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Usually I tend to focus on the reasons to buy gold rather
than the timing. Timing is not my territory. But as we approach the
anniversary of gold's all-time high, my thoughts turn to ebb and flow of the
gold market.
Last year, on Sept. 6, 2011, gold hit $1,920 per oz. It had shot up from
about $1,500 at the start of July, making new all-time highs almost daily.
Three short weeks later it was back down at $1,540. In sterling terms it was
almost the same story, £930 at the start of July, up to £1,194
and back again to £995.
Since then people have left gold alone, and many have sold. But gold has not
fallen away like almost everything else would have after a ten year bull run.
After a rally this week, it's currently trading around $1,660, or
£1040. It has taken a breather.
I speak to prospective gold buyers all the time – and they are
worried about the situation of our currency – the pound. Many would
like to drop the pound and buy gold,
yet when it was making new highs daily, like it did a year ago, they worry, understandably, that they'll pay the
highest price in history. I do too. But then when it drops away we worry that
it has further to fall. In volatile markets buying and selling is
frightening.
What volatility? Here in the gold business we have plodded along through
July and August, and it's been dull. The rule of thumb in the industry is to
expect July and August volumes to be 30% down on the rest of the year. Indeed
not much has happened, in fact it's been quieter
than usual.
But in the last couple of days things have started moving. Volumes are
creeping up again, and prices too. In the 7 years
since we launched BullionVault,
September has always been a high volume month. This week the holidays
end. The money professionals get back to their desks and look into their
crystal balls. What will they see, apart from this bowl shaped chart of the gold price?
Nothing has improved in Europe. Nothing has improved in the UK –
even if we feel temporarily lifted by the Olympics. Our government has got
weaker, and borrowed more money; July was dreadful. George Osborne is now
under concerted pressure to “do something”, and it's coming from
his own side as well as the opposition. As we approach the latter half of a
parliament we can reckon his worthy pursuit of economies will weaken.
We are printing new money and adding to the stock at about £16 per
working person per day – which all finds its way into the economy via
the wages of a bloated public sector. It spins around for a few short weeks,
generating modest economic activity, before settling on savers. For some
reason, which almost defies logical analysis, they buy government bonds, thus
completing the funding circle; taking cash back out of circulation and
leaving just a bigger pile of government debt. Thanks to savers' appetite for
gilts we have not seen the retail price inflation which money printing
normally produces – but only because we are in this unusual position of
printing money without increasing the quantity in circulation.
There will be a flood when those bonds turn back into cash, and that
looks increasingly imminent. Already there is a £1trn in outstanding
debt, which is evenly spread out to about 20 years. Unfortunately every day
it gets less spread out. It slowly concertinas into the short end simply
through the passage of time, and as it does so it approaches the concentrated
re-financing obligations which finally did for Greece. It's just a matter of
time.
For now we only have to finance redemptions and a budget deficit
amounting to a mere £500 million a day – which is close to an
indigestible quantity for the markets. Now remember, this is a government
which is too fragile to impose real economies, which is already a trillion in
debt, which is two years from campaigning again, and which controls the
printing presses. Pick a number. 600 million? 750 million? 1 billion? Daily
cash demands on this scale will try the generosity of even the most generous
pension fund – which, of course, is using your money. We are turning
inexorably into Greece. Whatever we do now, the concertina effect will impose
these sorts of numbers in due course. This would be true even if we were to
cut the record budget deficit today – which is politically impossible
anyway.
When the market finally says “no” to the government's need
for cash, the redemption of those outstanding gilts will require printing
real banknotes. You'll get your inflation then, and with £6 frozen into
bond markets for every £1 in circulation savers will realize that the
torrent of melt-water cannot stop for years. That's when we all abandon the
currency. Any other store of value will do.
I believe the pound has a weaker future than a German dominated
mini-euro. But thanks to a year old price spike, and a dull summer, for now
at least we can buy gold with
sterling at over 10% below its all-time highs. Do you really fancy buying it
when it's making daily all-time highs again? I don't. I come out in a rash
when I buy something at highs. It goes against my investing religion.
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