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For the
half of the world that will be responsible for gold’s eventual
five-digit destination—the Chinese, Russian, Middle Eastern and
Indian buyers—gold is doing its job. They are far less concerned
about short-term price swings. Their distrust of fiat currencies has not
abated just because the US came up with yet another plan for extending the
dollar’s hegemony—the latest being an attempt to flatten the
yield curve between long- and short-term bonds through the Fed’s
“Operation Twist.” Many of these people remember how
currency debasement can destroy wealth. The world’s largest gold
buyers, the Chinese, experienced hyperinflation between 1947 and 1949. This
is still fresh in their minds.
As the
aging population, outsourcing and a variety of other irreversible trends
converge, growth slows—yet growth is essential to our current
economic structure, and currency must be created to compensate for this
slowing growth. Ultimately, Western central bankers have no other choice
but to continue printing currency and, through this act, debasing its
value.
Despite
Federal Reserve Chairman Ben Bernanke’s recent assurances that
inflation will remain at two percent, real inflation, that which is
determined by measuring the original basket of goods before they began
substituting expensive items for cheaper ones, will continue growing. ShadowStats measures
this original basket of goods and puts real inflation at about 11 percent.
Inflation is caused by currency debasement. Gold is the best indicator of
true inflation because there is a limited supply of it and more
dollars/euros/pesos chasing the same limited supply makes gold appear to
rise in price.
As the gold
holders of the East probably realize, gold is not really rising in value.
It is holding its purchasing power much as it has for the past 3,000 years.
Currencies are falling in purchasing power against gold. This implies that
gold can rise as far as currencies can fall and, since there is no
alternative but to continue printing currency to compensate for slowing
growth and rising entitlement payments, gold is destined to rise much
higher for many years to come.
Gold will
continue to rise until the economy is truly healthy again. Talk of
deflationary pressures reversing the course of gold is a short-term,
Western assessment. Of course, as we’ve recently seen, when the stock
market crashes people sell their winners to cover margin, and lately the
big winner has been gold. Last week the gold market saw stop losses, margin
calls, raised margin requirements and a rising dollar, so the computers
that do most of the trading these days sold on overdrive.
The Eastern
buyers, as well as sophisticated Western investors, are happy with
pullbacks as they allow them to buy more gold at attractive prices. The
Chinese Central Bank has publicly stated that it plans to raise reserves
from 1,100 to 6,000 tonnes of gold. Unofficially,
they have stated 10,000 tonnes. They think in
terms of decades, not nanoseconds like Western speculators. The Chinese
government encourages its citizens to put five percent of their savings in
gold. They are developing infrastructure to make gold ownership as easy as
possible and to make the country the most gold-mining-friendly country in
the world. In fact, they now lead the world in gold production. For
those who like to compare our current gold market with that of the late
1970s it is well to remember that the Chinese, and most of today’s
developing countries, were not even participants at that time.
Perhaps the
most significant development of the past decade, and one that has gone
virtually unnoticed in the West, is the Pan Asian Gold Exchange (PAGE) to
be hosted in Kunming City, Yunman Province
– the gateway to all of Southeast Asia. This is a game-changing
event that is part of China’s five-year plan to change the entire
face of the gold market. In the west, 100 ounces of paper gold are traded
for every ounce of physical. The PAGE will be the polar opposite of this.
It will have a 1:1 leverage rate between the renminbi
and gold. This perhaps reflects the Chinese distrust of gold derivatives
and paper currencies. In a recent Forbes article ,
titled “The Chinese Mean To Control The Global Gold Market,”
author Robert Lenzner makes the point that this
is the plan.
Of course,
gold has a long history of moving to where things are made and, like
Western manufacturing jobs, gold is moving east. The PAGE is scheduled to
open to the 320 million customers of the Chinese Agricultural Bank late
this year and to the rest of the world in 2012. As it does, the PAGE will
appeal to gold buyers who prefer to trade in a liquid physical market over
a paper market. It will increase the demand for physical gold
exponentially. Confidence in paper products is rapidly waning. Easterners
are simply further ahead of the West on this as they have more recent
memories of the destruction currency devaluations can cause.
At BMG we
encourage our customers to think outside the box of this Western-centric
fiat thinking and to assume the broader, value-based perspective that gold
affords, one that many Easterners have already embraced. We encourage our
customers to think in terms of ounces not dollars. This is of course much
easier to do when you own physical bullion. Such a vantage point helps to
put these pullbacks in perspective. When gold corrects, buy more. When it
resumes its long multi-year ascent, be grateful you did.
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