Gold: a very traditional debating point

It's been a very long time since we last ran a thread on gold - it seems to be this one from 2015, when CU wrote: Gold hits a five year low; a positive message?

Well, turned out 2015 was not just a five-year low, it was a turning point, with gold on a rising trend thereafter,  There was a high in July 2020;  Russia's invasion of Ukraine didn't seem to register much; and the 2020 peak has been surpassed comfortably all this year.  Somebody will doubtless have a chart-based view: and I'd note that many key commodities seemed to have turned a corner just recently (certainly the energy-related ones I look at). 

Given that the gold market has many of the hallmarks** of a fair & easy place to invest and trade - deep liquidity; transparency; security (if you don't get suckered by the wrong platform) - the old discussion-points bear dusting off.  Do we have here the perfect hedge against Bad News?   That tends to be my way of looking at it.  Was 2015 a good year for news?  There's certainly a load of grim tidings circulating this year.  Of course, some folk view gold like others see Bitcoin - a market phenomenon with plenty of emotion & sentiment surrounding it, but nothing to take seriously.

What do we think?  Over to t'readership.

ND

__________

** sorry about that

Shorting Germany?

Anon, BTL previous post - "any investment suggestions?" ... 

Well we can't and don't do financial advice or recommendations on this blog, so DYODD etc.

But here's something from Capx which is a clear enough recommendation from somebody else: buy dollars and Italy, sell Germany! 

Blast from the past: 2010

The rationale is basically that the Germans are about to cop the bill for the Mediterranean economies.  Hmmm - that's a bit like nuclear fusion, people have been predicting it for a long time.  But maybe now's the hour.  You can also chuck into the pot Germany at long last being called out / caught out as being the mainstay of the Russian economy (both as importer of stuff and exporter of tech), which may not be allowed to last much longer.  What other game do they have to play that could be equally lucrative?  Well, China, of course as regards the tech exports - but the USA won't let 'em have a free run at that, even if they've (the Germans) been surreptitiously sleeving, not to say laundering for Russia these 8 years.

Personally I went 'buy USD' when the whole current thing kicked off which I date to Feb 2021 (when I first reported far-east gas prices going through the roof here) - a general rule of mine over the decades.  He who underestimates the latent strength of the USA is often doomed to a big disappointment.  Saved me in the late '00's when I shorted GBP @ 2.10 in '07 (hat-tip CU, I might add: I can even tell you which pub we were in).  We tracked its glidepath down on the blog, all through the financial crisis.

Gold hasn't been quite as effective this time around.

How much further down can £ go?  Well 1.05 (1982) is the all-time low (That's what it says when I looked it up just now.  From memory, it actually went a bit lower that year).  The psychological floor represented by 1.00 is apparently quite sturdy.  That's not a prediction, by the way.

ND

A copper-bottomed bet?

It's been a bloodbath for many years in the commodity sector. Many shirts have been lost (a few of mine even, tear-stained ones...). The price of oil is normally one of the key metrics along with gold for assessing asset inflation.


However, gold is only around $1300 an ounce, which whilst double the 2008 low is a long way off the $2000 plus highs. In fact, there has not been much movement in gold at all this year, as compared to say Bitcoin which is rapidly taking shape as the future of independent store of value.


Then we come to oil, off its $30 lows of the post-shale revolution, but still only around $50 a barrel and that is after some small, but actual, production cuts from OPEC. The supply side still looks strong though and this at a time when global non-recessionary GDP growth is de-coupling from the oil price/supply for virtually the first time in a hundred years.


Which leads one to look further afield and this for me is to copper;





Copper looks interesting, the world's biggest miners have been struggling with various geopolitical events and supplies are not increasing that rapidly. The building of China still is eating capacity but the new found desire for electric vehicles also implies a long-term demand surge for the metal that is the core of the electricity transmission industry (of course, Lead/Lithium are looking good too). So demand is growing whilst supply is relatively flat.


I wonder if long-term there may even be a good long/short bet on copper versus oil as the switch away from petrol and diesel cars takes hold over the next five year?

Gold hits a five year low; a positive message?

Perhaps the Greek crisis won't come back after all and Mr Schauble will play nice from now on?

Perhaps China creating money to give to private companies to buy their own shares is perfectly fine?

