Gold: The Banks are Selling but I’m Buying

US stocks were up 2% this morning. See, we told you not to panic. We hope you took our advice and used the past few days of pullback to buy stocks.

But we’re not looking at stocks today. Instead we’re looking at something we’ve neglected for far too long.

Winston Churchill once said of Russia that ‘it is a riddle wrapped in a mystery inside an enigma.

In other words, the boozing old philanderer didn’t know what to make of Russia. That probably explains why the mass murdering Josef Stalin had the better of Churchill during the Second World War.

But if Russia is a riddle wrapped in a mystery inside an enigma, then gold is all of those things, with the added complexity of being locked in a box.

Certainly US Federal Reserve chairman Dr Ben S Bernanke doesn’t understand gold. He admitted as much to the US Congress in July. So if one of the world’s most important moneymen doesn’t get gold, what chance does anyone else have?

Fortunately, it’s not that difficult. Dr Bernanke just isn’t trying…or doesn’t want to try to understand it…

As Bloomberg reported this week:

Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.”

You’re not dumb if you hold degrees from Harvard and MIT. That’s for smart people. So why doesn’t Dr Bernanke understand gold and the gold price?

There’s a simple answer for that. It’s not that he doesn’t understand it, it’s that he can’t admit to understanding it. To admit to understanding the gold price would mean admitting that printing money devalues the money already in circulation and causes the price of assets such as gold to rise.

There’s no way in the world Dr Bernanke would ever admit to that.

Big Banks Lining Up to Sell Gold

But right now Dr Bernanke isn’t the only one to give gold the cold shoulder. With all the volatility in stock prices and interest rates, and political instability in the US and Europe, investors just can’t tell what’s bullish and bearish for any asset class.

Is the US government shutdown good or bad for stocks? Is it good or bad for gold? Will a positive resolution be good or bad for either asset? And likewise for no resolution?

Really, it’s anyone’s guess. In fact, it’s probably fair to say that investors will only decide the answer to those questions when the resolution (or non-resolution) arrives.

The market’s reaction could come down to whether most traders got out of bed on the wrong side or whether they had a good journey into the office.

And we’re not kidding either. It’s why on two different days you can see the same excuse given to explain why the market went up one day and down the other.

But whatever the reality, it seems the big investment banks aren’t about to risk too much of their money on gold. As Bloomberg reported yesterday:

Gold will extend losses into 2014 amid expectations the Federal Reserve will pare stimulus as the U.S. recovers, according to Morgan Stanley, adding to bearish calls from Goldman Sachs Group Inc. and Credit Suisse Group AG.

“We recommend staying away from gold at this point in the cycle,” Melbourne-based analyst Joel Crane said in a video report received today. Bullion will average $1,313 an ounce in 2014, down from the $1,420 forecast for this year, Morgan Stanley said in its quarterly metals report on Oct. 7.

Don’t underestimate the power of JP Morgan, Goldman Sachs and Credit Suisse. These guys have a lot of influence on asset prices. They can put a whole lot of money to work quickly to affect the price of stocks, interest rates and gold.

But that doesn’t mean they always get it right.

So Much for the Harvard Education

The big banks have talked down gold for most of the past 10 years, although even they jumped on board as the commodities boom flourished through to the end of 2007.

Now it’s the opposite. It’s hard to find anyone prepared to bet on a rising gold price. That’s not surprising. As we wrote to you yesterday, a big part of investing is psychology.

Seeing as the gold price has trended downwards since peaking in 2011, and is down 20% in Aussie dollar terms in the past year, it’s only natural that many investors have had enough. That’s the same with any asset. If you hold a stock that’s done nothing but sink lower and lower, eventually you’ll give up on it.

That’s one reason why gold could go lower, even though logically with the torrent of cash unleashed by central banks, gold should go higher. But that’s the psychology of the moment.

Even so (and call us mad if you like), whatever happens to the gold price, there is zero chance we will sell even one single ounce of our gold holding. In fact there’s a greater chance that we’ll top up our holding.

After all, gold is the ultimate long term investment. Unlike a stock portfolio, we know gold will still be around in 40 or 50 years – 100% guaranteed.

But we can’t put the same guarantee on stocks, even the bluest of blue-chip stocks. There’s no guarantee they’ll still be around in their current form 50 years from now. And that’s coming from someone who’s as bullish as you can get when it comes to stocks.

Gold is for the long term. We’ll always own it. It’s an absolute certainty that the US Federal Reserve will keep rates low for the foreseeable future and print more money.

It’s only a matter of time before investors wake up and rediscover that the reason for buying gold – the reason Dr Bernanke won’t admit to understanding – is to protect your wealth from the constant and persistent devaluation of paper money.

It’s so simple we just can’t believe a Harvard man like Dr Bernanke doesn’t get it.


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Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

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I watched the price drop below $1300 yesterday, despite the uncertainty generated by the shutdown. Be interested to see where the gold price is in a week’s time.