The strange case of Swiss gold, Government dereliction, and EU fantasies.

As the EU wobbles and gold rises, the Swiss are on the ball as usual. But our Coalition is as smug and unthinking as ever.

One or two of you may have noticed a bit of a rumpus with ‘real’ gold and silver investors and Swiss banks earlier this month. I have been given several real names since reading the linked piece, although I’ve only spoken to one person, an American citizen. The situation seems to be that three or four Swiss biggies have been stalling when asked to give up the actual metal.

Nearly one-third of wealth kept abroad globally is in Swiss banks: the Swiss Bankers Association and consultants estimate this at $2.2 trillion, making the Alpine state the globe’s biggest offshore centre, well ahead of Britain and Luxembourg.

There are a hundred ways one could interpret this, none of which are neutral save for “Well, if you will deal with the Swiss…”. But although personally I have a tracker (not bullion) I do keep a regular check on the retail market – and as ever, you can’t get the real stuff for love nor money. This is rapidly becoming a situation on a par of madness with the EU’s farm and fishery contributions from the UK – of which I wrote yesterday to an almost totally underwhelmed readership.

There was a dramatic two-day sell off of ‘gold’ earlier this week, but as ever this was gold ‘paper’: you cannot have a retail sector on rationed supplies and falling prices in one and the same animal – at least, not in our Universe. So we are still left with the mystery as to why paper is depressed and the real thing is going gangbusters.

More evidence came to light yesterday when my own wealth managers Full Circle sent me their regular newsletter, in which was this intriguing quote from Professor Wilhelm Hankel of Frankfurt University:

“You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver… People have terrible memories of 1948 and 1923 when they lost their savings.”

One could dismiss this as German neurosis – but not when it looks like the Swiss feel the same way. As do the Chinese, who once again stepped up their gold purchases to record levels. When gold’s price was being artificially depressed in 2006/7, I was in little doubt that it was being sold secretly by the US; most of it miraculously and suddenly turned up in Beijing two years later. Now I think the situation is different, and involves one of trust: everyone is trying to buy gold at the minute, but not in paper form from a bank, because (a) nobody believes the stress test data and (b) many people think a rocketing gold price could embarrass banking tracker suppliers. The main institution we should be concerned about in the UK is (you’ll never guess) RBS – but as we own them now, as long as there’s money in the Exchequer, one’s investment should be safe.

The bottom line here is twofold, which makes two lines on a potentially very sore bottom. The first is that the hundred interpretations of Swiss stalling need closer interrogation. The one person I spoke to had to resort to class action threats in order to get his silver – over $18 million worth – ripped from the Gnome’s heavily-sewn pocket.

The possibility of fraud is there, but also (as usual) just greed and miscalculation. It is quite possible that some of the more completely amoral Swiss banks have sold too much at what they saw as a mug’s high…only to find the price still rising, and equally material clients wanting their ingots back.

The second conclusion is that we are in a situation of massive bollocks output here, with senior banking and sovereign figures trying to talk up the future generally and bank solidity in particular. But their behaviour – and other data – suggest that we are not being told the truth….or anything like it.  (Slog he say, watch what they do, not what they say).

In the last fortnight, Spanish 10-year and German 10-year bond yields have moved substantially higher.  The German yield has risen by more than Spain’s, a development suggesting that perceived default contagion may become more widespread more quickly than previously.

The Telegraph’s Ambrose Evans-Pritchard wrote last week, “The interlocking ties with German, Dutch, Belgian and British banks create a nexus of vulnerability.  Bondholder defaults would risk contagion to Spain and Portugal, where the banks rely heavily on foreign capital markets.” Too true.

Aware at last of the growing conviction among bankers, sovereign lenders and currency dealers that the dangers facing the eurozone – and the EU as a sovereign entity for that matter – are now very real indeed, Frau Merkel and President Sarkozy yesterday presented a united front to the media, dropping heavy hints about fiscal and even political union in the medium term. But for me, this leaves us with an even bigger mystery: as France is now backing the German resistance to a new Eurobond and bigger bailout fund, what exactly are the terrible twins going to do? We should also be wondering what the other 25 of us are going to be railroa asked to do when they’ve made their minds up. The markets appeared calmed by the Sarkomerkel show (and the slight improvement in some US data) but as ever, once the weekend is over, the slide towards the cliff-edge will restart. I also think now that it will accelerate.