Perhaps that ISIS lot will just toodle-pip off and those nice Iranians won't sponsor global terror anymore?

Perhaps Mr Putin is fed up with his picnic in Ukraine and is about to leave for home?

All of these things must be true to an extent if we are to believe market signals. The price of Gold has fallen to near $1000 an ounce, a five year low. Looked at historically, since the Brown Bottom, gold is still 4x higher than 2002, but of late the price has really cratered. China and the Oil Producing countries have been stocking up on supplies sold by European countries and new supply from Africa and Russia - they are less likely in the future to buy more gold so the price is declining. Also India has put on strong restrictions against gold hoarding which has been a challenge in its economy for hundreds of years (i.e. wealth is stored and not productively invested).

But longer term a low gold price suggests the preachers of economic doom are at a low ebb, with the world economy recovering still and has a bit of growth left in it yet.

I won't be buying into a contrarian bet soon - perhaps if the price reaches below $900 will be the time to consider it....certainly I did well in 2008 buying at $600 an ounce but that that time buying anything would have seen strong returns over the next few years.

 

Enter Dragon, Stage Left, with Smoke and Mirrors

China week in C@W continues, with another great story from the South China Morning Post. 

A mainland Chinese businessman, one Zhao Jingjun, bought 998 kg (worth HK$270m) of gold bullion in a consignment from Ghana (sic).  But when he came to sell it on, and his customer asked to check the goods, well bugger me it was a pile of base metal ! 

Just fancy that.  By coincidence he was staying in the hotel next door to mine, but I didn't hear any sobbing.

This immediately brought to mind the tale that FT Alphaville has been telling for a couple of years now: that the Chinese metals markets is massively distorted by the phenomenon of traders etc using metal inventories as collateral for finance - often indeed collateral against multiple loans - so that the huge quantities held in warehouses bear very little relationship to any underlying economic activity.  And if the gold turns out to be base, then presumably the base will sometimes turn out to be sand ...

Among the several consequences of this:

• as per the item I recounted at the weekend on collapsing HK retail trade, when the Chinese government suddenly decides to intervene on these scams, there can be dramatic and instant consequences (often involving a bullet in the back of the head as well as economic stuff)
• people who depend on Chinese metals demand (e.g. the whole nation of Australia) must be having a fairly nervous time
• who can believe any of the economic data issing from China at all?  

A bit unnerving for the many decision-makers large and small who must cater for China as being the driver of the world economy or whatever it is people say.  They are all flying blind, which is bound to end up in some messy crashes.

Incidentally, why is Mr Zhao importing gold from, errr, Ghana?  That's another illuminating story.  It turns out that for several years, Ghana has been a gold-rush territory for thousands of Chinese, including some very modest individuals who have been prospecting in a manner not dissimilar to the old pan-handlers of California and the Klondike.   It's all coming to grief there now, apparently: the locals have decided they don't really like these Chinese incomers.

We read a lot about how China is quietly taking a dominant position in raw materials across Africa, and that we'd all better watch out.  Really?  I bet the details are a lot more complicated and, just as they found with their 'oil assets' in Libya when the old Colonel got the chop, these Chinese investments may not be very secure at all.

What a game.

ND

Merchants of Doom

A cheerful banner across the Telegraph's online Finance page this morning.

Just when you thought it was safe ... emerging market rout ... budget disaster ... cannot save Greece ... lose control of inflation ... mass unemployment will return ... world slump

Oil up, Gold up ... quite like old times.

ND

(a) They'll Do Anything; (b) Bullion as Hedge

A couple of really interesting articles that illustrate powerfully some recent C@W themes.

Bargaining session

(a) They'll Do Anything.  This superb piece from Hinde Capital on the Cyprus debacle, strongly reinforces the point that politicians will do anything to keep the bicycle upright in the short term - and not just the usual slow-burning devaluations and inflationary tricks.  In the comments here we'd discussed more precipitate measures such as seizing private gold and forcibly converting savings into Consols.  Hinde stresses what a fundamental outrage is being planned for Cyprus in the expropriation of deposits, and lists a few more ghastly examples from recent years:

... the reality that the state is not in fact here for your protection as it once was and that we all need to take on self-reliance and a heightened sense of responsibility for ourselves. Some notable rule changes of late are subtle but growing in number: 

• The ECB, holders of Athens-law and foreign law Greek debt all received different treatment 
• The Dutch didn’t restructure SNS Reaal paper, they confiscated it 
• The Irish banned lawsuits against the ultimate wind-down of Anglo Irish 
• Portuguese private pensions were confiscated 

The list is long but you get the idea. Rule-changes are getting ‘regressively’ more creative and sinister ... as if the football referee has gone from being a quasi-neutral arbiter, to pulling off his black shirt to reveal a Manchester United one underneath and awarding himself a series of penalties.

