It is getting tougher to justify holding precious metals as a store of value. Gold hits a five year low; silver and platinum prices also very weak

It is getting tougher to justify holding precious metals as a store of value. Gold hits a five year low; silver and platinum prices also very weak

The gold price hit a five year low in final trading in New York and London today.

This caps off four consecutive weeks of declines.

Gold is not doing its job as a store of value and the risk is that it will continue to decline, especially in US dollar terms.

It closed in London at US$1,132.80/oz and in New York at $1,133.30/oz.

One reason is that the US currency is strengthening, representing a better way to store value. (But that is not saying much.)

The last time gold was this low was on April 6, 2010. At that time it was US$1,132.75, and in local currency NZ$1,603.55.

It reached a peak in US dollar terms of US$1,895 on September 5, 2011.

In New Zealand dollar terms, it reached a peak of NZ$2,314 on November 15, 2011.

Since then, it has been four years of declines.

Today, when the US dollar price has hit a five year low, the New Zealand dollar price is $1,729/oz and +19% above its intervening low point of NZ$1,456/oz in June 2014.

But is that a good return?

If you had bought US dollars on April 6, 2010 instead of gold, you would have paid NZ$1,604 for US$1,133. That US$1,133 would today be worth NZ$1,740.

That means you would be NZ$31 worse off over the period, with an equivalent compounding annual gain of just +1.55%.

With Fed Chair Janet Yellen maintaining an upbeat outlook for the US economy, the Fed is on track to remove the zero-interest rate policy (ZIRP) later this year. The bullish sentiment surrounding the greenback may continue to dampen the appeal of bullion and raises the risk for fresh 2015 lows.

Analysts at DailyFX say that from a technical standpoint, gold has broken below key support and the technical damage done leaves prices vulnerable while it is below US$1,150. Look for interim support at US$1,130 early next week and if that is breached, further lows may be in store.

New Zealand holders are getting a little insulation because of the weakening Kiwi dollar, but by any measure gold remains a very poor store of value.

Other precious metals are faring equally poorly. Silver is at only US$15/oz after peaking at US$48.70 in May 2011.

And platinum is now below US$1,000 for the first time since early 2009.

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.

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However, as a hedge against a NZ$ that is getting sicker by the day gold looks to have performed OK in the past 2 years - and presumably folk holding gold here buy it with NZ$? Your graph suggests anyone buying in pretty much anytime in the past 2 years (a few months accepted, ie Jan/Feb 2015) with NZ$ is showing a reasonable return of 5% plus?

nah. theres on been a narrow band where NZD had buying power but most metals were also up during the same period, now NZD going down, metals down.
Silver would have been good about a year ago.

still got to sell through, to get income. otherwise its worthless.

I am quite curious why a store of value needs to provide a "return". A SOV is simply meant to maintain the purchasing power of long term savings. That includes of course the debasement of fiat currency that is actually just a medium of exchange. And not a good store of value at all, and I guess that's why everyone runs around trying to figure out who to get a "return", lol...

I can answer that quite easily. - I will hold your store of value for you, start with 100k. Post your check
c/- David C, at Interest.co.nz and he can forward it to me.

I will hold your 100k for ten years for you.
if you're short on the 100k, I'll put in the difference but since doing so costs me, I'll have to ask you to cover my extra cost.

When can I expect YOUR $100k. ?

No, this is not a theoretical nor a "joke" answer.

Hmm, you lost me I am afraid... If I wouldn't have saved 100K, I would not borrow to pretend that I saved 100K! (and leverage to be more precise, to speculate on a rising or falling gold price!) Could you explain to me again in other words what precisely your point is?

you asked why a store of value requires a return price.

Send me your 100k (fiat, gold, whatever, as long as it equates to 100k NZD).

In ten years I will return it to you.

sound good?

