The chickens will come home to roost with inflation the likely result from the 'Tsunami of paper money' being printed by central banks, NZ Mint boss says

The chickens will come home to roost with inflation the likely result from the 'Tsunami of paper money' being printed by central banks, NZ Mint boss says

By Gareth Vaughan

With the gold price down more than 5% in US dollar terms so far in 2013, and off nearly 20% from its 2011 record highs, has the bubble burst after a bull market that ran for around a decade, or is this a buying opportunity?

Simon Harding, New Zealand Mint's chief executive, reckons the expert commentary is fairly evenly split.

"(But) we're certainly seeing evidence that people are viewing this as a buying opportunity," Harding told interest.co.nz in a Double Shot interview.

"We've had an upsurge in activity, especially last week where we had some fairly big inter-day movements (of) up to NZ$25. People thought 'well, this is an opportunity to get in' for what they perceive as a good price. The counter to that is there's always a seller. So the (sellers) perception may be is 'this the beginning of a slide'," said Harding.

He estimates that NZ Mint's trading volumes are up as much as 10% from last year.

Since September 2011 peaks, the gold price is down almost 20%.

"And 20% is generally defined as being bear territory so we're on the edge of a bear market," Harding said.

Goldman Sachs, Societe Generale get bearish

Based on the London end-of-day fixings, as charted by interest.co.nz (see chart below), the gold price peaked at US$1,895 per Troy ounce in early September 2011. And as of Thursday evening's, London time, close it was down US$330, or 17.4% at US$1,565. And so far in 2013 it's down US$99, or 5.9%. See more detail on prices here.

However, Gold fell sharply on Friday, after the Harding interview was recorded, closing at US$1,477/oz in New York and US$1,535.50/oz in London after soft US economic data and with Cyprus expected to sell gold reserves. See more on Friday's drop here.

International investment banks Goldman Sachs and Societe Generale have both taken a bearish position on gold of late. Goldman's forecast is for a year-end target of $1,450 per Troy ounce. And Societe Generale said gold was in a bubble and heading for a bear market.

There has also been news that financially stricken Cyprus may sell up to €400 million worth of gold. This has raised questions over whether other heavily indebted European countries may also come under pressure to sell gold reserves. Portugal, Ireland, Italy, Greece and Spain, combined, hold more than 3,230 metric tons of gold, Reuters reports. However, Harding suggests these countries selling wouldn't necessarily be bad for the gold market.

"If any of those sovereign states were forced to sell it would be indicative of quite a dire economic circumstance in which there would likely be a flood of buyers seeking a safe haven," said Harding.

'Brown bottom'

Meanwhile, some central banks, led by Russia's, have been major buyers of gold over the past two or three years. But Harding cautions that, given the track record of central banks, it wouldn't necessarily be wise to follow their lead.

"Central banks have historically not been the best predictors of when to buy and sell. One of the classic examples was earlier last decade when Gordon Brown, as Chancellor of the UK Exchequer, decided to sell a significant portion of the UK gold reserves and managed to time exactly the nadir of the market, which preceded the bull run ever since," Harding said. "And in the market that point in time has actually been known as Brown bottom, which indicates the bottom of the market." (See more on the Brown sales here).

"So whether the central banks right now have got it right or wrong history will only tell. But I wouldn't have too many concerns of a flood of central bank selling precipitating a fall," added Harding.

Central banks added 534.6 tons to their reserves last year, the most since 1964, according to the World Gold Council. On central bank buying also see David Chaston's story here.

'Tsunami of paper money'

With quantitative easing, or money printing raging from Japan to the United States and Europe, there's an expectation this will ultimately cause inflation, something gold's traditionally seen as a hedge from.

"Economics 101 tells us if you turn on the (money printing) presses that it's ultimately inflationary," said Harding. "And we've got a tsunami of paper money being printed."

"Ultimately the chickens will come home to roost on that one. So if we do see an inflationary environment then gold is traditionally the safe haven in inflation. You can turn the presses (on or off) but you can't change the supply of gold very easily overnight. It's finite, the supply is finite. You can mine more if prices go up, but it's comparatively inflexible," Harding added.

He said interest from offshore investors, especially those in the US, in buying gold through NZ Mint is steady. New Zealand's being seen as a "safe haven," is perceived as not being corrupt, and has a stable government. Harding said these were all factors in people from overseas deciding to invest in gold in New Zealand.

(Update adds sentence on Friday's big fall in the gold price).

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

25 Comments

Comment Filter

Highlight new comments in the last hr(s).