Then, in comments under yesterday's post, Anon directed us to this story - our old friends Gazprom offering to bail out Cyprus !  Such a neat solution, eh ?  I have long suggested that, when the chips are finally down, we'll find ourselves delivered to the Chinese, and it looks as though we might be in for a small-scale rehearsal of this approach.  [Though in this instance, presumably the Cypriots will simply use it to get more out of the Troika - one Russian-sounding rescue package vs another ...]

(b) Bullion as Hedge:  the other day I suggested that bullion might work as a currency hedge (not an original thought, I know) and this is another theme developed in the Hinde piece - with graphs to make the point that gold has worked well for Sterling and Yen investors. Strongly recommend you take a look: if we are all being forced to take that heightened sense of responsibility for ourselves, the more perspectives the better.

ND

Sterling, Silver

On Monday CU offered us a contrarian punt on Sterling, so here's a different view.  I don't much like the look of any of the major currencies right now, what with talk of competitive devaluation and every currency-bloc having its own compelling tale of woe. I took to billing in EUR again 6 months ago, which has served me well, but now I find myself unable to judge.  Is it all hopelessly relativistic ?  I am no macro-economist.

But there is always bullion to consider as a possible reference-point for paper money.  Readers will know I am a long-term holder of gold (strictly physical) which has been a one-way bet for several years now.  There have been some lurid commentaries on the precioussss just recently but I am unmoved: and quite by chance (Moody's having inexplicably failed to tip me off) I decided at the end of last week that we had reached a bottom.  So I went long silver, which I haven't held for ages now, and is by far the more volatile of the two traditional PMs: but I expect to be at my desk for a bit now, and able to watch the screen.

So if the post-Moody pound is to weaken against the dollar, I shall be even more glad of the decision.  Then again, CU may be right and Sterling may bounce, which would take some of the shine off it.  

As always, just MHO, DYODD etc etc.

ND

Update: and now there's this - 

"Sterling is winning the currency wars, having overtaken the yen as the world's worst-performing major currency this year, although economists suggested the pound's biggest falls could be behind it"

The Chinese Are Coming, Part 94

I have a feeling we know how the comments thread will run ... but here goes, anyway.

Yes, not content at coming over here with their blandishments of shiny new nuclear power stations and marrying our electricity industry, the Chinese are buying up the North Sea.

Well of course they are.  Rather them than the French, eh ?   They are becoming Proper Players (these look like serious acquisitions), unlike the Russians who simply try to sucker people into their dark alley-ways and then mug them.

Let's not forget either, the recent Chinese acquisition of the LME.  I am told by my friends in the bullion industry that these busy Chinese chappies are planning to build gold smelters (in the East), and - here's the interesting bit - are applying for accreditation by the LBMA for the coveted London Good Delivery standard (the gold standard, indeed!) that is recognised worldwide.  (Most accredited smelters smelting, incidentally, are Swiss is done in Switzerland** see note below )  Not that any of the newly Chinese-minted bullion is likely to find its way physically to London - oh, no, it is intended for the Asian markets, the usual destination in a one-way global flow which transits London as the principle trading venue.  And London takes a substantial turn.

See, direct physical control isn't everything.  But as ranted here before, by all that's holy we need to defend what's left of our integrity.  Osborne, this starts with you - Heaven help us.

ND


** Correction, courtesy of Timmy in comments.  I believe it's correct now.  But the Freudian spelling mistake stays! (h-t dearieme)

Oil: Flirting With Double Figures

In October oil stooped briefly to touch $100.  But it rebounded strongly, maintaining a flat-ish $125 through March (which I misread).  The earlier assessment was the correct one: the distinct prospect of GlobalRecession2 has put a dent in commodities, even as producing nations are opening the taps;  the Baltic Dry Index, that traditional coalmine canary, is in decline once more; and oil dipped back into double figures again this week. Since GR2 isn't remotely played out, we may expect more flirtation with $99.

