Lehmans? Even the smart people get whacked in a
PEOPLE THINK the gold price
always goes up in a crisis, right until they find out it doesn't. And the
reason that this now feels so much like the Lehmans
collapse of three years ago is that, looking at the numbers alone, you'd
think it was autumn 2008.
Put silver to one side. Because
with 60% of annual demand going to industry, the restless metal remains very
exposed to the global economic downturn. Whereas gold, long term, tends to
rise when other investments – shares, bonds, cash, real estate –
fail to deliver.
Look at the grinding losses of
Treasury-bond or equity holders in the late 1970s, or the Tech Stock slump of
10 years ago, or the sub-zero real returns paid to cash savers – across
the world, after inflation – over the last half-decade.
By the same token, gold tends to
fall when investors can see better opportunities elsewhere. Short-term US
deposit rates of 19%, for instance, paid above-inflation returns of nearly
10% in 1980. Little wonder the gold price sank from its then-record peak of
$850 an ounce, and kept sinking as US bonds paid an average 4% real interest
rate for the next 20 years.
Whereas today? Thanks to Operation
Twist already snarling everything up, 30-year US Treasury bonds now offer
just 2.79% to hungry new buyers. By the time they mature in 2041,
Washington's debt-to-GDP ratio will stand around 400% according to one credible estimate – a mere 2.5 times the burden about to force Greece's default
– with debt-interest alone eating more than $1 in every $4 generated by
what is very unlikely to remain the world's single largest economy.
In return for taking that risk,
30-year bondholders will meantime earn one full percentage point less than
inflation this year. Gotta get some for your
Or take the Japanese Yen –
the world's other ugliest currency. Like the Dollar, it's managed by central
bankers so bent on printing money to "fix" every problem they spy,
capital markets now have a nervous breakdown each time they don't. Nor do the
Dollar or Yen pay their domestic cash savers anything, while foreign
investors have seized the chance to borrow both at next-to-nothing, using the
money to buy more exciting assets, such as slow-drying paint (and non-rusting
gold) through to Brazilian Reals (down 11% so far
this week vs. the Yen) or wheat (down 5% against the Dollar on Thursday alone).
The financial world cannot bear it
when the Dollar or Yen go up. Which is just what they're
doing, thanks to the interbank lending crisis – otherwise known as the
latest credit crunch – forcing Dollar and Yen debtors to pay back all
those "free" Dollars and Yen used to finance investments in stocks,
bonds, and commodities.
The "liquidity line"
pumped into Europe by the Federal Reserve last week proves just how desperate
Eurozone banks have become. So too does the rise of the gold offer rate – the rate of interest offered by bullion owners, through
London's wholesale market, who want to borrow cash and put up their gold as
collateral. Yes, holding gold is great, but holding cash is better still
– short term – when your institution can't otherwise raise a loan
in the market, or needs to pay back its Dollar or Yen financing.
Those two currencies, source of so
much free investment cash over the last decade, really are at the heart of
this current slump. This week so far, for instance...
· Japanese Yen
price of gold: down 5.1% from the weekend
· US Dollar gold
price: down 4.5%
· Euro (and Swiss
Franc) price: down 2.2%
· Pound Sterling
price: down 1.9%
· Canadian Dollar
price: up 1.4%
· Aussie gold
price: up 2.2%
See what's happened to gold vs.
the commodity currencies? Issued by resource-rich states, the money of
Australia or Canada look a no-brainer when base
metals and energy prices rise. But when copper drops 30% in a month? Or crude
oil sinks so fast that the Opec cartel threatens to
tighten supply for the first time since – oh! – crude oil last sank this fast?
Just as no one cared when
commodities rose that the Canadian Dollar paid way less than Canadian
inflation, so no one cares today that the Aussie currently pays 4.5% more per
year than it should cost to borrow and sell US Dollars. Because no one can borrow Dollars, not in Europe
especially. The warning was there, however, just as it was in mid-2008 when
the first slug of the crisis neared its peak. The gold price in terms of both
Australian and Canadian Dollars rose to new record highs as the US gold price
sank in late 2008. It hit new record highs again in August and Sept. this
year against both commodity currencies – a signal that gold's new high
in the US Dollar was flashing "credit deflation!" instead of the
consumer-price inflation most economists still think gold requires to go
Yes, today is just as much about
investors selling gold to cover losses elsewhere as it is about the liquidity
crisis forcing Dollars and Yen higher. But again, that's just like Lehmans' collapse. And just like that slump, it's hard to
see today's drop as the end of gold's multi-year bull market. Because
everything else looks just as bad as it did yesterday. Only worse.
Can't speak for silver, though.
Yes, it typically moves in the same direction as gold day to day. Yes, a bull
market in one is inconceivable without a rise in the other. But over the last
43 years, silver has moved 1.7% for every 1% move in gold on average, both up
and down. Whereas the huge run-up this spring, plus the dramatic pull-back
since then, mean silver has so far in 2011 moved 2.9% for every 1% move in
gold, magnifying the yellow metal's rate of change almost 3-fold.
So far this week, silver has lost
10.1% vs. the Dollar and more than 11% vs. the Yen. It's even lost ground to
the Aussie and Canadian Dollars. But that's the trouble with a financial
crash. Even the smart people – the people who saw it coming,
and might even be right in the long run – get whacked just like
You can Receive your first gram of Gold free by opening an account
with Bullion Vault : Click here.
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment gold,
vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on