You miss the point cowboy. If you are going to introduce counterparty risk (and you have) then you should pay chris_t a return on his capital. What if chris_t doesn't want to put his capital at risk by loaning it to you? The whole point about a store of value is that you don't have counterparty risk and it keeps its purchasing power over long periods of time. 100k in fiat doesn't do that, has never done that. That's gold's job. Apart from fiat losing value each year, its value can be wiped out with the stroke of a pen. If you want to keep something of value for the long term without counterparty risk don't hold cash, hold gold. The rich understand this. Why ? Because gold is real money accross international boundaries and across generations. To hold fiats value you need to put it at risk.

Quite right. A store of value that a person can actually hold onto, in their hot little hand while all the world sees paper assets vanishing before their eyes !! Or being stolen, or haircut, or whatever.

The barbourous relic, defensive yes but no counterparty risk ! Its a case of the bird in the hand ...

I got your stored value right here.... ;)
It's all fine to say stored value, but if it's not returning it's losing value, and costing you, AND you still have to be able to convert it when you want access. Some people figure residential housing would be soted value until the see the real estate agents commission....

and you are still trying to mine bit coins? So using more $s of electricity than you get back? Yeah sound decision that, lets collect an abstract collection of 1s and 0s as a store of wealth and not PM.

Haven't for a while since they had a big reshuffle in the market and I couldn't get straight answers from the few who even willing to speak. It was like working as a tailings hound with a little dish... where the dish had to be rented from the oFficial supplier, they coordinated the results of the team, and controlled the allotted findings, then charge for storage and commission services entirely at our risk.
And my minings were all solar powered - still got the solar power. so still getting my $.

But please lets stick to the direct question.
He wants a store of value.
He give me the 100k,
In ten year I send him back 100k.
he wanted to know why store of value needs a return.

Me having free use of HIS capital for ten years will learn him in ways that form solid proof

But as soon as you introduce counterparty risk he no longer has a secure store of value. A real store of value doesn't need a return (you only want a return if you want an increase in value). If you wanted a store of value fiat doesnt do this, and you know it, everybody knows it. Even chocolate fish know this.

Cowboy - use interest.co.nz own figures in their graph above. Go back 10 years. Gold was around 620 an ounce in 2005. Now it trade 10 years later at 1150. That's an average return on gold of between 8-9% per year in fiat terms (but zero in gold terms). But if you are taking a gold loan from chris_t you are putting his capital (gold) at risk and he should have a return - not in fiat, but in gold. So if he lent you 50 ounces you should repay him 10 years later with say at least 60 ounces? That's one ounce per year for 10 years (or 2%). Personally I wouldn't make him that offer. Lets calculate chris_t return on such a deal in fiat terms if history repeats - 50 x 620 = $31,000. 60 x $1150=$69,000. Well over double the original loan in fiat terms. However the next 10 years may well be much better for gold than the last 10 as if government bonds start to crash the world over, gold will be the only place left for fiat to run to, and people will; want delivery of their paper contracts (which of course will be impossible but they will have to bid gold to a price where the bullion banks go broke) so over the next 10 years gold may resume its relentless climb. Even with free use of his gold its not 'free in fiat terms'. Why? Because fiat is not a store of value. And that's what David and yourself keep missing about gold.

Fiat isn't a store of value. Chris_t isn't claiming that it is. Its only you saying that it is. Or are you suggesting to take $100,000 in gold and pay him back in whatever gold $100,000 will buy in 10 years time - but that's not a 'store of value' then is it?

A store of value doesn't need a return.

Quite perfect answers have been given already by others, thank you! Apologies for letting cowboy go on for that long without response. Obviously very few true savers...

July 15, 2015 - 11:03am David Chaston: When fear and uncertainty rises, many investors start thinking about having a portion of their assets in precious metals Traditionally these have been an effective store of value, even a medium of exchange when the standard economic system breaks down.

3 Days later: Gold is not doing its job as a store of value and the risk is that it will continue to decline, especially in US dollar terms.

I hope no one bought precious metals in the last 3 days.

