The Gold Enigma

November 4, 2014 | By | Reply More

As all dedicated followers of precious metals are, no doubt, by now aware gold and silver have hit lows not seen since spring 2010. During these four years we have seen the effects that a series of quantitative easing policies have had on the psyche of investors and speculators of all classes, from the humble retail buyer to the powerful central bankers and their cohorts on Wall Street and further afield overseas. To back track to 2010 when the gold bull market started its main run up to near $1900 an oz by August 2011 to its gradual decline today to $1170 an oz. we ask ourselves what has fundamentally changed to precipitate this fall, and herein lies the gold enigma.

Quantitative Easing

Back in 2010 the awareness among investors majorette on the trillions of new money being introduced to the economy via QE and its effect on the value of the dollar with the assumption that significant inflation would follow as sure as night follows day. It was also considered to be the Feds policy to encourage a degree of inflation in order to alleviate the effects of paying off the nations debts and interest payments. Of course there were other factors to take into account , not least of which was the fear of deflation and its consequent result of a stagnant economy and high unemployment levels.

The Feds Money Finding a Home

By August 2011, not surprisingly, profit taking began to erode the gold price while at the same time the big hitters realised that, with all the new QE money swanning around looking for a home, the stock market, property and other assets, such as art, classic cars etc., all of which had been badly hit after 2008, were now looking attractive. Not least of these were US Govt. treasuries Since that time all these investments have become increasingly profitable as each new tranche of QE money has found its way into these markets.

A Scenario Created for Quick Profits

Eventually many smaller investors realised that getting out of precious metals and putting there cash into these booming markets was going to make them quick and profitable returns. To aggravate the gold and silver situation further they became very aware that the futures market was dictating the metals price, with perhaps some government help, despite the volume of business conducted by Comex bearing little or no relation to the availability and the demand for the physical metals.

The preferred investment vehicle for those smaller investors had been gold backed ETFs such as SPDR Gold Shares however doubts were raised in the media and amongst on line analysts that the physical gold held by these ETFs was secure. That accusation seem to have died away and was unlikely to have any foundation in truth. It is small wonder that the average retail investor felt out of his depth with his money in gold when there was such tearaway action in the stock and other asset markets.

Beware of Technical Analysis

Now we have the technical analysts take on the situation with many of them forecasting a further slump in the gold price, some to below $1000 an oz. We read of one who was basing his assumptions on gold’s chart over 200 odd years. We suppose that makes a talking point. What is significant is that technical analysts have come up with a myriad of conflicting scenarios for precious metal markets over the last few weeks. This is an example of the dubious reliance we should place on reading the runes of past performances to forecast the future. The only exception new have to that is in the very short term as guidance to day and other short term trading.

Deflation Then Inflation the Final Result

But back to today and the gold enigma. Herein lies the crux of the matter. Apart from the dollar being stronger, an anomaly that is unlikely to last, nothing much has changed since 2010. There is ever more money being introduced into western economies which will, eventually, find its way into general circulation with the consequent leap in inflation, at least so history has taught us.

Prior to that, there may be a period, probably short in duration, of deflation when the Fed and other Central banks affected, will let rip in the hope that they can control the following rate of inflation. In the meantime they dare not raise interest rates for the fear of deflation and there are many reasons to expect another round of money creation early in 2015. The mid term US elections, depending on the result, could lead to a two year period of economic stagnation with the exception of the money creating program which both parties will endorse so as not to be seen as rocking the boat when the presidential elections are held in two years time.

The Longer the Feds Money Creation the Bigger the Slump

Those very reasons outlined above caused gold to peak in 2010 and yet we see very little has fundamentally changed. The perception that ‘follow the money’ is a guiding light to successful investing has proved itself in the last three years but as far as we can see these stock, bond, property and other assets could just as well come tumbling down just as the perception was in 2010. The only difference is that the inevitable crash will be that much more damaging than if we had got it over and done with in 2010. The longer the crash is delayed the more disastrous the consequences to the US and other western economies will become.

Why China and Russia Keep Buying Gold

On a further note we learn that China, Russia, Turkey and others are still increasing their gold reserves non stop. Also the demand gold and silver bullion and coins remains firm. As an example, last month saw German demand for silver coins reach record levels to such an extent that buyers are having to wait for delivery. Gold was not far behind. If we think that gold is dead and buried then ask yourself why China and Russia, both with huge natural resources, are buying into gold hand over fist.

Insurance

What lessons can we westerners learn from the gold enigma. In simple terms we should keep some physical gold or silver, say 10%-15% in your portfolio as insurance. We keep ours in wwwbullionvault.com where buying, selling and storing are simple. For those who have the faith and the stomach now is as good a time to buy as ever. If as seems possible the price declines further then buy more, always with the proviso that you can hold on without jeopardising your future cash needs.

China and Russia Will Control Gold and Currencies

As a last thought, what will happen when China and Russia dominate the physical gold market which they are well on the way to doing so now. Will Comex survive? Will the London gold fix become meaningless and abandoned? What about currencies with little or no gold backing when China and Russia are in control of gold? Has the US really got the gold it claims in Fort Knox and other US vaults despite not having had an audit since 1953, over sixty years ago! Why? Why does the US delay repatriating gold to nations that put their trust in America 50 or more years ago? It would be a monumental mistake to ignore the lessons of millennia of history by writing off gold in this modern era!

Logic will dictate the outcome. Patience is a virtue!

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