Gold fever may return

Gold has been in the doldrums for a while, but we're now getting messages about inflation and if Fannie Mae and Freddie Mac are added to the liabilities of the US Government, we could be back in the paper-money world of pre-Revolutionary France as advised by the Scottish gambler, John Law.

The Mogambo Guru gives value, not just in comic entertainment, but also in his useful references. One of them is to Adrian Ash, who points out that gold is now worth less than 2% of world financial assets, whereas at times of "investor stress" (and as late as 1982) it has risen to 20-25%. It may be time to consider the argument for precious metals, not so much as investments as insurance against the severe loss of value of other assets.

Marc Faber update: take refuge in gold

Dr Faber has become a gold bug again, but is expecting a correction in other commodities. In a climate of low interest rates and high inflation, Adrian Ash seconds the call for gold.

And here's an extract from Faber's monthly "Market Comment" three years ago (July 5, 2005):

... Lastly, think about the following situation. The US manufacturing sector becomes very weak. The housing market falls and consumption declines. But oil goes through the roof because the empire of eternally rising home prices has just bombed Iran (very likely, in my opinion). Now the Fed cuts interest rates and eases massively. Just think what the stock, bond, foreign exchange, and gold market will do? The initial reaction might be a flight to safety – into government bonds and gold, and out of stocks. But, thereafter, a massive sell-off in bonds could occur as inflationary pressures build from sky high energy prices and massive money printing.

I have to confess, that I am not so sure exactly how this situation would play itself out, but it is worth thinking about it.

Worth the US$ 200 annual subscription, you may think. Especially since some of it goes towards the education of poor children in northern Thailand.

The name's Bond, Negative-Return Bond

Adrian Ash reports that pessimism has made bond prices soar, which in turn means they're a terrible investment for inflation-dodgers. He gives this graph:

Naturally he thinks this boosts the argument for gold, but I'd suggest that remorseless monetary inflation simply means that we need to store our excess wealth in a diversity of things. We just need to be careful not to pay too much, as the waves of excess liquidity temporarily make this or that asset bob high above its longer-term trend.

Veneroso: up to half the gold has gone

GoldSeek (November 1) relays Frank Veneroso's assessment that central banks may have disposed of up to 50% of their gold bullion:

... The manipulation of gold prices was first noticed in the 1990s by Frank AJ Veneroso, one of the world’s top investment strategists. As more gold bullion came onto the market depressing the price of gold, Veneroso believed the central banks were its source.

When queried, central banks denied Veneroso’s assertions. Central bank records, in fact, showed their gold reserves to be stable. But Veneroso was right and the central banks were lying. The gold moving onto the markets was indeed coming from central banks via their co-conspirators in capping gold, the investment banks.

Investment banks were borrowing central bank gold at 1 %, selling it thereby depressing gold’s price and investing the proceeds in higher yielding government debt; and, as long as the price of gold moved lower, the profits of investment banks increased (see The Manipulation of the Gold Market, http://www.gata.org/node/11).

The International Monetary Fund was complicit in this deceit as IMF regulations allowed central banks to count gold “swapped” or “loaned” as still being on deposit in their vaults. Veneroso now believes that up to 50 % of gold reserves claimed by central banks have already been sold—a fact that will be instrumental in our collective bet against central banks in their house of cards...

... Veneroso believes central banks sold 10,000–15,000 tons, equal to 320,000,000 to 500,000,000 ounces of gold over the last 20 years. Just imagine how high the price of gold would be if the central banks had not sold this staggering amount.

Today’s $800/oz. gold is a bargain—as is $2,000/oz. or $3,000 oz. gold—a bargain that exists only because central banks literally sold thousands of tons of our gold onto the market in their attempts to prove gold a poorer alternative to debt-based paper currencies.

Over a year ago, Veneroso estimated central banks had less than three years supply left to cap gold’s price. He also predicted the central banks would capitulate before then, keeping what little gold they had left. When this happens, the central bank subsidy of gold will end and the price of gold will skyrocket.

On the same site, Adrian Ash (November 2) looks at gold's disadvantages and decides that it is best defined not as a commodity, but as a currency:

Given that gold doesn't pay you anything in yield, interest or dividends – and that it does not have any real industrial value – the "investment motive" for gold can only be explained as desire to quit other assets. Or at least, to hold an asset entirely free from what drives other asset markets up and down.

... perhaps the gold market says investors are looking for protection against falling bond, real estate and equity values – as well as a falling US Dollar and slumping US economy.

So they are buying protection ahead of time. And to do that, they're buying gold – a wholly different asset from everything else.

One for the speculators. Meanwhile, perhaps the non-rich among us should take the precaution of paying off overdrafts, credit card debts and any other loans that can be called in at short notice.

Gold to resume its rise?

Adrian Ash and Richard Daughty are bullish on gold again. Adrian expects the downturn in the US housing market to turn investors bearish; Richard relates the recent price-dawdling of gold to Spain's decision to sell a lot of it on the market to restock their foreign currency reserves.

The Dollar vs the Euro

Adrian Ash in the Daily Reckoning Australia: even if the Euro is capable of replacing the US dollar as a trading currency, it has similar problems!