It seems to me that the dollar price of metals reflects the inverse of the opportunity cost of holding the metal. Doesn't that mean there's never a good time to buy metals? if they're cheap you'd be better off levering up to buy something else. If they're expensive it means you're too late - the music has stopped and you've got no chair.

My $1.5M house is nice and warm tonight. If I had a pot of gold it will be cold and wet.

but what if your 1.5M house had an 800K mortgage? and what if the credit markets seized up for some reason and interest rates went to 12%. What if the price of silver went to 120 USD/ounce in a short space of time. Perhaps then a cold wet 100kg of silver wouldn't be so bad. You could quench a large part of your mortgage? or perhaps none of that stuff could ever happen.

If we saw 12% that would be within a "normal" band ie <20% I think it would be a lot worse.

For global credit markets seizing up it would I think it would be much worse in the short term. Simply in such event there would be no banking system as no bank would lend to another this is what frightened so many Govns 2008/9 and caused our RB to bring in the OBR. In such an event, no one could buy or sell food, no one would get paid etc etc. This is why we have the OBR so the credit market is separated from our chequing account so our society doesnt also freeze up with the resulting unpleasantness.

As an example, if you look at Greece its 30%+ so a credit event of the scale you mention I think we'd see high rates and then NZ would default and no one would lend to us.

"happen" a) if you have any precious metals the Govn will probably take it off you and give you worthless fiat. ergo if you truly believe its going to be that bad then you should be buying silver and gold and lead with cash so its un-tracable and store it safely somehow. b) I think its highly probable there will be such an event within my lifetime. c) Personally I wouldn't use it to quench the mortgage I'd be keeping it as a means of barter/cash exchange. mainly because everyone is going to be in default anyway so the Govn would have to do a debt jubilee or have many hundreds of thousands of homeless NZers it has to house.

" Perhaps then a cold wet 100kg of silver wouldn't be so bad" I think its a sound idea to have some form of PM or other medium of exchange if its part of a survival strategy if you think it could get that bad to need it. I mean PMs is traditionally seen as a way to retain your wealth through a critical financial event and should not be seen as a way to make money off.

As a slight aside my grandfathers were in the home guard during WW2 one had his own shotgun and used to pop rabbits while on "duty" guarding the local beach from invasion (I kid you not). It was about the only meat my mother saw during WW2, so much so now 65 years later she wont eat rabbit despite its a healthy meat. So ammunition say 22LR would or could be highly tradable or used to put food on the table, if of course you think its possible to get that bad. The Q is if not why would the OBR be brought into existance? I mean its only real function is its [semi]stated function, to keep our economy and society going in an extreme event where ALL banks and not just one are insolvent IMHO. Now that if true is an interesting thought on how our Govn is thinking.

Hey Steven. The government is not going to take gold or silver from anyone. How exactly do you see them doing that in a practical sense? Most people by far don't own it, will they go from house to hoouse searching for it went 99% dont have it? They don't have the man power. In a crisis they will be looking to cut employee costs not increase them. At present they don't even charge GST on it or know who has it.
Land on the other hand they may tax it away from you. Shares they may tax away from you. Bank deposits may be taken from you. They aren't going to take any gold. That's part of the point of having it.

or if your pot of gold had 50k loan outstanding.

you play the "what if" game.

what if 50oz of gold, 3 years ago.
or Plat tomorrow.
With the house there are many takers including himself as immediate consumption.
with the PM it has to be a tradeables market with liquity or barter value - in int goes to 12% will there be any monied buyers wanting to spend? or will they be busy picking up overextended property.

Only owe $270K. Shit happens in the big bad world and out of my control. However, I can control my own personal area to a higher degree. A roof over ones head has a worth, just ask a cave man 40000 years ago, a cave was his house. A pot of gold may buy a house but if it comes down to basic need, the house trumps the pot of gold.

And the same argument holds true if it comes down to 'basic needs'. Food, water and clothing trump a house. What good is a roof over your head if one had no food? When you are talking about gold you are not talking about people who have no food or water or shelter though.

