GOLD: Why the old purchasing system is breaking down

Banks and Sovereigns fight for gold as middlemen lose out

The Slog has posted extensively since 2006 on the subject of gold as a strategic holding that, from time to time, is clearly sold off-piste between one sovereign and another; has its price massaged by large-scale Fed dumping to stop it from becoming an easy exit from stock markets; and is used by banks to leverage the loans they can get from other lenders. I’ve recorded at various times how China’s gold holdings miraculously doubled in just ten months, how Fort Knox hasn’t been visited by a US President since 1951, and how a great many investors in real bullion have found enormous difficulty getting banks to give them their own gold back again.

Until last April, I had a gold tracker (ie, a paper contract) with RBS. But I became so alarmed at some of the feedback I was getting about the bank’s parlous state, I sold (at $1872) and put the money instead into gold mining shares. Although I didn’t fully realise why at the time, this may have been one of the best decisions I’ve ever made.

There are now two golds in the world: the real stuff you can’t get for love nor money, and the quasi-derivative paper that gets quoted day in day out on the various American, European and Asian bourses. This latter type has been static to going backwards in recent times. But the actual bullion is like hen’s teeth. That rarity tells us – more than any other single economic fact in the world today – what investment opinion leaders feel is coming: viz, something pretty awful in which gold will become a form of uber-currency. And as long as central banks everywhere exhibit all the signs of adulterating their currencies (even, behind the spin, with the eurozone’s reckless junk purchasing) the MoUs will continue to want the amber metal.

In recent months, so acute has the demand been for the physical stuff, the old ways of trading in it are rapidly breaking down. This is important, because when the selling structure of an important commodity market changes, it means considerations above and beyond commercial are coming into play. It means a step-change in wealth distribution is starting to flex its muscles.

Earlier this year I reported evidence of Austrian gold purchasers being rationed by banks as to how much they could buy. This trend seems to have gone further underground – and yet be ever more influential. Basically – as far as I can understand the feedback – lots of middle-men are being cut out. Very large investment combines and wealthy Arabian/Asian Sovereigns are approaching the miners direct. They offer the producers mouth-watering deals: have the cash now, set aside the gold for us in (say) six months time…have the money interest-free. Just sign here saying come what may, you’ll give us the gold. Or – just as attractive in many ways – at this guaranteed futures price way above the current level, we sign here to say we will buy whatever you can produce. (And above all, they add, we are not some flaky bank: this is, as it were, solid-gold profit).

Now clearly, the one party with a 0% risk in that dizzying context is the mining sector. Which is why, despite average performance since I bought them, I regard my mining shares as gilts-on-steroids. And I may well increase my holdings.

Health warning: what you do is your affair. I am not certified to etc etc etc. This is not advice, just recording what I’m doing: caveat emptor and all that – buyer beware. But this is my opinion: whatever the Jonahs tell you, gold has a long way to rise yet. And I’m finding it very hard to work out just how those mining the stuff can lose. Long after even the metal itself has corrected, miners are going to keep on posting profits at unbelievable margins.

But on a more sombre note, the banks will be outbid in this new free-for-all by New Sovereign Money. And that doesn’t bode well for the eurozone, the US, or indeed the entire planetary system of raising money for real capitalism.

Related: There’s nowhere near enough money to save both eurobanking and the Clubmeds

Why the Brics are piling into gold