Notes From Underground: Gold, Huh, Yeah, What Is It Good For?

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.

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9 Responses to “Notes From Underground: Gold, Huh, Yeah, What Is It Good For?”

  1. Charles Reeder Says:

    now you’re quoting jim sinclair on gold-LMAO

  2. yra Says:

    no just agreeing that Gold will not find support until Chines and russian enter the market–on that he is right but again what price will that be—they are not idiots and will wait for market to reach capitulation—hey you got a few trillion dollars and euros–where do you go ??

  3. Ronald Ferrill Says:

    Good and Timely post, Yra. Like your tossing in some classic Rock similes.
    Is China really so adept at trading? I remember when sages in U.S. were all gaga over Japanese buying up U.S. real estate – that didn’t work out so well for them. On big purchases they ended up selling at BIG losses. While I believe, and have acted in synchrony, that Gold is overdue for the correction we are seeing, I have no reason to believe that China is any smarter than the rest of us. They do have a lot more wealth to pour into Gold buying than most of us (can’t speak for anyone but myself). I’ll be checking the charts, and thinking about the price of gold vis-a-vis price of guns and ammo.

    The other point that I’d make is that there can be no surprise at the ineptness of anything that the administration of the federal government of the U.S. would say or do. If it doesn’t have something to do with their own and most importantly, Mr. Obama’s, self-aggrandizement, and/or votes, then it isn’t on their agenda. It is all posturing without the ability or will to back it up. If I were a country, I’d just smile, and ask for a handout, and make up threats to get more handouts. Lew is not a global thinker, just another bright political hack. I’m just a simple individual investor, and industrialist. Create value, get paid for it, look for ways to improve constantly, and create more value. Know what your competition is doing, “plagiarize, plagiarize, let nothing good evade your eyes!” and improved some more… (Tom Lehrer – Lobachevsky)

  4. GreenAB Says:

    brilliant post, Yra. thanks a lot.

    “global equities had replaced gold as investors’ and traders’ haven and store of value.”

    i think you are spot on.
    we could witness the same pattern as we did in previous years.

    in 2008 when every other asset class was already broken OIL was the last one in a steady uptrend. the sky seemed to be the limit. killer argument was “China and peak oil”.

    fast forward to 2011: when equity markets struggled the can´t miss trade was GOLD. killer argument “store of wealth during euro crisis. printing CBs”

    today the stock market is the last man standing. clear uptrend. all time high. here´s where the easy money is to be made.
    argument: “FED+BOJs printing is a free put and will drive markets higher”.

    GOLD could have much further to fall as long as we see no inflation. the built bubble is enormous imo. lets see if some of that money moves into stocks and helps to prop the market up.
    but at some point i expect the “new safe haven” stock market to follow.
    to much complacency and technical buying.

  5. Drake S Says:

    Rumors of Gold’s demise are being greatly exaggerated.
    You have to have it in order to sell it, pledge it, fractionalize it.
    German Gold will take 7 years to be repatriated. From where ???
    A gentleman’s promise must be honored.
    Shame about that little Pasqua Lama problem up in the Andes.
    And all that Silver too !
    Should have remembered the big hole with a liar on top story…
    Buy Stocks sell Gold now ? or is it buy low sell high ?
    Hmmm, better get in line first.

  6. paladin Says:

    now you’re quoting jim sinclair on gold

    Yar… keep quoting Jim Sinclair….hell yes


  7. Carl HT Says:

    Gret article Yra… I wonder who the Hunt brothers of today are!?! Maybe we will find out in a few years.

    I’m not saying there were gold longs manipulating the market, but, rather that the strength of the axiomatic views and ideologies supporting the thesis and the seriously ambitious pricing of inflation expectations into the shiny metal, created similar price action.

    I think this is the single most obvious instance of reflexivity in my short career, and I’m proud to say I was short it!

  8. yra Says:

    Carl–I laid in bed thinking about the hunt brothers –once they got into the game of leveraging waht was previously a cash position,when the market corrected as all markets do,the leverage was the variable that broke the back of the corner.Very good post and glad to hear of your wisdom and the success it yielded

    • Prometheus Says:

      Thanks Yra, I read about them in a copy of The Great Silver Bubble when I was trying to work out what happened in 81 with gold and silver from 79-81… I wasn’t born yet so it was handy information to fill the mosaic.

      I don’t know what the future price of gold will be. I think it could come back. However, partly credit to your blog; the news about the eurocrats taking Cypriot deposits rather than giving the bondholders a haircut, coupled with the short-term stagnation in Gold’s price action (and all the Bitcoin alternate currency gibberish), told me the thesis was, at least temporarily, invalidated.

      Would love to drop you an email with an idea I’m considering if possible.


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