People here are missing the point. Real wealth is never destroyed it just changes hands. Real wealth will always need a place to run and hide and lie quiet.... and the premium hiding place is in gold, nothing else will do it. In a time of crisis currencies can be devalued, government bonds can default (and have been defaulted on), wars arise and property prices may collapse and property isn't easily mobile. Earthquakes happen, insurance companies can go broke, etc..etc..

Where can real wealth go to hide? In commodities - no, if economies dive - so will demand for oil etc... It's in gold. It's always been in gold for thousands of years. There is no other place of hiding.

The fact that gold has taken a few years off in its upward track is a reflection that most people believe central banks have saved the world and they trust financial markets and thus paper gold contracts will not be defaulted on. However they are wrong on both counts, but time will reveal all, but by then it will be too late for the guy on the street.

People who trade paper gold, buy one month, sell the next and vice versa (gold trades in the many US trillions each year, more than even oil). They are not looking for a store of wealth. They are after income, they are trading nothing but paper contracts.

People who are looking for a store of wealth buy the real thing and they think in terms of years or even generations. It matters not what gold does next month or next year or where it is compared to last year, they don't think like that. They aren't thinking - how can I make my next $? Even though the big players know how to make gold provide a return through gold leasing and finance. They will never settle gold for just fiat. It's too valuable for that.

PMs are a relic in the exciting times of FIAT.

But....
Thousands of years of humanity still appreciates the shine and weight of PMs .
Hold a 5 oz of gold in your hand and you will feel the meaning of money

pay for it with physical labour, and then realise you can't actually buy anything with it....
yes that will teach you the real meaning of money

Very happy with my return on my PMs in NZD terms which is the way a NZer will evaluate it - but thats a bonus, even if it wasnt so good, unless you have total comfort in the way central banks are manipulating things, you shouldnt be sleeping as well as those who hold some PMs.

That assumes you have no debt though? Debt would appear to be even more long lasting than PMs as it has the weight of law behind it.

and when debts are unpayable, it's surprising how light that weight really is...

Actually the reality is that PMs are more long lasting than debt, especially in a world overdosing on debt, - debts that just aren't payable.

Very few people truly understand debt, or more to the point, the difference between being a debtor or a saver.

It is a strange thing when wealth is measured by the intention of others to pay them a credit from owing from somebody else. One day this will be shown up for how misguided this really is, right now its main line thinking.
Maybe it might start with Greece...or if Greece manages to get its bailout by Greece, Spain and Italy as they all are slowly lined up to default together...

I know people who have kept their share cetificates from 1987, I don't think you buy gold to make a return, it's something to put a little bit of your money into in case you lose everything else.

Agree, or something similar that stores value and is highly tradable/usable.

Except the main purpose of gold is not to trade but to store.

Well maybe tradable for the less well off who need to just 'survive'. A store of wealth for the wealthy (who will never trade it by the way) who want to carry wealth over into the next monetary system...

Loads of wealthy people lend their gold out for a fee - I previously executed the transactions for billionaires and banks alike back in the eighties - now paper (derivative) gold is traded on a much larger scale than the underlying physical supply - that's what I mean by tradable.

And it would seem someone has executed a rather large paper sale today.

We bring this up because moments ago, just before 9:30pm Eastern time or right as China opened for trading, gold (as well as platinum, silver, and virtually all precious metals) flashed crashed when "someone" sold $2.7 billion notional in gold, resulting in a 4.2% or about $50 to just over $1,086/oz, the lowest level since March 2010. Read more

Sounds like the US exchange traded fund maybe at work again...

Lending gold and trading it are two different things. If the wealthy didnt have faith in the financial system they wouldn't lend their gold out. In such a crisis, on a large scale gold will just go into hiding and cease to trade. Paper gold can do what it likes, those that understand what gold really is do not care.

Excellent comments Economist.