Stock markets have found reasons for optimism just now, but overall it looks like another crisis brewing: number 94 in a long and tiresome series. And right on cue, for whatever you think it's worth, gold and silver have broken out of their 3-month-long down-trend.  I'd assess that particular uptick as more meaningful than the stock markets' own burst of green.

ND  

JP Morgan: Rum

You don't need us to give you links to the current slew of lurid JP Morgan / London Whale stories: you can hardly move for them.  And what about that Ina Drew, eh?  (Must be OK with a name like that.)  Her with the "enviable reputation as one of its best managers of balance sheet risk" - and the $32m pay-off.  Nice work !

But if this seems to have come from out of a clear blue sky, here are a couple of suggestions for google searches in a quiet moment.  Try JP Morgan / silver:  the word 'manipulation' pops up before you've barely entered s-i-l-v, and you'll need a whole afternoon to sift what you find.  Or you could try prospecting for JP Morgan / gold -  blow me, it's 'manipulation' again, and away you go for another afternoon at the races.  (That Blythe Masters ... what a gal!  Imagine her pay-off when she retires.)

Then type in JP Morgan / coal: the word 'loss' will beat you to the punch, and you're off on another fascinating thread.

Seems these chaps have, errr, form: it's beginning to look distinctly careless.  Either that or Astonishing Bad Luck.  And some rather unenviable public relations episodes, too.  What are we to think ?

ND

Supply, Demand, Manipulation ... Gas, Oil & Gold

Starting gun for the battle royal over UK shale gas seems to have been fired. Timmy, (who first picked up on this from C@W), lost no time in firing an inflammatory salvo - no smooth-talking PR man he, but his original battle-cry was the right one: "a political battle that we must win".

Yes, the supply fundamentals for gas are looking good. But oil ? Cnut Obama is at it again, asserting that it's all the work of the wicked speculators.

The US cannot afford to let speculators artificially drive up the price of oil, the US President said on Tuesday, revealing plans to boost supervision of the market and tackle manipulation. "Rising gas [petrol] prices means a rough ride for a lot of families," President Obama said. "It's like an additional tax that comes right out of your pocket." The measures from the White House include an "at least six-fold" increase in the number of staff who scrutinise the trading of oil futures contracts at US market watchdog the Commodity Futures Trading Commission (CFTC).

Well, we can't object to scrutiny, though it may prove an expensive waste of time. But hey, while they are in the CFTC, how about looking into the manipulation of precious metals ? You don't need to be a conspiracy-loon to raise your eyebrows over this kind of thing - latest in a very long series (almost weekly, in fact) of strange, strange goings-on.

It's "an additional tax" of another kind, Mr President. Go take a look at that one, eh ?

ND


UPDATE - if anyone's interested, more on the bullion shenanigans of this week

It's Going To Get Nasty

From my predictions for 2012:

there will be a vast surge in UK crimes against property (often inevitably involving violence), including some really nasty burglaries on folk keeping too much under the mattress

This is the kind of thing I meant. A lot of people keep dosh under the mattress: well who trusts banks, and how much interest do you get, and what if we wake up to find the ATMs dead and credit-cards not accepted ?

And then there's the precioussss ... which very many Asians keep stashed at home in large quantity.

And other people know this. Only the first of the many such stories we are going to read in the coming months, I fear.

Yes, it's going to get very nasty.

ND

Oil and More Rumours of Wars

Just as the Baltic Dry falls through the floor (a reliable indicator of global slowdown), our good friends Gazprom cut their prices again, and commodities soften generally, oil is once again in the spotlight. And not in a good way.

Yes, at home and abroad the prospect of trouble at t'pump looks to be on the cards. Starting with Petroplus*/ Coryton: this may provide an excuse for a price-hike in the South East, but in reality its effect will be limited. When the owners of a conversion-process asset like a refinery go under, the creditors step in smartly to ensure it keeps running, just to generate whatever basic turn is there to be had: no-one wants to see the cashflow dry up. We've seen it a dozen times with power plants (in the dire period 2002-04, for those with short memories). What tends to happen is that the asset, which should be run on a highly-optimised basis when in the hands of a proper owner, slips into a dumb but still effective mode of operation, with reduced but still positive margins.

