ANALYSIS: the dramatic change in the status of Gold

Why gold is about to change from being a hedge metal to a bank-repairing élite currency

goldcoins

Some of you may have noticed that in the last few weeks, Russia has started issuing gold ‘pieces’ that are legal tender in the RF, and must be accepted at face value in all kinds of payments without any restrictions. Other banks outside Russia are also looking at ‘stamp sheet’ squares of gold grams that can be used in the same way. Inside China, at the top of the financial system a measured debate is well under way about how to create a global ‘super-currency’ backed by gold. The Chinese would favour this of course, because they own more gold than almost anyone now. And although it would be a bind for them (if it indirectly made the Yuan far more highly valued) in terms of their export drive, as a trustworthy multinational currency it would mark another move up for Beijing – bringing with it massive financial services revenue as the hub for 21st century deal-money transmission. In today’s bonkers world, there is more to being a sovereign than physical exports alone.

But in an equally broad sense, gold is shifting its investment positioning as fiat currencies issued by the West begin to look increasingly prone to the inflationary pressures of debt management. Not only that, but those banks we all love to hate are having the same thoughts about how to stabilise their finances through the medium of more flexible forms of gold.

Basel III (and Basel II) divide bank assets into three risk categories (credit,  market and liquidity risk) and weight each risk depending on its attributes. Gold is now“zero percent risk-weighted” in terms of credit risk. If the price of gold (POG) takes off – as I believe it must before long – banks with lots of the shiny metal would see a boost in capital – whereas the chance of getting a capital boost holding the assortment of faux, central-bank-inflated, “higher-rated,” no-return sovereign bonds is nearly zero.

Expert Eric Sprott explains that ‘If the Basel Committee decides to grant gold a favourable liquidity profile under its proposed Basel III framework, it will open the door for gold to compete with cash and government bonds on bank balance sheets’.

Bear with me, I am going somewhere with this.

If you make gold more of a tradeable/spendable ‘money’ than it is now, the metal moves from being a lump of unwieldy ingot to being liquid cash. You don’t have to be a brain surgeon to work out how quickly this would make light of the liquidity/confidence problem the world’s banks face. It would do so only in the eyes of mad accountants and sociopathic bankers, but that’s not the main point at issue here: Erdogan’s Turkey has already demanded an increase in the proportion of gold held by its commercial banks as part of its reserves. China’s central bank has openly called for gold to be a part of a basket of assets used to support a new super-currency.

Several things stem from this:

1. Alongside distrust of fiat Western currencies, gold’s demand factor must rise enormously – given the increasing calls for gold backed debt products, gold as a backing for currencies, gold as something to hold which retains (at least) its value, gold as a way to repair bank balance sheets, gold as adornment in an increasingly affluent India, and gold as a payment method in its own right….taking share from cash and credit cards in a world replete with uncertainty.

2. Although somewhat stationary as shares to hold in recent times, gold mining stocks must now be seen as on the verge of a major growth spurt.

3. As the redefinition of gold on the surface solves so many problems for the banks, they in turn will press for maximum access to it. Because almost all developed governments are incapable of resisting bank-sector lobbying pressure today, as I have suggested on many occasions in the past, the desire of sovereigns to stop their citizens holding and trading in gold will become all consuming over the next three years. Therefore, the window of opportunity for those wishing to benefit from investing in it remains finite.

Earlier at The Slog: Can Julia Gillard save the World?

76 thoughts on “ANALYSIS: the dramatic change in the status of Gold

  1. Interesting in the light of the visit to the gold vault and the question to the chancellor. It now appears these visits have little to do with 60th anniversary

  2. I thought the final scene of the awful Royle Family which I had to watch on Christmas Day to be polite said everything you need to know about gold.

    My wedding ring is the only gold I have. My wife lost hers down the sink – well no actually that was the engagement ring – she had her gold ring cut off and enlarged – but what is the point in wearing it, if your knuckles are getting bigger. I think its rheumatism, otherwise she is as fit as fiddle, and looks much the same as when I met her well over 30 years ago.

    I rarely watch TV now. I thought the Artist was just about O.K. Black and white and no sound. But why was everyone raving about it?? Well because nearly everything else is total crap. Its like watching someone play a videogame.

    “They” can put any price they like on Gold…

    Its pretty, but otherwise soft and useless…

    The only thing to invest in is people who have some creativity and determination to make things work.

    If you are buying gold, you have already accepted defeat. You would be better off growing tobacco and storing it in lots of gold coloured boxes labeled Senson & Bedges. You will always be able to trade tobacco for something useful like food. Its lightweight and highly portable…and completely legal

    What exactly are you going to do with that bar of gold you think you own if the SHTF? You need lots of friends who have useful skills not Gold. Go and chat up your local farmer, and ask him, if you can borrow his gun and shoot rabbits, and in the meantime – pay him to eat his cattle, milk, pigs, sheep, hens, eggs and turkeys. Tell him he’s a good guy and ask can I buy you a pint? He will look after you, if you work for him when nothing works. Most of stuff we need just grows out of the ground, or falls as rain from the sky.