The 'return' on holding physical Gold is knowing you hold it and not having anyone else know you hold it !

If as DC says you like stroking your pet rock, go for it.

but not ultimately to store. Maybe we are just splitting hairs here. As your last sentence, the idea is its a holder of your wealth though an event because its hopefully tradable for more useful assets out the other side. Thing is it also assumes a rule of law survives through (or outside) the event, Kunstler for instance has an opinion that this may not be the case and the wealthy could face retribution from the masses they have ripped off.

Yes ultimately to store. Gold does not need the rule of law to be valuable, fiat does. You have it around the wrong way. Without the rule of law fiat is nothing!

It possible the wealth may have their wealth taken from them, yes, that's happened before, can't argue with that. Its easy to take land, cars, houses, artwork, etc... those things may be hard to hide or move unnoticed. They may even take their gold as well, yes, if they can find it though, and it can be pretty hard to find if one really wished to hide it....

Not many of these are really essential though many like sugar are "nice to haves" and nothing more. As a starting point go back 100 years and look at what was in use then. On top of that what was the main source of "power"? people, so hand tools and skills, education, reading, books stores of that knowledge cant see books in that list. Non GMO Seeds I would consider of great value, of course if you have ruined your weather with climate changes it might be quite hard to grow anything repeatedly year after year.
Anyway, thing is now we simply have too many ppl in many parts of the world if it gets like the mad max fantasy to matter what we have stored.

Hey David can we PLEASE get a English (not US) dictionary for this thing

I think going long physical gold in $NZD is compelling right now - clearly there are two markets here: the notional (EFT & Derivatives) & the actual shiny yellow stuff (Tiny).

I am of the view that the gold price downward pressure is via EFT's (only a few market participants can drop a $1B sell order in notional on the market, as occurred recently), alongside some portfolio margin calls; perhaps as a means to buy the underlying physical at the suppressed levels as the physical demand is high with comex warehouses holding less physical (Russia, China & German central banks have all registered large net increases).

The run on central banks has already begun: http://www.zerohedge.com/news/2015-06-25/first-time-ever-qe-has-official...

http://www.zerohedge.com/news/2014-02-01/market-cornered-jpmorgan-owns-o...

I wouldn't get too carried away by tracking the trading whims of the ETF industry. We have been following the quarterly volume purchases since June 2000 (via the Gold Council) and over that period their net purchases amount to just 1,611 tonnes or just 3% of all purchases. Actually they bought 2,707 tonnes (4.8%) of all gold but in 2013 and 2014 they were sellers, quitting 1,096 tonnes of physical holdings. These are tiny proportions compare with jewellry demand (66%) coin&bar investors (20%) and industrial uses (11%).

True, some third world central banks have been buyers but all up they account for only 4.1% of all other total demand. Just like the EFT dealers they can influence a week's, or a month's demand/price, but are just too small to move the whole market over the long run.

The problem for gold is not EFT traders, or even central banks, it is that most people now regard it in the same way they do a 'pet rock'. That may change (and it has at various times over history) but the 'fear' reasons people used to hold gold might be transitioning to bitcoin and crypto-currencies these days. Certainly the money laundering folks probably have transitioned already.

I am keen to explore it further David:
1. Some EFT's are a gold backed, which Id imagine are the ones that account for the 3% of all physical purchases via gold council.
2. The point I am making is that the vast majority of Exchange Traded Funds are not gold backed, and so a pure secondary market; this paper market is estimated at least 10 times larger than the physical gold market (& prone to airpockets & phantom liquidity much like the current bond market).
3. So I contend that movements in the secondary market control the price of the physical market, "but not forever in my opinion" (It now costs $USD10 for a mine to buy an Oz of Au in the ground (vs. $USD50 recently, on an average 2 gm/tonne; that is very good medium term buying with keynesian policies running riot for people that can afford it (lets not forget the $USD T bond hasn't been triple A since 2011).
4. I say not forever because the secondary market is prone to terminal crises (much like bit coin): http://www.zerohedge.com/news/2015-07-03/gold-bullion-dealer-unexpectedl...
5. We have seen many intermediaries fall over in recent times & we have seen many serious scandals none more so than on the price of money itself with the Libor scandal. A skeptical mind does not need a long train of thought to form some stark conclusions. Any entity that can drop $USD2.7B notional on the futures market & induce a 5% flash crash event can benefit multiples of times with simultaneous arbitrage & short positions - e.g. NCM fell 11% yesterday.
http://www.zerohedge.com/news/2015-07-20/last-nights-gold-slam-so-furiou...