If it turns out this isn't possible, i.e. only a hyper-optimised refinery is profitable, it will mean there is a surplus of finished products (petrol etc) anyway. So no big worries just yet.

The main story, though, is in the Middle East where Syria is in turmoil, Iraq is nudging towards civil war, the Iranian war-drums are beating, and the carrier groups are massing once again. A war-weary western public may be forgiven for groaning déjà vu and assuming it's just another galling waste of blood and treasure to satisfy the American electoral process.

But from the C@W standpoint, is there something really rather new and interesting afoot ? The possibility that oil might start being priced in gold is not hot news, but could be a serious development - and one that might make the US pause for careful thought. I have previously highlighted the forthcoming Chinese Pan-Asia Gold Exchange as a potential Chinese strategy to supplant the dollar: lots of countries are looking to a post-dollar world: the euro is hardly a candidate anymore and oil-for-gold would be a very logical step along the way.

The ramifications of this will be many. Here's one: if this catches on, a lot more countries and companies will potentially be in the market for gold hedges (just as they are for oil and dollar hedges, as a matter of day-to-day risk management). But the paper (forward) gold market is, allegedly, one of the most heavily manipulated in the world (along with silver and the Swissie and oil and ...) - hmm.

Any other suggestions as to how oil-for-gold would change the world ?

ND


* Petroplus was always a quirky operation. The cleverest thing they did in the last decade was develop an LNG import terminal in Pembrokeshire, and planned to do several more around the Atlantic basin - they are very easy to build, even for a company whose main business at the time was oil storage tanks. But they sold this nascent LNG business, '4Gas', to Carlyle in order to concentrate on becoming a 'specialist refiner' ... hah! Should have stuck to tankage.

Trading Update: the Precious Metals Strategy

Well since CU mentioned it, *ahem*, it is indeed a fact that the PM strategy has worked out OK.

As updated a while back, silver trading on a fairly active basis (by my sluggish standards) has yielded a tad over 40% - which is obviously sub-optimal but I failed to sell at the April peak. I've been flat since August, so there it stays. The issue with this book has been the grotesque VaR I was carrying whenever long. Boy, that's an ugly market: don't ever be away from your desk.

The gold is up just a tad over 30%, for zero activity and a very much lower (though by no means insignificant) VaR, depending on how you factor in the powerful multi-year (upward) drift. That's why the long stays on - and of course the valuation is MTM, with potential for an update by year-end.

Since all of this is considered (by me) a hedge against the other awful stuff away from the Drew trading-floor (e.g. the pension, for starters), I may end up needing every penny ... still, a few glasses to be raised when the C@W annual staff party convenes!

ND

MF Global: What Counts As Safe Anymore ?

A short while ago I wrote, can't recall where, that I'd assumed back in '08-09 the financial system itself might collapse - credit cards not accepted, wire-transfers not possible, funds frozen etc etc; but that apart from one Sunday evening when apparently the ATMs were nearly turned off, for most people this actually never really happened.

So - can we afford to be sanguine this time around ? Once again, I'm assuming not - and as Exhibit A we have the ghastly case of MF Global.

Hopefully not too many C@W readers have been personally affected by this; but some folks have been seriously harmed. Read this and gulp. When segregated client funds start going walkabout, the end is nigh. What - or who - is next ?

It's the reason (in my personal opinion) why sticking to physical is best if one wants PMs as a hedge against the worst. Even then, unless its under the mattress ...

ND

Trading Update: Tale of Two City's

Never let it be said that we push a consistent party line here. On the one hand, CU shares his up-beat fortunes (and occasional misfortunes) in the equities. I on the other offer doom, gloom and precious metals. In the middle, Mr Q keeps our spirits up with tales from the High Street and the doings of Brownadder.

Following CU's latest update, a quick word about the preciousss. Things were looking toppy at the start of the week, and so it proved. I have come to view silver as the vehicle for in-and-out moves, and for once I sold at the top (having missed that trick on 1 May): the Drew silver account is a bit more than 40% up on the year. As anyone can figure out, that is by no means optimal, proving I am no trader.

