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Gillian Tett (Financial Times): "Do you think that
gold is currently a good investment?"
Alan Greenspan (private citizen): "Yes. Remember what
we're looking at. Gold is a currency. It is still, by all evidence, a premier
currency. No fiat currency, including the dollar, can match it."
– Council on Foreign Relations meeting, November, 2014
OPINION
Reflection #1
Caveat venditor
Let the seller
beware! The German citizen/investor who put away a few rolls of 20 mark
gold coins (.2304 tr ozs. shown below) in 1918 would have done so at 119
marks per ounce. By early 1920 the previous rapid inflation had suddenly
given way to deflation. Had that gold owner decided to cash in on gold's
significant gains thinking runaway inflation was over, a 100,000 mark
investment would have made him or her a millionaire. The glow, however, would
have quickly worn off. By late 1921 the runaway inflation had resurfaced but
now with a vengeance. Gold shot to 4,000 marks per ounce. By mid-1922 gold
reached 10,000 marks per ounce and the wholesale price index went from 13 to
70. By late 1922, the roof caved in. Gold traded at 134,000 marks per
ounce. In January, 1923, it cracked 1,000,000 marks per ounce. By
midyear, it broke the 100 million marks per ounce barrier and at the peak of
the hyperinflationary breakdown, it sold for over 100 billion marks per
ounce. The individual who thought he or she had the cat by the tail and
cashed-in his or her golden chips during the 1920's deflation became a
millionaire. In short order though, that millionaire became a pauper as wave
after wave of hyperinflation washed over the German economy. One moral from
this somewhat frightening tale is that becoming a millionaire or even a
billionaire on one's gold holdings was inconsequential. Another is not to
give up one's hedge until there is ample evidence that it is no longer
needed. Momentary nominal profits can be illusory.
Caveat venditor!
TrailerNote – From The
Nightmare German Inflation by Scientific Market
Analysis: "Those who held funds in dollars, pounds or other stable
currencies, or in gold, saved their capital. The government set up rigid
exchange controls as the inflation proceeded. As usual under such conditions,
a black market flourished. The ones who fared best
were the small minority who had the foresight to exchange marks into foreign
money or gold very early, before new laws made this difficult and before the
mark lost too much value." The currency image (left)
illustrates the rapid depreciation in Germany's paper money with single notes
going from a 20 mark value in 1918 (the paper equivalent of one 20 mark gold
coin) to a 20 million mark value in 1924. Fast forward to 2015, nearly one
hundred years later, and we find that all currencies are being deliberately
devalued against one another in an on-going global currency war. That hedge
is no longer available. Only gold stands outside the fray. Perhaps that is
why former Fed chairman Alan Greenspan recently said, "Remember what
we're looking at. Gold is a currency. It is still, by all evidence, a premier
currency. No fiat currency, including the dollar, can match it."
Reflection
#2
New Fix
same as the old Fix
Though Financial
Times, quoting reliable
sources, reported that the new London Gold Fix would be comprised of eleven
members, three of which would be Chinese banks, in the end only six banks
made the cut, all of them familiar names, all of them western banks
– Barclays, HSBC, SocGen, Bank of Nova Scotia, UBS and Goldman Sachs.
Governing the Fix, we will now have two British banks (Barclays and HSBC), a
French bank (Society Generale), a Swiss bank (UBS), a Canadian bank (Bank of
Nova Scotia) and an American bank (Goldman Sachs) but no Chinese banks.
Notably absent is another American bank, JP Morgan. (Added Note: Mineweb's
Lawrence Willliams reports that JP Morgan has now been added as a direct
participant in the fix.) I should add that in one announcement on the new
participants, room was left for the entry of Chinese banks at some later
date. No date-certain was offered. Little seems to have changed with this
player roster. All six are currently under investigation by the U.S.
Department of Justice for gold market rigging, so we are left to wonder
whether or not anything meaningful in terms of reform has been accomplished.
The new Fix, in short, looks pretty much like the old fix only on an
electronic platform. At the very least, the London Bullion Marketing
Association should be more forthcoming about why Chinese banks were rejected
for membership at the outset. It would also be helpful to know if Chinese
banks might play a role in the future and, if so, when.
TrailerNote –
China is now pressuring the physical gold market the way
Europe led by France did in the late 1960s, early 1970s. The blunt tool
employed last century was physical delivery. China employs the same tool
today and, at this juncture, one can only speculate whether or not its
interest in physical delivery might have played a role in its being left out
of the new price setting club. I will stick with my
original contention that once the London–Zurich–Hong Kong–Shanghai gold
pipeline runs dry, China's best interest lies in higher gold prices against
all currencies including the U.S. dollar. I hasten to add that it is likely
to act in its best interest whether or not it takes a seat at London's price
setting table. It seems to me that London would be better off with China in
the club than outside. The British establishment seems to have applied that
kind of logic in joining the Asian Infrastructure Investment Bank despite
American criticism. Thus far though, it has failed to apply the same logic to
the new London Fix. China is not likely to sit back and wait forever for a
membership invitation when it is fully capable of starting a new club on its
own. That is where the Shanghai Fix might still play a role in setting the price
of gold. Subsequent chapters to this tale, it seems to me, remain to be
written.