Im sorry but to have a CEO of something like NZ mint  to stupidly quote "economics 101" and that ""Economics 101 tells us if you turn on the (money printing) presses that it's ultimately inflationary," said Harding. "And we've got a tsunami of paper money being printed."
Is frankly shocking...he obviously never attended economcs 201, 301 etc....ie never heard of the Keynesian zero bound trap....
Eitther that of he's nicely throwing in "ultimately" so being misleading.  Of course, if you wait long enough we'll get inflation. The fact that in between we could have a 10~30 Greater Depression with huge deflation is neither here nor thre....or that most of this prining is being held onto by the banks who are speculating like crazy.....so its not out in the wild...ie main street and ppls pockets...no wage increases mate....
regards
 

kimy... u have this completley the wrong way around....as well as using questionable logic.
Money supply growth is endogenuous... ie. It expands or contracts based on the DEMAND for credit....  
http://www.businessdictionary.com/definition/endogenous-money.html
Lower interest rates ....and u increase the demand for credit
Raise interest rates and u lower the demand for credit.
The simple reason Banks are a "house of cards"... is the  same reason your property Investment business might be a house of Card..... LEVERAGE..  ( and bankers are not the smartest guys in town...  they give u the umbrella when the sun shines and take back when it rains )
Banks leverage can be anywear from 10x to 20x equity.
I'm guessing that ur property business might be 2x levergage....( 10x levergae and u would have been toast in 2009 )
In the end ..property is the biggest game in Town... so it is generally a bust in the Property market that causes the the big hit of bad debts for banks. ( property includes the rural sector)
The crux of the problem is that we all borrow to much....  I'm sure if u could borrow at 2%...u would be like a kid in a lollie shop ..buying up all the assets u could... that might have yields of 4% +
And if u did not take up that opportunity... someone else would ....  ( is there a little bit of greed in all of us..?? )

I hear what u are saying...   I do kind of think Banks are both drug pushers and drug users...  bankers suffer from the same emotions as do investors..
There is always euphoria near the top ....and fear as it all collapses.
We have had a few real estate cycles...and I've been around long enuf to witness the demise of overleveraged friends and associates.
Yes... there is an overabundance of Money out there ... in the "Global world"....  There are plenty of foriegn Investors that want to buy property in Countries that have a solid ...legal Property rights system...  ( and they will pay a premium to get that).
Where I totally disagree with u ....is with your assertion that lower interest rates is ...somehow... the solution to the problem of an overabundance of money supply...
And as sure as night follows day ...once this property cycle is over...there will be another crop of overlevergaged investors that will ...lose it all....  ( and maybe they will blame it on interest rates going up )...and maybe.. this time the downturn could be a biggie...and could well threaten the stability of the banking system..???
 
If anyone is culpable...in regards to money supply .... it is the Central Banks.. ( I think they have a pretty ordinary track record for managing things...and I question their "paradigms" or "world views"..... eg. that people make rational decisions)
 

NZ has been designated a 'high interest, food commodity' economy by the world powers-that-be.  Maybe the NZ Reserve Bank does not have the freedom to set interest rates at the developed economy current rate of around 1%. 

kimy... I can't comment on singapore.... but if they have 1% mortgage rates...I would guess they have high house prices...excessive money supply growth and also high inflation... Maybe singapores success is due to hard work..good leadership...physical location...etc..etc.   ( u draw a very long bow...suggesting it is because of interest rates)
Going back to first principals....   How would u like it if the Govt put rent controls on Landlords....How about if they actully forced rents down..???   Would u arge the same line as u do about interest rates..????
U have a view on interest rates that is not supported by any kind of philosopical or economic principles.
Interest rates is a "price"...just like rents are....    Savers are entitled to a "market return"...just as landlords are...   
Look at a graph of interest rates in USA  from say..1990 to 2002...   Each recession lead to lower and lower interest rates...   With hindsight we now see it was like giving a drug addict a stronger ..and stronger "fix"...each time he started to get withrawal symtoms.
we are addicted to debt...and ur answer is ..lower interest rates...????   I don't understand.
The theory that business cycle recessions can be cured with lower interest rates has been shown to be flawed....All that does is kick the can down the road that leads to a larger generational cycle that u might call "debt deleveraging"... which is usually a depression...   ( we have GFC as evidence of this )
NZ has one more cycle to go...before our interest rates are at zero.....  before we are totally in the shit..
One of the most disturbing trends of modern western capitalism is the growing concentration of wealth in fewer and fewer hands....   I would argue that unfettered credit growth ( from progressively lower and lower interest rates) has played a large role in this..... This disparity of wealth has been mirrored by the growth of the global financial sector...
Just my view ...of course.
 

I would suggest that Gold is the pointer that (enough) ppl now finally see that inflation isnt the risk but that a Depression and deflation and losses ARE.   We see the EU contracting....the US at best flat....Chian a ponzi scheme set to pop, japan, well yes....in a word DEBT.
The Q is at what point to BUY gold, to protect from losses, $600? 2 or 3 years away....
we have to fall off a cliff first.....I wonder how low US treasurys can go......how low NZD as ppl run to USD....wonder if we are at the crest of that roller coaster.........
regards

steven,
Goldman Sachs recommending people to sell something (such as gold) has  often been a counter-cyclical buy signal.
 
It depends what you think is going to happen with the NZ currency as to whether you should have some gold or not. IF you think the NZD is over-valued AND will correct, then Gold is a good thing to have in your back pocket as insurance.  If you saw what happened to the NZD value of gold in late 2008 while the NZD was plummeting against the USD while gold waseither steady or rising against the USD, you would have wanted to own some gold during that window. (And to have sold it at some point around that time)
 
IF you think the NZD will continue to appreciate, then owning Gold is probably not so wise.
 
