Gold continues to get a whacking. Both by the markets and by the mainstream press…
“The motions that you are seeing are now indications of a market pop. People should keep in mind that a reserve currency does not fluctuate as much as gold.” – Erik Davidson, Wells Fargo.
Really? More on that in a moment…
Last night gold had its biggest one-day fall since 2008.
The CME Group increased margins on gold futures contracts for the second time in two weeks. The same ruse that saw silver slump a few months back.
Since the beginning of the week, gold has fallen from over USD$1,900, to the current price of $1,764 – a drop of more than 7%.
So, has the so-called bubble popped? Is this vindication of the Wells Fargo “gold bubble” report that we scoffed at last week?
Well, let’s look at two quotes from an article in today’s Age. First this one:
“Investors are paring down positions in gold on expectations Bernanke will do something to boost equity prices”, says Adam Klopfenstein at MF Global.
And this from Patricia Mohr at Scotia Capital:
“Gold got pushed up on the idea that Bernanke will announce further quantitative easing. Now people are not so sure whether that will happen and that is creating disappointment in the gold market.”
OK. So one analyst tells us Bernanke will print more money, which is good for stocks but bad for gold… whereas another analyst tells us Bernanke won’t print money, which is good for stocks but… erm… bad for gold.
All we know is a lower price gives you the opportunity to buy a bit more.
But what about this idea from Mr. Davidson at Wells Fargo that “a reserve currency does not fluctuate as much as gold”?
Well, let’s put that to bed with two charts. First, the gold price in pounds sterling from 1718 to 1949:
You’ll note for most of the 200-plus years the gold price was stable. Why? Because gold was money. Money and prices of goods were remarkably stable for a long period of time. Governments and central banks couldn’t print money willy-nilly.
But if they did, the rising gold price gave the game away.
The exceptions to this are the blips on the chart. Those just so happen to coincide with periods of government manipulation and money printing…
The early 1800s during the Napoleonic wars… the second blip during World War I… and the last blip as the U.K. and other nations went off the gold standard as a result of previous inflationary policies and then to finance another war.
Now look at the next chart. This one is in U.S. dollars for the period 1950 to 2010:
Similarly, while paper currencies were backed by U.S. dollars, which in turn was backed by gold, the gold price was stable and so – generally – were prices.
But when U.S. president Richard M. Nixon committed financial and monetary terrorism by abolishing the convertibility of U.S. dollars into gold… all heck broke loose.
But here’s the thing. It’s not so much the price of gold has risen – although it has in nominal terms – but rather the value of paper money has fallen.
In other words, it’s not the gold price that’s volatile, it’s the instability of the underlying currencies. After all, as the anti-gold lobby insists on telling you, gold doesn’t do anything… it just sits there.
In that case, how can its value change? It doesn’t pay a dividend, it doesn’t produce anything and it doesn’t change shape or form. A one-ounce bar from 1718 is still the same one-ounce bar today. So what’s changed?
The change is in the value of the currencies that gold is priced in.
Let me show you another chart. This one is the U.S. dollar Trade Weighted Exchange Index from the Federal Reserve Bank of St. Louis. It covers 1973 to 2011:
The index charts the value of U.S. dollars compared to other paper currencies.
Now, look at the first chart again that showed the gold price from 1718 to 1949. And the left-hand part of the second chart showing the gold price from 1950 to 1971.
Now tell us, which is more volatile? The gold price when it was uninfluenced by government meddling and when gold was money… or the last 40 years under a paper reserve currency…
Note the difference. Without meddling by governments and central bankers, money was stable and people could plan for the future. But since the 1970s, the value of money has shifted around all over the place… mostly down.
No-one in their right mind, after seeing this evidence, could possibly claim that paper currencies are less volatile than gold.
So, what are we getting at?
All up, it’s this: today gold is down. It was down yesterday too. The day before it was up… as it was the day before that.
Which way will it go tomorrow?
We’ve no more of an idea about that than we had yesterday. But the more we read from goons who don’t understand gold, the more we’re convinced that gold is the best long-term investment you’ll ever make.
Keep buying on the dips.
Cheers.
Kris
Publisher’s note: Market set to move on Bernanke’s Friday speech – but which way? Find out what our ‘scarily accurate’ trader thinks will happen – for FREE – here.
We know world markets move whenever US Fed Chairman Ben Bernanke opens his mouth… but which way will they go after his Friday speech? Up or down?
Slipstream Trader Murray Dawes has been watching how other traders are preparing. Some are ‘short covering’… some are buying ahead of the speech in the hope that “The Bernank” announces QE3…
Murray has a different view. And it might disappoint some investors hoping to see a rally…
Whatever happens when this key speech is over, you’re going to want to know two things: what key level on the ASX Murray has targeted for action And what action to take if that level is breached.