Once that happens, you can bet the farm on France and Germany looking after each other, and the devil take the hindmost. We are not only part of a fiscally dysfunctional trading bloc, we are selling into an economically moribund unit heading towards ever more dictatorial policies from the German Brunhilde and her put puppy France.

Other considerations aside, I see no sign at all that this issue is on the radar of anyone in the British Coalition Government. For once, the Guardian talked some sense earlier this week by noting that ‘some Conservatives are hoping that the euro will unravel in the perverse expectation that the UK will enjoy enhanced status as a result, dictating terms of surrender to a demoralised Brussels. It is a reckless fantasy. A prolonged crisis in Europe would sabotage prospects for growth in markets on which Britain depends. If the euro fails, the whole continent will suffer. The Channel will not protect us…’

But that’s just Big G hoping still for a Coalition split over Europe; my question is more fundamental: to hell with what the Tory Right thinks, what are Osborne and Hague planning, if anything?

William Vague is the Tory in dilatory, without doubt. From the day he took office, this chap has more or less pretended that the EU isn’t there. Cameron’s dismissal of the European issue is based 30% on the manic desire to avoid a split, but 70% on the cynicism of an oily PR man: he has seen the research, and while it shows that over half of us want out of the EU, it also shows that – for now at least – the issue is well down the voter priority list. As for Osborne, he appears to have gone native in Brussels: while pledging direct support to Ireland, he was quick to cooperate with the Brussels team when bailout became inevitable. How the three lions have become lambs to the slaughter.

What none of the three brass monkeys may have yet thought through is not only how the EU and our attitude to it should be the biggest game in town – but also just how nasty things are going to get next year.

Inevitably, the British public remains fixated by the outlook for house prices. The home as pension has now become so ingrained in the national consciousness, it has taken over from wages as the central thing that can swing an election – after ‘the economy’ as a whole. All three are inextricably linked of course, but they rarely become an issue all at once. In 2011, however, we are going to have an employer’s market, a house-buyer’s market, and – at best – a stagnant economy. Everything, in fact, that the British like to see going up is going to come down. All of which brings us back to where we started: precious metals. And why – in the UK just as much if not more than elsewhere – I can only see the  bubble inflating much further.

As Money Week recently pointed out, if you had sold your average British house in late 2004 and bought silver – just regular bars of silver – you could now sell that silver and buy 5.5 average British houses. It just so happens that July 2004 was when I first scented disaster and thought very seriously about cashing out of the UK property market. What I wasn’t savvy enough to do back then was whack it into precious metals.

Since the warrior-monarchs of the Middle Ages, governments and central banks have overspent and overlent,  thus debasing currencies with gay abandon. There are hundreds of so-called smart ways of hiding and rationalising it – from rearming all the way through to issuing too much paper…and the contemporary method of choice, deficit spending – that as long as politicians and bankers exist, this will be as inevitable as (funnily enough) taxes.

Since the 1960s, UK house-price averages traded in a range between 50 and 300 ounces of gold. Around 1998, the average UK house cost around 150 ounces of gold. But house prices had become so silly by July 2004, the average had reached 700 ounces. In 2010, it’s way back down to 185 ounces. As gold becomes safer alongside mortgage supply drying up and unemployment increasing, logic suggests that the very best scenario for house prices by roughly 2013 is a drop of 35 ounces – around 20%. However, given we are going to face the worst economic contraction in most of our lifetimes, the most prices might fall is down to 50 ounces – or 62%.

The usual caveat applies, but I’ll tell you what I’m going to do. If things continue as I foresee, sometime in the late summer of 2011 I’d like to be in a position to sell one property. This is because despite all the glaringly obvious signs of doom, precious metals (especially gold) will continue to fluctuate as the short-termist folks change their sentiments about the outlook from one day to the next; UK property prices, however, will dive – of that I’m sure. So the plan is to exit via the French house before Christine Lagarde works out what’s going on (that’s a big window) and be in a position to buy big into gold just before it goes completely mad.

It’s a sound strategy, and we’ve already put out some initial feelers. A thousand things could change between now and then, but the fundamentals won’t: a cycle is ending and a new one beginning. Until such time as equities shake out and the global penny drops, I’d prefer a growing asset I can access to a declining one that I can’t.

Please remember that this is a personal analysis, and not intended as either advice in general, or a buy/sell signal for investors in particular.