After an especially quiet summer, gold has risen to four-month
highs...
I'M WRITING a very rare piece – about the time
to Buy Gold, and not the reasons to buy it, writes
BullionVault
founder Paul Tustain.
It's not my normal teritory; I don't do timing.
A year ago, on 6th September 2011, gold hit $1920 per oz. It had shot up
from about $1500 at the start of July, making new all-time highs almost
daily. Three short weeks later it was back down at $1540. In sterling terms
it was almost the same story, £930 at the start of July, up to £1194 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 $1660, 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 is 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 analysis1, 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.
1The reason gilts can be sold is that they are being bought by
people who don't care about losing all their money. It's true!
All a pension fund wants to do is pay you out its nominal obligation in
15 years time. The way to ensure that is to buy government bonds.
If inflation is around the corner they don't need real investment
returns, and they don't really care if the money they pay you only buys you a
sandwich a month, so long as their debt is repaid. Pension payers love
inflation.
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