on the world.
When you have $100 in your pocket, you are not concerned about earning a yeild on that money, you just want it to be able to buy you $100 worth of an item tomorrow – or the next day or the next…
When you look at the prices of a house in new zealand in 1940’s as costing $793,600 in todays dollars when priced in gold, that indicates that gold has performed much better as a store of value than the paper equivilents.
On the subject of gold ETF’s and paper gold, I would just like to point out one thing. You are not buying gold – you are buying paper that pretends to be gold. It is however just paper. Just like paper money, paper gold is at its heart a fraud. It’s ok if you want to trade the price movements, but if you believe that you can ever get the gold behind it, I have a mine in my back garden that is for sale!
It is also wise to remember that due to the practice of naked short selling in the market place, it is widely estimated that as there are somewhere in the order of 1.6 to 2.0 shares currently being traded for every share issued on the world share markets. This was validated when the SEC stated that they could not resolve the naked short problem because it would be imposible foe those companies who had sold the naked short shares to remain solvent after buying back the shares they sold.
November 8th, 2009 at 1:55 pm
On a side note, tune into financial sense and listen to the comments in hour 3, where they interview a raer earth mining company. For those people who believe that the green power revolution is going to happen easily had better pay attention to the supply of rate earth metals – they are at the heart of the new green power generation story, and are in radically short supply.
November 8th, 2009 at 1:58 pm
Does our reserve bank seriously have no Gold?
November 8th, 2009 at 2:17 pm
Why would it . Bolly is no fool . He knows that gold has no future . And a romanticized past .
November 8th, 2009 at 2:32 pm
Hey Roger,
Have you ever read stories about the collapse of societies – the paper money couldn’t buy you a loaf of bread, but gold was always welcomed.
I hope we never get to a situation where I can truely say “Told ya so!”, because that would be very uncool…
November 8th, 2009 at 2:52 pm
Max Keiser commenting on sick US dollar, corrupt bankers, etc, etc…….connecting the dots.
http://www.youtube.com/watch?v=f9NaYSz3VjM&feature=player_embedded
November 8th, 2009 at 4:24 pm
Personally I bought gold & silver bullion (back then, 10% of my portfolio) back in 2007 and have made a 19% p.a. return on it since then…and Roger, when the USD rallied during the crisis, that was when we NZ gold investors made the most because of the resulting NZD fall.
Holding precious metals is purely insurance against monetary crisis, and we sure ain’t out of this one yet…..when we are, and I’m suspecting we’re talking more than a year or two yet, I’m out of gold….it is an investment for the right occasion, and that occasion has been here for most of the 2000’s. Those that truly understand what’s going will have considerably reduced their exposure to paper.
November 8th, 2009 at 4:33 pm
For the umpteenth time this weekend , I have been reproved for the error of my views . The majority must be right ………… Shall salve my soul with a small bag of gummy bears . And let peace reign upon one and all . Adieu .
November 8th, 2009 at 5:16 pm
Don’t worry Roger, we’re not the majority, your views are – and the majority are always right !
November 9th, 2009 at 1:48 pm
@ Wally
Care to tip any of these producers? I’m holding NCM and LGL but I’m sure there are some other gems out there…….