IF Japan and the US continue to flood the world with Yen and USD then owning some gold as insurance is probably not a bad thing.
 
If you are a Deflation True Believer, then owning gold is probably not so wise UNLESS you think it will devalue less than other assets (including Cash)
 
To sum it up,  there can be valid scenarios to have some gold in your holdings.  Being fully in only one asset is a one way gamble in my opinion. Be it Gold, Cash, Share or property.  And with the way the monetary systems are driven by governments and central banks, all investments have a degree of uncertainty (hence risk/gambling) attached to them.
 
And lastly, Cyprus has to sell its gold as part of the bailout deal...
 
http://www.zerohedge.com/news/2013-04-12/mario-draghi-orders-cyprus-sell...
 
[later edit]
with NZD up and Gold down, it may not be such a bad time to buy gold.  However, you should probably look around as the margin extracted by the likes of NZ mint is a bit too high in my opinion

Extremely erudite piece there , Mr Gibber ..... well done !
 
..... and if one happens to be passing through Hong Kong anytime , the local banks sell world gold coins on a very slim margin , if you really want to obtain some gold ...
 
.For my money something 'like a field of corn or a herd of cows is a preferable investment , as they actually produce something that benefits mankind .... and cows can keep your little secret !

I Believe that the US fed, EU and Bank of Japan will get traction with the money creation. They hold all the cards. They also have no other choice.
The financial system is barely solvent and relies on top ups from sovereigns. Those sovereigns are going broke.....
Gold......who knows......better than "bail in" with deposits.
What I find interesting is that 500 tons of paper gold is sold in a day but central banks are purchasing gold at the same time, but the purchases are physical gold.
So if the paper market sets the price of physical coins, but the paper market is many multiples of the physical supply, what does the price really mean?
I like gold. It's liquid, portable and non reporting. Under the radar so to speak. 
Cheers
 
 
 

But why be concerned about the 20% decline since 2011?
You could lose the 20% (and more) by simply buying a NZ Mint Silver Fern at NZ $36 and then asking them to buy it back. They will then give you NZ $28.
http://www.nzmint.com/bullion
Why wait for years to acheive what you can do in afternoon, regardless of the spot Silver price?
My late night critique of the CEO's dress sense seems to have disappeared, faster even than an investors prinicpal. Good God, with margins like that you would think a decent suit can't be that much of a stretch.

Just checked cash price and had to rub my eyes to make sure. Low of the day about 1430, down another 50-60/oz. Crikey. Lot of peeps wiped out in last two sessions. Shorts gleeful, no doubt. Ah, yes. Love the smell of deflation on a wet Monday. What will be the bext bubble to go popski? I am short the S&P.

Probably margin called JGB traders and others liquidating to met the demands of exchanges and position funding creditors (RP cash providers etc).

SH. Edit. Wish I had not decided to give the other GS trade a crack; short 10yr, from 132.5, stop at 134. If S&P is next to fall, the UST 10-yr will get a huge bid. I put this short on the day before we talked about this. Stoopid! 
What is the head scratcher about all this is shorting gold and UST10 cannot on the surface both win at the same time. Or can they?

No not really - if the Yen carry trade maintains it's attraction on the back of continued BOJO JGB purchases US Treasuries will see demand.

Goldman Suchs

.

Goldman Sachs comments like gold entering bear market - means between now and $1400 an ounze for gold is good buying and Goldman Sachs will be buying big for a 5-10 year term.  Also be careful with Warren Buffet investments as he has lost he touch with the ageing process.

Really, Starfish? Shares in Berkshire Hathaway are up $42,000 per share in the past 12 months. Everyone agrees that Buffet is as sharp (and funny) as ever.

With sweetheart deals it wasn't too hard as Bill Gross points out  - even then it has been a bit of a struggle from 2007 highs.

Cash gold now down below 1400. It if can do this during ZIRP etc, then anything is possible.  Bring it on.

A week or two ago GS started jawboning it down .. they were either unloading or shorting it .. this evening they're talking $1200 .. so that where they want it .. that's where it's going

Shake down morning all over!!
It's gonna be an interesting week, with everything breaking down already, I reckon there will be plenty of opportunities in the next few weeks.
Better put the helmet on, and some padding!
HGW

Explosion in Boston, at Boston Marathon's finish line, rocks the markets!
Maybe it's time to run for the hills...? 
HGW

I was reading this morning that Indian households have around 15,000 METRIC TONS of gold stashed away.........!!
http://lfb.org/today/indias-gold-mania/
So a paper 500 tons of paper selling represents what exactly for the retain owner? 
I vote with the Indians and Chinese on Gold ownership.......It's getting to be buying territory again.
Cheers

Not just yet Splineman.....wait for it,,a coupla more commod shocks first.....another  wee currency stoush looming...a bit more captured money.....Ben then considers the last of the big print runs....The Boj finds the rock n hard place......China sniggers......the amber light flashes for those quick on the pedal.......
and their racing.