Find out the answers to both these questions – for FREE – in Murray’s latest YouTube market update. Watch it here.
Related Articles
Return of the Gold Bubble Monsters
One Analyst Who Didn’t Ignore This Shiny Metal…
When Will Aussie Gold Stocks Start Playing Catch Up?
Why Market Volatility Will Last Two More Years… At Least
From the Archives…
Guaranteed Not to Make an Old Queen Smile
2011-08-19 – Kris Sayce
One Chance in a Quintillion
2011-08-18 – Kris Sayce
Return of the Gold Bubble Monsters
2011-08-17 – Kris Sayce
Watch What the Rich Do, Not What They Say
2011-08-16 – Kris Sayce
Two Decades of Boom and Bust
2011-08-15 – Kris Sayce
For editorial enquiries and feedback, email moneymorning@moneymorning.com.au
{ 39 comments }
← Previous Comments
PF@30,
Comparing gold ETFs and physical gold is ridiculous. The failure to differentiate between the two shows that you don’t get it. Actually, a gold derviative scandal would ultimately do very well for the gold price.
I’m not comfortable with my analysis at all. But I’m less comfortable with that posed by the mainstream and the sunshine policy leaflet droppers like yourself. Applying the Black Swan theory doesn’t make any sense. The pundits are convinced it will fall and the gold nutbars such as myself invite the distinct possibility that it will crash, so where’s the unexpected event?
Come on PF you’re as robust as the next Commonwealth Bank investment newsletter. Can we have some meat please?
Thank PF @ 30, I agree that yours was a neutral response and you did raise some good questions.
I’d still be interested to hear from fans of gold especially, what they expect re. my question @ 16. J.C, JB, others?
JC – Yes I agree a good gold etf scandal would be good for physical gold prices. Which kind of says that they are presently related, if not the same, but I do agree.
First you want revelations, and now you want meat. I’ll have to practise on some loaves and fishes first.
While you are waiting for your intellectual feast, why don’t you give Drew the benefit of your wisdom, he did ask you a question. I won’t intrude – I promise…..
PF@33,
Gold derivatives are a tool for speculation. If it were discovered that the claims on gold were far greater than the actual physical, then I would expect that the price of gold derviatives to fall. But if you could grasp that people are buying gold for many more reasons than pure speculation, it would actually be very supportive of the demand for physical bullion.
I can’t see how that is particularly difficult to grasp or high brow pontification.
But I do understand that, I thought that was understood.
If I can quote Kris from the OP above :-
“Last night gold had its biggest one-day fall since 2008.
The CME Group increased margins on gold futures contracts for the second time in two weeks. The same ruse that saw silver slump a few months back.”
At the moment the price of physical gold and other gold deritaves have a correlation, but if the ETF’s were shown to be suspect investors would desert them, but the holders of physical gold would not, and after the obligatory market turmoil the price of physical gold would right itself, but the ETF’s would lose significant ground depending on the strength of the adverse rumours or proven difficulties.
However until that moment in time, regardless of the reasons for buying either gold or gold derivitaves, that price relationship will stand.
So are we in general agreement?
M+M . Dunno if you,ve ever been to France but i have spent a lot of time there and it is one of the more sorted countries in the world. Many french colonies are still french because they have a very good lifestyle.
You are correct that they do indeed have excellent , healthcare , pensions, superb public transport, etc. etc . Don,t you want all that for your family?
On your comment , “we get to look after ourselves” what happens if you can,t?
As for the steel workers , you say that if we introduced tarriffs then you would end up paying their wages. The opposite is true. With tarriffs in place they would still have jobs. The tarriff is meant to keep imports ( cheap chinese ) out. When they lose their jobs you will be paying their dole money from your taxes.
A little bit of thought and a lot less mindless following would do you a power of good.
PF@35,
But as I said gold derivatives and physical gold are fundamentally different. Of course they’re correlated. You’re saying that that derivative trading can cause the market price for gold to crash. That is patently obvious but misses the whole point about the inherent value of gold.
JC….not related to the Midas,s are you?
Yes now I understand – I’m right, but I can’t be right and it would not be cool to agree with me in any way, so I’m wrong – OK I’ve got that. Clearly I fail to see the inner beauty and ethical purity of the yellow metal, it’s a bit like some modern art, that I also fail to comprehend despite also being a modest art collector.
Well I’m just a country boy, so what can you expect….
I could argue, but really I just can’t be bothered…
Have a nice weekend.
← Previous Comments
Comments on this entry are closed.