Sovereign paranoia and bondholder debt mistrust mean the gold bonanza can’t be far away
This from Zero Hedge yesterday:
‘China has a habit of being quiet for several years at a time, and then announcing big increases in gold holdings. So quoting old numbers will only mean that one is caught flat-footed as to China’s current holdings.’
The entire article is excellent by the way – a rattling good read making a pertinent observation: suddenly, all those sovereigns with their gold bars in other places ‘for safe keeping’ want it back. And guess what? The safe-keepers are dragging their feet.
ZH makes two other key points in the piece: first, that ‘governments have been caught on several occasions manipulating the gold price’; and second, the point above – China’s miraculous ability suddenly to find another 20K tons of the stuff lying around, and then stick it in the stats.
The Slog has been writing about US gold sales to China as one means of price capping since 2005. When I first embarked on that long series of articles, I was dismissed by most people in the sector as a nutter. But not by everyone: three or four senior hacks and well-respected wealth-managers sent me discreet emails saying “I think you’re right”. Looks like we were indeed.
But the most interesting thing about the last three weeks has been the sense of panic gradually bubbling up to the surface: “Hmm, time to audit our gold” – aka, time to check that the lying buggers have actually still got it.
Last week I posted about the ECB’s top secret viability study regarding the use of gold as backing for EU bonds in the future. Well, we are close to the stage now where bond buyers et al will start to worry about whether the ‘gold’ backing is actually the shiny stuff…or perhaps some ETF tracker holding held in increasingly worthless euros. There is of course no practical way to do that short of every major bond-buyer getting an escrow vault account, and going to inspect the gold there at regular intervals. It would be an administrative nightmare.
Ultimately, trust is at the heart of all investment and borrowing. What Draghi, investment banks and the Fed Reserve have done is destroy that trust. That in turn has started a desertion of fiat currency in favour of top-of-market property and gold. It would be a horrible (and highly destructive) irony if the distrust now stretched to include gold itself.
Such distrust already includes paper gold-price trackers. My own hunch is that if a transparent auditing system is set up in the eurozone area, then the use of gold as debt-collateral will not only transform matters there, it will also kick-start the coming zoom from $1650 to around $2500. But the dodgy rumours about what’s actually in Fort Knox (and jiggery pokery between major-player wealth funds and gold miners) will continue to make some net worth protectors nervous.
For my money, the top three factors at play as to when and how the gold-spurt will begin are purchase saturation in the top-end property sector; what happens in relation to Spain and Greece in the eurozone; and the extent to which bank liquidity defences can be massaged upwards.
QE is a failure, but it’ll be a while yet before it becomes clear to Mr & Mrs Gameshow that cash is being diluted in order to help banks who won’t help themselves. Some time after that, the Big Boys need to decide which of two ominously dangerous policies to try next: money-printing on a grand scale, or raising interest rates in order to stem the gold rush and restore some faith in the citizen’s ability to keep up with inflation. (Or, funnily enough, both at once in a race to the bottom).
Gold and property remain the only two ways guaranteed to help protect what wealth one has left. Globally today, we have stock markets everywhere that are ludicrously overvalued….propped up as they are by Zirp and QE. But in the trade-off between reduced consumer purchasing power and confidence-boosting stock market levels, push must come to shove in the end.
When it does, gold will go stratospheric….and then sovereigns will ban its private sale. The sector they manipulated for years to keep mugs happy with flakey debt bonds and air-fuelled bourses will be blocked off formally. I don’t know what happens after that, and I’ve yet to see a convincing account of what will happen. Also, I don’t want to think about such an aftermath. For the moment, I remain focused on the window left open to gold-bugs, and stuffing as much wonga through it as I can before the shutters come down.
Related: Nervous Germans demand gold audit
The Slog 