Is Gold ‘Withering?’

by Nigel Bolton-Shaw on August 22, 2012

Don’t Count on the Chinese-Indian Gold Bubble To Hit a New Record Peak … The gold rush of 2008 to 2011 has sputtered out. I am so glad I resisted the temptation last year to predict that the apparent craze of the Chinese for gold as an alternative to currency would drive the price to record levels beyond $2000 an ounce. As I was unable to visit China and see for myself what was going on among the population, I hesitated to hype a story about which I had doubts. Gold was supposed to be a sure thing– the source of another killing by John Paulson, George Soros and all the would-be John Paulsons and Soros followers. Gold was supposed to spike every time a central bank added to the globe’s money supply as the ECB has been forced to do. But gold peaked near $1890 an ounce and are off almost 15% since then. Gold is up 3% in 2012 but demand for the big ETFs like GLD are mainly flat as the gold story has withered. – Forbes

Bob Lenzner of Forbes Magazine has discovered that the gold story has withered. We’re not so sure. All things considered we’d rather be in gold.

But we look at Lenzner’s background and understand his bias. Here’s his Forbes bio:

Robert Lenzner writes the StreetTalk column for Forbes.com and anchors the StreetTalk video show. Previously Lenzner was National Editor and Senior Editor at Forbes Magazine, New York Bureau Chief of The Boston Globe and Wall Street correspondent of The Economist.

Two major culprits: the Boston Globe and The Economist. This could account for the bias. The mainstream media doesn’t like gold any more than Wall Street does. Gold is hard to securitize. It doesn’t yield commissions, or allow for the creation of the kinds of securitized businesses that would yield up ads.

But that doesn’t mean the 2000s gold rush is over. Just as in the 1970s, the prices of precious metals will have their ups and downs but it would seem to defy investment logic to declare the golden bull is done.

Is Lenzner doing that? Unclear, but examine the other points he makes in this column. He’s certainly not a big fan. Here’s more:

Just as the Chinese banks were promoting installment gold accruals by ordinary Chinese, the sharp slowdown in the Chinese economy placed a massive halt on the rush to accumulate the precious metal. The precipitous fall in real estate prices and the general weakness in many commodity prices has restrained Chinese demand.

In the west, gold is no substitute for shares that have earnings and bonds that have yields. I think the Chinese are finding out the same lesson. Savings are going into the banking system and into investments with a guaranteed return. The foreign exchange reserves of the Peoples Bank of China are shrinking due to a shrinking trade surplus.

The general tone in the markets for gold and gold mining shares has lost its sense of drama and excitement. Gold mining shares as well have attracted little buying despite their chronic weakness in the face of higher bullion prices. Costs of mining have risen as have political pressures to raise revenue from the privately held mining industries.

You see? Gold is no substitute for “shares that have earnings.” Maybe not, but gold and silver have shown extraordinary appreciation in the 2000s at a time when equity markets have sagged.

There is something else Lenzner does not mention: Steps are being taken to recognize gold-as-money from a banking standpoint.

The Federal Reserve and FDIC have circulated a letter to banks that brings US banks into accordance with Basel III banking regs. BASEL III stipulates bank reserves and “gold bullion,” are to be a recognized reserves along with “cash.” You can read more about this here: “Big Changes Ahead: Gold Just Became Money Again” …

Back to the markets. As far as mining stocks go, the golden bull is not over yet in the eyes of many savvy observers. That’s because the rise of gold and silver is not an aberration.

One needs to understand that the West’s central banking economy inevitably generates booms and busts. Over time, the imbalances grow deeper and inevitably there comes a times when the economy itself needs to be purged of dysfunctional enterprises.

We are in such an environment now. Until the purging is complete, gold and silver will likely continue to accrue in value relative to securitized assets because people remain leery of many investments that seem to be propped up government money and central bank money printing generally.

Gold and silver are a good alternative bet. As purchasing bids up the price, interest turns from the physical to securitized assets. Finally, the stocks of junior miners begin to be purchased.

This is not an inevitable sequence … but a likely one, explaining why junior mining stocks appreciate toward the end of a golden bull. The appreciation is far from being realized which is another reason for speculation that this metals market is far from exhausted.

Lenzner sees it otherwise of course. But he is analyzing the golden bull from a consumption and industrial point of view. We’d argue the fundamentals are mostly monetary

If you are an investor in the 2000s looking for a “sure thing,” you’ll likely consider a gold or silver investment. It has nothing to do with market momentum necessarily or even supply and demand. It has to do with what you trust and how you want your assets distributed going forward.

Share

{ 1 comment… read it below or add one }

Argus Freeman August 23, 2012 at 3:14 pm

“In the west, gold is no substitute for shares that have earnings and bonds that have yields.”

I tend to think the obverse: Shares (in a fantasy-based “too big to fail” corporation depending on government largesse) are no substitute for gold that has intrinsic value and can be touched, picked up, moved and traded value for value in time of need.

No contest. Ironically, I own no gold….yet.

Argus

Reply

Leave a Comment

Previous post:

Next post: