US Dollar Index vs Spot Gold
Again this week the gold price tested the $1,200 level dropping below it
on higher US dollar against most fiat currencies. It is assumed that a
stronger US dollar against the euro and other fiat currencies is also
negative for the price of gold. However gold is not a hedge against the US
dollar but rather against all fiat currencies. Even though gold’s price has
been falling, in India and China gold premiums have increased signifying a
rising demand. We have also seen a substantial increase in silver and gold
coin sales in the US. Actually gold coin sales doubled in September compared
to August.
US Mint Gold Coin Sales – Gold and Silver
With sentiment at historic low as I explained in my previous article Gold Sentiment,
$1,200 and more specifically $1,180 is more a correction within a secular
bull market than a pause in a larger bear market. With more and more articles
coming out with titles like “Gold Dies”, I am more convinced than ever
that we are seeing a major bottom being crated. Eastern central banks are
still buying massively and Western central banks are holding on to their
stock. This doesn’t look to me as a continuation of a downtrend.
On November 30, Swiss
citizens will go to the polls to vote on three areas; whether or not the
Swiss National Bank should increase its gold reserves to 20%, that the
central bank should stop selling its gold and that all its gold should be
held within the country. If by any chance the Swiss people votes in favor I
expect major tremors in the gold market. Just the fact that Switzerland will
have to buy a large amount of gold to reach the 20% will have a major
psychological effect on the gold market not to mention also the snowball
effect it will have on other countries. Switzerland is a very small country
but with a long history of gold ownership. A vote in favor in the Swiss Gold
Initiative referendum would mean that Switzerland would have to buy 1,700
tonnes of gold. This represents 70% of annual world gold production. The
Swiss National Bank has 5 years to acquire the 1,700 tonnes if the initiative
passes.
Gold as a hard currency is also influenced by geopolitics. But for gold to
go up you need not just a local crisis but a crisis that has global impact.
Other ways it only increases in price locally in the conflict area with
temporary impact on global price. With the Crimean annexation by Russia the
world has switched from a détente and disarmament environment to a new cold war
and rearmament. Local conflicts are appearing everywhere with potential of
escalating into a global conflict. The Middle East and in particular the
Iraq/Syria region has become a stateless land where ISIS is trying to expand
its influence and destabilize the entire region. Libya, an oil rich country
is still in chaos and now social unrest in Hong Kong is threatening stability
in China. Let’s not forget the recent unrest in the US with the Ferguson
riots, a suburb of St. Louis, Missouri. The US is not used to having social
unrest on its own territory. Home grown terrorism spurred by economic
hardship has not happened in the US since the 60s. There is a believe in the
US that trouble can only come from the outside forgetting even the recent
Oklahoma City bombing by a good American boy named Timothy McVeigh. In Europe
high unemployment, the rise of the extreme right and secessionist movements
(Scotland, Catalonia, etc.) threaten the European Union.
The currency wars are still alive and contrary to the G8 agreement not to
manipulate their exchange rates, this is what is actually happening. The US
dollar going up against the euro is a stated desire of the European Central
Bank. But there is no reason why gold should move with the euro. Gold is the
anti-fiat hard currency not just the anti US dollar. Gold has risen as much
in all paper currencies in the last 15 years not just against the US dollar.
In the most recent Fekete Research Gold Basis
Service, Sandeep Jaitly states that “December silver remains in backwardation
and December gold is soon to join it”.
In a recent article in the London Financial
Times, John Dizard mentioned an increase in gold’s “popularity as a medium
of exchange for international transactions has been soaring,
particularly in the past few months as the impact of US government sanctions
on non-compliant banks has become severe.” And that, despite gold
being “the most expensive and least convenient of all of the monetary
alternatives to the dollar.” I emphasize the words “medium of
exchange” and “soaring” because if we believe the mainstream media nobody
wants to use gold as money because it is expensive and least convenient. I
mentioned it in a previous article on gold sentiment but I wanted to mention
it again because I think it is a very important piece of information.
Physical gold is being accumulated and used in exchanges but very
discretely as of now. In a recent report mentioned in the UK Telegraph
it is revealed that a record number of super-rich elite are buying gold
bullion bars weighting 12.5 Kg. The report says “The gold buying secrets of
the UK come as it was recently revealed the number of 12.5kg gold bars being
bought by wealthy customers has increased 243% so far this year, when
compared to the same period last year.”
The geopolitical and economic environment in the last few months was in my
view the calm before the storm. All the economic issues both in Europe and
the US and all the geopolitical conflicts I mentioned above, or a combination
of them have the potential to degenerate “unexpectedly”. Both the economic
and political environments are uncertain and will surprise the complacent
markets. More and more the current environment reminds me of the Citigroup
president’s statement to the Financial
Times before the 2008 crisis. CEO Chuck Prince made clear that he was
aware of the risks his company was taking but said “When the music stops, in
terms of liquidity, things will be complicated. But as long as the music is
playing, you’ve got to get up and dance. We’re still dancing,”
An unexpected precipitating event like a black swan event in this uncertain
environment will push gold and silver up with a quantum leap with gold
leading.
