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).