But I have left the longstanding gold position in place, and thus missed out on the 20:20-hindsight 10%-in-2-days on offer. Why ?

Because from where I am sitting, gold looks inexorable. Look at the chart (source: 'economicfreefall') - what is a 10% twitch against that trend ? Less than the previous 2 weeks gains, that's what. The bottom line approximates very closely to the 144-day moving average, the significance of which is that silver bottomed on the 144MA after the May massacre, and then resumed its bumpy ascent.

There was, in my view, no way that 2008-9 was just a nasty bout of recession. The only trick up the sleeves of Gordon 'PFI' Brown, or Ben 'helicopter' Bernanke or whomever, is that dealing properly with problems can generally be postponed. For a bit. Theories of what is happening abound: here's one you may care to read.

Sometimes, to quote Brute Anderson from the DTel yesterday, what's needed is "some old-fashioned Tory pessimism".

ND

Gold vs US Debt: Another Handy Chart

Not quite what we'd call 100% correlated ... but entertaining nonetheless


Source: TF Metals Report

Crown Currency failure may have Golden sister

Thanks to an anonymous email I have been alerted to a further development in the Crown Currency debacle.

Now, Foreign Currency exchange has always been a big market for the darker sides of our society. After all, dealing in cash has obvious attractions. Another angle of late has been to con retail investors out of money by getting them to play with Currency trading. Using high leverage you are guaranteed to lose. FT Alphaville has exposed this scam many times over. To dateit has not stopped these type of companies sponsoring Premier League football clubs or inspired the FSA to actually do anything.

Anyway, back to the Crown currency collapse of which little is known at the moment. All I can see is that Barclays have £2 million and about £20 million is owed. It could be a pure ponzi scheme or something similar. Anyway, under UK law you have no protection so the poor people who have got involved in this company trying to get FX for the future are going to suffer.

Then we come to Mayfair and Grant, whose shareholders are also Peter (previous form) and Susan Benstead of Hayle in Cornwall, same as Crown Currency. This company sells small amounts of gold at amazing prices which they sell online and store for you on their premises...I would not be very happy if I had put money there recently.  I wonder when we will find out how much Gold is in the vaults? Not surprising schemers like this pick on areas where retail punters are getting lured into a toppy bull market.

The story gets worse, as another main shareholder of Crown Currency is Edward James, a Tory Councillor in Somerset and one of the leaders of the Tories in the County.

How fare the Gold bugs?

James Higham has asked my views on Gold. It is a long time since I wrote on the Gold price. In 2006-8 I was a huge holder of gold, it was my biggest asset by far and it did well during that time too - in both ETF's and Funds. Subsequently I shorted it through the financial crisis and timed a repurchase well at $700 an ounce. Then I sold out at $900 an ounce to get into shares at the beginning of 2009.

Now on reviewing the above I see that the calls made were all good. Even the sale at $900 was OK, because although I missed another 50% increase my shares that I bought at that time went up over 300%.

But now to today, where is Gold going now? It is flat on the year so far.

Well, the end game for the West is still inflation, in the UK we seem to be getting there early. Massive debts can't be paid and the in some ways the most equal way of sharing out the remaining wealth will be through a period of high inflation. Much like the 1970's. In fact we are going to have stagflation, a prediction made here long before the financial crisis.

As such, Gold is going to be a good store of value, but then again Shares will be too as they outpace inflation. Indeed anything that is not cash is going to be a good investment. So Gold will go higher, maybe even to $2000 at some point next year (one for the 2010 predictions), but other investments will be too. On the other hand, if the World Economy collapses and we do end up with deflation then Gold will only do OK relative to other assets.

With this in mind I own shares in (potential) Gold miners such as EMED, but am not heavily into Gold. I prefer Oil, it has more practical use and will only get more expensive as we pass peak oil. Co-Capitalist Nick Drew takes a very different view. Given he is more successful and wise than me, probably best you read his posts on Gold too!

(The real trick is going to be to get debt now, fixed at a good rate, that I can then invest in more profitable ventures. Normally I would be erring to get free from debt slavery, but not now. Just as in March 2009 I called to buy shares, now I will try to fix debt for the inflation ride to come - thinking of it as my revenge on the Banks).