What are the gold price and fundamentals telling us this week?

We had a choppy week in the gold price and silver price. The gold price closed the week at $ 1579 and € 1222. That’s a decline of some 3.5% compared to one week ago. The silver price ended the week under 30 US dollar for the first time since the beginning of 2012, closing at $ 28.89 and € 22.36. That’s some 6% lower than a week earlier. Mainly in the first half of the week, we saw a substantial decrease of  the gold and silver prices; the gold shares have been hit even harder.

Let’s try to find a reasonable explanation for this decline. Given the price action, one would expect to find some bad news regarding gold (investing, mining, legislation) or some deteriorating  fundamentals. Here is an overview of the most important evolutions and announcements of past week.

Announcements in the major gold consuming countries

Past week’s news coming from top gold consuming countries in the world, was fundamentally very positive.

Turkey for example announced a massive increase in exports of gold to Iran and Arab Spring countries. A news story on Zerohedge reported that “The increase in trade with Iran comes as sanctions make it harder for trading partners such as Turkey, India and China to pay in dollars and euros. Iran said in February it would accept payment in any local currency or gold. Reuters report today that Iran is accepting payments in yuan for some of the crude oil it supplies to China, the Iranian ambassador to the United Arab Emirates said on Tuesday.

Moreover, China is well on its way to become the biggest gold consumer in the globe, overtaking India. China’s demand for gold year-to-year in Q1 has gone up sixfold ! That’s a huge number and an incredibly important evolution. Bloomberg wrote in an article : “Imports from Hong Kong were 135,529 kilograms (135.53 metric tons) between January and March, from 19,729 kilograms in the year-earlier period, according to data from the Census and Statistics Department of the Hong Kong government. Shipments in March rose 59 percent from February, yesterday’s data showed.” It was only a decade ago when it was forbidden for Chinese citizens to hold physical gold. With increased wealth in China, their citizens have been able to accumulate gold and silver, a trend which will probably not change in the near future.

Finally, India, the world’s biggest consumer currently, came out with positive news as well. Their government confirmed it would withdraw the earlier announced tax on gold jewellery imports, stimulating the gold trades and imports.

Economic evolutions

Clearly, the focus past week was on the worrying election results in Europe. Socialist parties have been on the rise in France and Greece. They have been claiming anti-austerity in their campaigns and seduced quite some people with their ideas. The Eurozone breakup risk is becoming bigger indeed; the differences between Germany’s vision versus the “Southern minded countries” become bigger. Would a breakup occur in Europe, than the banking system would be exposed to great risk.

Now in such an environment, we would expect to see a major boost to the gold and silver price, as the counterparty risk on all financial assets becomes bigger. Precious metals have one unique and powerful benefit, the absence of counterparty risk.

Instead of a large scale increased demand for gold and silver, we saw a flight to US bonds and dollars. While there is a historic negative correlation between the dollar and the price of gold, it’s not justified in the current environment, no matter if the euro is weakening. It clearly indicates to us that the financial worlds still does not understand what gold really stands for. By contrast, it appears that only smart money is buying gold and silver.

The semi blind anti-gold cartel

The gold debate is heating up and we have new players coming on the scene. The oracle of the financial world, the most wealthy person on earth, Warren Buffet, came out in public and made some explicit statements “against” the idea of holding gold. The Vice Chairman of Warren’s company, Charlie Munger, stated in an interview on CNBC that “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold. They invest in productive businesses.” Well, the irony between the lines is quite remarkable. Buffett got support from Bill Gates and CNBC, to help enforce the message and find their way to the public. Why such statements in such an explicit way, and why exactly now ?

Did these intelligent men forget how much liquidity was and is being pumped into the financial system to keep it alive and to avoid a 2008-alike economic crash ? Are these powerful men blind to the counterparty risk of today’s economic environment? Undoubtedly not. So then there should be a reason why they are not mentioning it is a real benefit of owning gold in this economic environment

A couple of days after these ironic anti-gold statements were made, we saw JP Morgan coming with some suspicious announcements. We all know the huge leverage a company like JP Morgan has and its exposure to derivatives (in some cases extremely toxic). Who can deny the counterparty risk of such a company ? Why do nor Mr Buffett, Mr Gates or CNBC mention this risk as a valid reason to hold gold ? Yes indeed, we can only find one answer: it’s not in their interest. After all, the fortunes of those people is built on fiat money, so why would they support the idea of holding gold or silver.

Central banks keep on accumulating gold

In the same week, we got again the confirmation that central banks around the world are still accumulating gold. The figures below don’t require any additional explanation, except to mention that they indicate the amount of new gold acquired only in March of 2012 (source: Financialsense.com, based on figures of the IMF).

  • Russia bought 16.55 tonnes in March.
  • Mexico bought 16.81 tonnes in March.
  • Turkey bought 11.48 tonnes in March.
  • Argentina bought 7 tonnes in March.
  • Kazakhstan bought 4.3 tonnes in March.

So, “what are the gold price and fundamentals telling us right now?”

Let’s go back to our initial question. In our view, the past week revealed some interesting insights. First, gold and silver are still misunderstood by the public and by most investors. Central banks by contrast are very well aware of the benefits of gold. Second, when fundamentals are incredibly strong but it’s not reflected in the price of the asset, than we are probably in a short term anomaly. Third, emotion and mass psychology are currently controlling logic in the financial world.

In closing, we would like to quote Rick Rule. We strongly support his ideas. Rick is part of the powerful Sprott Asset Management and he believes that “We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum – there’s only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.

Our personal belief is that long term trends, based on strong fundamentals, always overtake short term imbalances. We stick to our idea that gold and silver are the safest place in the times ahead and that the absence of counterparty risk is key in this environment. And we do own gold and silver to protect our own long term wealth.


Author: Desk of GoldSilverWorlds.com


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