Send me gold and I will send you my 'pet rock' any day David. How silly can people really be? In modern times gold is traded and purchased more than at any time in the known history of the world, out trading even oil.
Good grief David, bitcoin and crypto-currencies replacing gold? Really? I doubt they trade even in 100's billions in a week, certainly nothing even close to the LMBA exchange alone does in gold contracts. In fact more gold has been bought than actually technically even exists, I suppose that's because people don't want gold? Huh? ??? Really David?

In some countries holding gold has a purpose because if the worst happen you can run for the border carrying it. But as Stephen Hulme points out 'tradable' counts. At the worst of situations your Krugerand coin might not get you that can of beans the nasty man with the gun offers to sell you.

LOL the myth of self-sufficiency. Even if Dilbert had an armory fit to make NZ blush (not hard) and some americans do, it just means that maybe you survive a little longer when the zombies come.

Yet how many major gold mines are left with a production cost much lower then todays cost? If so its suggests a rapid fall off in production is imminent. I mean if gold is $900US and ounce and it costs $1000 to get the million tonnes (or whatever) no one is going to ever mine the gold are they? Rinse and repeat for oil, coal and anything else we need.

"at which point gold miners will simply cease to produce the metal whose all-in production cost is in the $1100 and higher range"

http://www.zerohedge.com/news/2014-12-30/peak-gold-production-hits-2015

It seems weird to me that we use a piece of coloured paper, that has no value other than the trust of the people who use it, to value Gold, a metal that for centurys has controlled Kings and Governments by putting the power in the hands of those who hold the metal (up until 1913 at least). History is based on the butchery that ocurred in the quest for Gold and its power.

Gold needs to give value to paper money once again. Now was it Kennedy that wanted to go back to that ? mmm.

Holding some Gold is nothing about return, investment, tradability, etc etc, its about individual sovereignty and responsibility rather than the collectivist scamming that has got the world where it is today.

It's about once again holding our leaders to account, making the rotten corrupt banking cartels and their lacky brokers and advisors subservient rather than dominent and about limiting our human desire for excess to a standard that is in itself limited in its existence.

We are about to see some of the largest wealth stripping in NZ since the Great Depression and surely prudent ones have a spread of resources available to them that offer the best chance of economic survival. Other than that, take a number and join the queue !

It wasn't Gold that controlled Kings and Governments. It was wealth. Wealth can take many forms depending on time, place and individual and public circumstance.

Colt 45 (1911?). Abe Lincoln, if me memory's right, also dabbled in State taking back money supply. Hmmm.

Well Colt_45, it would seem Alan Greenspan (former chairman of the FED) would in part agree with some of your comments:

http://www.constitution.org/mon/greenspan_gold.htm

LOL. Dilbert nails it every time.

I wonder if in today's global society if precious metals is still a store of value myself. I mean the idea is to have PM as a store of wealth through an event. What if the event never ends? Like the preppers fantasy of a mad max world? just way out there.

... and that's why billionaires and central banks own it steven? just to get through an event? is that the main reason? really?

Or you could buy 20 guns yourself with 1 Oz!

Maybe some of these traders are selling paper gold to crash the market so they can buy physical gold cheaper. Everything is overvalued in a high liquidity world. Why are banks around the world strengthening their reserve ratios? Is that a sign of a strong world economy?