By the
way, here is a food for thought on the AIIB situation from the Telegraph's
Ambrose Evans-Pritchard: US risks epic blunder by treating China as an economic enemy
Reflection #3
Federal budget myths and reality
The gap between the "political" deficits and the
"real" deficits remains a constant source of irritation among
economic conservatives. For fiscal year 2014, the political deficit, played
up by the press, was $483 billion – the politicians' feel good number. Here's
the reality: On October 1, 2013, the beginning of the federal government’s
fiscal year, the national debt stood at $16.747 trillion. By the end of
the federal government's fiscal year, September 31, 2014, it was $17.824
trillion. In reality, the federal government added $1.077 trillion, not
$483 billion, to the national debt. The inability of the Beltway to
confront the budget deficit reality is at the basis of its inability to deal
with it.
TrailerNote –
The politicians complain about the deficit but they never really do anything
about it – Democrat or Republican. Dick Cheney, George W. Bush's
vice-president, went so far as to say that "Reagan proved that deficits
don't matter." One wonders what Ronald Reagan, a life-long critic of
over-blown government spending and the irredeemable national debt, might have
thought of that comment. Another myth promoted by many within the political
class (mostly the Keynesian variety) is that the national debt doesn't matter
because we owe it to ourselves. First, deficits do matter because the
taxpayers ultimately must pay the interest on the national debt. In fact
roughly one-third of the real deficit quoted above is interest on the
national debt, money that would be better spent elsewhere. Secondly, we no
longer owe the money only to ourselves. We owe a big chunk to China
($1.24 trillion) and another big chunk to Japan ($1.24 trillion). In
total, the United States owes the rest of the world $6.22 trillion – or about
one-third of the total national debt. To redeem this debt with the bullion in
U.S. Treasury coffers, gold would need to be priced at $23,800 per troy
ounce.
Reflection
#4
How gold benefits from the yuan's challenge to the dollar
The United States government reacted strongly to China’s
introduction of financial institutions to rival the International Monetary Fund
and the World Bank. The United Kingdom, Germany and France – Europe’s
core nation states – have become (or are in the process of becoming) members
of China’s new Asian Infrastructure Investment Bank (AIIB) much to the
chagrin of the U.S. government. China set up the AIIB to rival the
International Monetary Fund and the World Bank – two institutions at the
heart of the dollar's global hegemony and top reserve currency status.
Last week, the United States, in a rare public criticism of the United Kingdom,
complained of a “constant accommodation of China, which is not the best
way to engage a rising power.” Japan, Australia and New Zealand
have also joined the AIIB, so none of those countries is engaging China in
"the best way" either. China has designs of making the yuan
an international rival to the dollar and with its nearly $4 trillion in
currency reserves, it has the financial muscle to make it stick.
So what does all this have do with the demand for gold? The
World Gold Council's Juan Carlos Antigas offers this interesting take on the
situation:
“The importance of China on
the global stage is not yet reflected in its currency. It is likely that we
will see a greater renminbi footprint before long. . . The dollar’s share of
global reserves has fallen slowly but steadily – from 61% in 2000 to 55% in
2014 – as the euro’s share grew from 15% to 22%. Other currencies are growing
too, particularly the Canadian and Australian dollars. However, as non-dollar
currencies increase in their share of global reserves, their effectiveness in diversifying
foreign reserves may diminish as the monetary policies of their respective
central banks become more synchronised. This could make gold’s value as a
diversifier in foreign reserves more apparent to central banks."
Reflection #5
The potential effects of gold
repatriations on the rest of the market
Bundesbank reported recently that it repatriated 120
tonnes of gold last year. Gold analysts thought the repatriation had
stalled but that does not seem to be the case. The 120 tonnes
represents about 18% of the intended repatriation to be completed by 2020.
The pace of repatriation is not as important as the intent. With the
ECB having launched its quantitative easing program and the seemingly
intractable sovereign debt problems in the southern tier creeping back into
play, Germany – like Netherlands, Belgium, Austria and possibly others –
would like to repatriate its foreign gold within national borders. Though
none of these countries talk about the real rationale for repatriation
officially, there has to be an element of on-going concern about whether or
not the euro system rests on solid ground. Too, with the U.S. national
debt being what it is, monetary fundamentalists the world over worry about
the long-term stability of the dollar as well, and some of those, believe it
or not, still hold advisor status in the policy councils of nation states.
TrailerNote – These
repatriations are not well understood. Many believe that the depositories
(e.g., the New York Federal Reserve, the Bank of England, the Bank of France,
Bank of Canada) are on the hook for returning this gold to its rightful
owners – other central banks like Bundesbank. That, however, is not the case.
The real debtors are the bullion banks who took the gold on deposit from
central bank creditors then loaned it back out to various customers who, in
turn, used it in their ordinary business operations. Now that gold is widely
dispersed among the global population, and reassembling it in 'good delivery'
form is like putting Humpty Dumpty back together again. It cannot be done on
demand. As a result, the bullion banks are forced into the open market to
make good on their promises – a process likely to take several years
depending upon who lines up in the queue and when they decide to do so.
I have
mentioned in previous writings that gold repatriation is a hidden source of
demand. In fact, it is a hidden source of semi-permanent,
built-in, and elevated demand.
As such it serves as an important adjunct to China's acquisitions. Neither of
these demand sources is likely to go away any time soon. This shift in
sentiment only adds to gold's long term prospects for the investor who
understands the suppy-demand dynamics and has the patience to let the market
find its way on these matters. The best way to do that is by owning physical
gold coins and bullion, tucking those holdings safely away and taking a 50
yard line seat to watch the action here at USAGOLD. No country seeking
repatriation would be going to all this trouble if it, and an important chunk
of its citizenry, lacked faith in gold's centuries old status as a reliable
and constant store of value. That perhaps is the most important message of
all in the unfolding repatriation movement.
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