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Price action isn't the
big players' big concern in gold and silver right now...
"FAITH and
RELIGION," said Edel Tully of UBS, the Swiss investment and bullion bank.
"Those were key
themes," she said, summing
up this year's LBMA conference last Tuesday evening.
We could hardly ignore
those topics, meeting in the hills just west of Rome with 700 other delegates
for the London Bullion Market Association's annual jolly. From Monday night's
dinner on top of Monte Mario, the dome of St.Peter's dominated
the view. And any asset which doesn't pay an income, and which has fallen in
price for more than two years, must look like a "hold-n-hope"
investment based more on prayer than cold logic.
Instead of "faith
and religion" however, we had already scribbled down "trust and
independence" as the LBMA conference's key themes. Because where
Dr.Tully heard whispers of eternal beliefs �– here in God (or gods),
there in gold �– we nearly had to cover our ears from all-too worldly shouting
over safety and sovereignty, confidence and freedom.
Gold forms a triangle
with these ideas throughout history. Trust and independence met gold again
last week in Rome. Because today's oh-so-modern mob of taxpayers, government
officials, lenders, traders, high priests and the rest still need to trust
each other but also demand independence as they skip through the forum. And
as the oh-so-sociable LBMA conference showed, the way that gold and silver
are treated speaks to people's trust in each other, and their freedom to act
as they choose.
Take central bankers.
They tend to sell gold when it's cheap, and buy or hold when it's not.
"This," as Blackrock's Terence Keeley rightly noted to the LBMA
conference, "is no way to diversify your portfolio."
But for central banks,
gold investment is about much more than smoothing returns or improving your
efficient frontier. It's about independence, even if that independence puts
the central bank's trust in other institutions in doubt. Institutions such
as, say, the monetary union you're publicly working to deepen and develop.
Not that any of the six
current or former central bankers addressing the LBMA conference last week
dared say any such thing. Nothing too blatant was given away. But you didn't
need rolling translation to hear what was said.
"Trust is a central
bank's most valuable asset," announced keynote speaker Salvatore Rossi
of the Banca d'Italia. Only just behind that, he seemed to suggest, gold came
a close second. And given Italy's recent history with gold, it certainly
seems to support the central bank's trust amongst the general public. Because
as Rossi said, gold so plainly supports the bank's independence from
government.
"I don't need to
remind you of gold's unique role in central bank reserves," said Rossi,
nevertheless reminding the 700-odd delegates to the LBMA's two-day meeting in
Rome that gold is "unique amongst risk assets" because it is not
"issued" by anyone. So it carries no liability and needs no
counterparty for its inherent value.
Just as importantly, the
central bank of Italy's director general also pointed to "psychological
reasons" for gold's key role. So did Clemens Werner of the Bundesbank,
the world's second-heaviest gold owner behind the United States. More than 40
years after the final gasp of the Gold Standard and eight decades after that
monetary system really hit the skids, he named "confidence" and
"precaution" as the big reasons for continuing to hold gold.
Because as Italy's Rossi
went on in his speech, gold "enhances resilience" in the central
bank's reserves overall, typically rising when other risk assets plunge. More
notably, gold "underpins the independence of the central bank" from
government. Quite how, Rossi didn't say. But with Silvio Berlusconi trying to
destroy Italy's government just a few minutes cab-ride away, the point was
plain enough if you knew the history.
Il Cavaliere came after the Banca d'Italia's gold in 2009. He was told
where to go. The central bank's big friends at the European Central Bank then told Berlusconi where to go,
too. Trying to tax the central bank's unrealized profits on gold was illegal
under the Euro treaty, breaching line after line of the critical
"independence" from government which national central banks must
retain. Italian central-bank governor Mario Draghi has since moved into the
job of ECB chief. So his stand against Berlusconi's failed gold bullion tax
grab looks a good template for how the ECB, and the biggest gold-owning
central banks of the Eurosystem, might view their gold reserves today.
Most definitely, none of
Germany or Italy's gold is up for sale this year. Alexandre Gautier said the
same of France's hoard. But then again, the Banque de France said that in the
late 1990s, only to break ranks and take advantage of rising prices in the
early Noughties. Gautier also spoke last week about trading and
lending (this was a business conference, after all), but only to say the
former is now very limited, while the latter is off the table. Not until gold
borrowers come up with collateral. Which is unlikely but necessary now that �–
compared with 10 or 15 years ago, when lending European central-bank gold was
all the rage (as was selling it, at least outside Rome and Frankfurt) �–
"the environment is totally different. I'm not sure it could be
acceptable for a 1-year loan without collateral."
Which brings us back to
trust...to be continued in Part II...
Adrian Ash
Adrian Ash is head of research
at BullionVault, the secure, low-cost gold and silver market for private
investors online, where you can fully allocated bullion already vaulted in
your choice of London, New York, Singapore, Toronto or Zurich for just 0.5%
commission.
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 it.
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