This is the question investors all over the world are asking after the massive selloff on Friday. I have argued that gold was a tired bull for the last six months and that global equities had replaced gold as investors’ and traders’ haven and store of value. Gold has done yeoman’s work as a store of value in the world of central bank hyperactivity resulting in negative real yields all over the globe. As gold prices have stagnated, investors have sought out other asset classes to supplant the need for increased risk and hopefully positive returns. Multinational corporations with high dividends have become the new store of value and the rush to unload traditional hard assets for productive real assets has gained traction. The Cypriot debacle scared global investors and sent them scurrying from bank deposits to corporate assets, with a higher yield via dividends and possible appreciation. (Especially if the assets are domiciled in a jurisdiction that has a court system that protects property rights.)
In the weekend Financial Times, the widely read LEX COLUMN ran a piece, “Bullions of Euros,” in which it takes up the issue of gold-backed bonds. It takes up the idea through looking at previous attempts to use gold as collateral–the famous Giscard D’Staing bonds that the French issued in the early 1970s. Those proved to be a debacle for France as gold rallied and the bonds were redeemed for huge profits and sizable losses for the French Treasury. Lex discusses the use of five-to-one leverage and thus changes the nature of the financial math behind using the global gold hoards to provide cheaper financing for debt-stressed nations. Besides, the French issued the Giscards with gold priced in the $30 range. If Cyprus were to issue gold-backed bonds, the price is now $1500–a much different financial world. If gold prices were to drop it would be all the better for the Cypriot financing authority. It seems that some naysayers to gold-backed bonds argue that central banks own the gold and are prohibited by Eurozone rules to directly finance their governments.
The greatest oxymoron is European law for the rules of the EU are continually abrogated to suit the powers that be. Was Mario Monti elected the Italian P.M.? Did the Troika just move to confiscate deposits of less then 100,000 euros? It is of more than passing interest that those who proclaim gold has very utility value will not unload the huge stockpiles they are sitting on. The IMF has massive GOLD holdings but why are they afraid to put them to use? The Lex column points out that the entire eurozone has 11,000 tons of GOLD in its vaults, which yield no return on its face. If there is no utility value, why hold it? The central banks are staffed with financial geniuses, promoting all types of aggressive monetary stimulus plans. Is there nobody forwarding ideas about relinquishing the GOLD for high yielding sovereign bonds?
Jim Sinclair has stated that GOLD PRICES will drop until the Chinese and Russians step in to begin unloading paper assets to purchase hard assets. I quite agree, the only question is what price level? The Chinese have proven to be astute traders and will let the market clear and take advantage of the massive unwind. November 3, 2009 is an important date in gold trading. The IMF announced the sale of 200 tons of its gold to India at a price of $1045.00 per ounce for a total of $6.7 billion. The Chinese were none too happy about being overlooked. If GOLD is good for absolutely nothing, then central banks ought to be selling. Because “It Ain’t Nothing But A Heart Breaker.”
***It’s A Mystery To Me (Fleetwood Mac). In a semiannual report released by the U.S. Treasury, the FT captures the Treasury position in the headline, “Treasury warns Japan and China on Currrency.” This is absolute madness as it reveals that the Treasury and Fed are out of sync. The FT article says that the U.S Treasury warns Japan not to enter competitive devaluation and “the Chinese renminbi remains significantly undervalued.” This comes just before the World Bank and IMF meetings in Washington. Chairman Bernanke praises the BOJ for taking action to move the Japanese economy out of deflation and raise domestic demand. Bernanke has stated over and over that there is no currency war as long as monetary policy is directed at raising domestic demand. There is a growth war and not a currency war.
Any currency impact coming from BOJ action is small worry relative to global benefits of Japanese economic viability. Can the people at Treasury call the Fed and synchronize a policy action? And is this really a good time to challenge the Chinese? Asia is the center of global growth as Treasury Secretary Lew has admitted. Last week, Secretary Lew was in Europe begging them to back off their race to austerity and get busy easing monetary and fiscal policy. The ineptness of U.S. policy makers has me wondering on the equity markets have us all HYPNOTIZED.