The Slog offers solid-gold reasons why he’s sticking with the shiny metal.
Gold rose past $1420 yesterday. It keeps having small setbacks as the world’s key sovereign markets put out spin-balm about their fiscal plans. But always, it comes back and passes the previous high.
Like everything, it is a bubble. But it will continue to inflate as others continue to devalue and – despite their doing so – signs of real growth remain well-hidden. Aside from these general reasons, however, specific events in the last week have brought safety-seekers flooding back in.
Polemics aside, it is becoming increasingly obvious that the EU is now flailing around in quicksand: the more it struggles to convince the markets, the more it sinks into the clinging mire.
Luxembourg, Italy and some half-hearted fellow travellers want a new ‘E-Bond’ to convince the markets that the ECB is the safe guarantor of all countries, be they A1 collateral or aimless Clubmed. This is never going to wash, because the thinly-disguised desire of the Eurocrats here is simply to abolish yield-spreads.
Germany’s Wolfgang Schäuble agrees that the unsubtle nature of this latest Brussels wheeze won’t convince anyone, correctly arguing that jointly guaranteed bonds would require “fundamental changes” in European treaties. (Germany also fears that the issuance of such a joint bond would raise its borrowing costs.)
What’s more, the European Central Bank was last week forced into huge purchases of eurozone government bonds to prevent the crisis spinning out of control still further…having six weeks earlier said such buying was at an end. Just to sprinkle some petrol on this inflammatory act, ECB president Jean-Claude Trichet made clear that “the initiative for long-term resolution lies with the politicians”. So then, the ECB has done a volte face, followed by a Pontius Pilate. Highly reassuring.
But there is yet a third EU faction: those who believe that an increase in the European Union rescue fund (ESFS or ESM?) is the answer. Apart from the absence of any further rationale as to why this might be the answer, my common sense also tells me that a bigger fund would suggest to the markets that there is a bigger problem than the one currently under discussion.
Key players one could never accuse of lacking balls are stepping back from the contagion. JC Flowers, the US private equity house, has reversed rapidly out of its investment in a major Caja (Building Society), dealing a blow to Spain’s problematic banking sector. Flowers agreed in principle last July to buy €450m of convertible bonds in Banca Cívica. But yesterday its founder said: “We entered into a non-binding letter of intent with Banca Cívica in Spain. That has never been superseded by a formal agreement. Consequently we have not made any investment in Spain and are not committed to do so.” Affirming that he wouldn’t acquire any bank in a country facing sovereign credit risk, Mr Flowers said the Banca Cívica deal was not expected to be completed until Spain restored faith in its finances.
A look at the trends in the bonds sector as a whole is equally instructive. Bond funds just posted three straight weeks of outflows for the first time since March 2009. This is not what debtor nations want to see.
Rather, lower risk is seen in emerging markets, which took in $475m for a second week of major bond inflows, while energy sector funds had their best week in more than two years with inflows of $1.2bn – suggesting a desire to spread risk. And for the more conservative end of the market, there was a $1.28 bn inflow into money market funds – signalling risk aversion.
But the most profound reasons lie – as so often these days – in China and the USA.
Gold importing by China rose yet again this year, turning the CPR (already the largest gold-mining State) into a major overseas buyer for the first time in officially – Beijing has been buying it on the quiet for years. The new imports, showing how Chinese investors are still looking for insurance against rising inflation and currency appreciation, mean Beijing will soon overtake India as the largest consumer of gold on the planet. Anyone imagining this won’t affect the gold price shouldn’t be allowed out on his own.
In the USA, we have a Government printing money with no sure aim in mind beyond reducing the real value of debt it owes to those in Beijing busily importing gold. Fed Treasury chief Ben Bernanke’s declaration of yesterday had a sort of negative positivity about it: he said that another easing programme – QE3 – was “certainly possible”.
When the world’s biggest economy is tentative about when it will stop printing money, and its chief rival is hoarding the ultimate hedge against this, then it is surely time to increase exposure to gold. Indeed, as an investor I would think myself mad to do otherwise. What others decide to do is their business.