    Tony

    • You have no idea what you are talking about. Gold has been a form of investment for thousands of years. It has been so because it is rare enough and costly enough to mine to be of value, is compact and therefore concealable and portable (you could easily hold 50 grand’s worth in the palm of your hand), and resistant to corrosion. In other words, a perfect store of wealth.

      Your equating gold with “light and portable” tobacco is completely ridiculous, as gold is more valuable and you must first have the land to grow said tobacco in the first place.

      Don’t think gold would do you much good if the SHTF? Ask refugees through the ages who were able to buy their way to safety because they had gold sewn into their jackets. And you are of course assuming that a SHTF scenario will take the form of total societal break-down, whereas many gold-owners have gold merely as a hedge against fiat currency devaluation. And if the SHTF scenario does entail societal melt-down, where did John or anyone else say that gold is the only protection you’ll need?

      Your post isone-third irrelevant, one-third straw-man argument and one-third dead wrong.

    • Tony, absolutely bang on!
      And, what is more you’ll be happy & contented while the gold grabbers will worry themselves to death – I’m with you all the way.

    • Very idyllic but….

      When your friendly farmer is protecting his livestock and produce you think he will lend you his gun and even more precious his bullets?

      The stuff that just grows out of the ground requires seed, fertilizer, diesel power and protecting. Or will the starving masses just pass your fields and livestock by?

  3. If I can’t eat it, drink it, or shelter under it then it is worthless no matter who owns the most of it.
    The obsession with precious metal will fail faster than cash.
    Although, a hell of a lot of people will have to die. Which will happen.
    This is the phoney war.

  4. All investment strategies benefit from hedging. The big decision is how far you really expect things to go down the pan. In a complete societal breakdown you need tools, preserved food and a defensible perimeter. Gold is useful as long as some elements of the monetary system survive but as stated above, isn’t very tasty (even with mayonnaise).

    I do notice that ‘preppers’ are the latest group to have documentaries made about them – you know, the kind of documentary that keeps a straight face but really is secretly flipping you the finger and really implies ‘look at these loonies – titter at their insanity’. If the mainstream media are trying to tacitly associate food stockpiling and survival training with madness perhaps we should all be learning to sharpen sticks and cook with roadkill.

    • IP,

      Bollocks.

      Are you prepared to kill a human being with your bare hands, to see his eyes bulging as you squeeze his last breath out of him to provide your own neccesseties of life. Are you ‘prepped’ to eating your own children ?

      I can, I will.

      You have no idea as to the lengths that people like me will go to to sustain life.

      I will defend you, I will befriend you and then I will eat you (mayo is a bonus)

      I can’t eat the shiny, but it does seem to attract the gullible.

      I do have a nice Chianti

      Pretentious wankers like you, deserve tormenting before slaughter (it tenderizes the meat and breaks down the fat)

      You are a prepper, you set yourself outside of your community, when under siege, they will offer you up for sacrifice (you would do the same)

      You should be very afraid of societal breakdown; it would not be a good thing for you and your family. You have no idea as to how weak the rusty cord is.

      • “I can, I will” – oh, f*#% off. Unless you’ve actually been to war you have no idea, you self-regarding cretin.

        I have visions of a 5’5″ 9 stone weakling with milk-bottle glasses at his laptop, dreaming of dystopia, when he will finally fulfil his dream of becoming a Nietzschean super-man. In the meantime, in between online rants, he wanks himself furiously like a safari park chimp, hoping his wife doesn’t find out.

      • I don’t think that Mr. Ward approves of your types of banter on his website.
        Please refrain in future, it is neither necessary or welcome.
        Thank you.

      • All very well, however as a ‘prepared’ person you should be cautious of making sweeping assumptions about people based on little evidence as you have done here. Part of your strategy seems to depend on being able to predict your ‘enemies’ plans against you. If you are as wrong about them as you have demonstrated yourself to be about me then I fear for you.

    • hysteria is contagious and communicable. if journalists circulated descriptions of a fictitious disease people would start ‘coming down’ with it almost immediately, as is well known. there was an epidemic of flying saucer sightings in the US starting in the late 1940′s at a rate of a handful per month and peaking in summer 1952 when many hundreds were reported per day. bank panics, investment bubbles, on and on one could go … oh yes, the emperor nero was expected to return for several years after his death and impostors appeared who attracted large followings and caused trouble. all of which goes to show, that like fictitious forces in physics mass delusion is something to be taken seriously.

  5. Gold may or may not have a greater future role in monetary policy. I’m agnostic on that. But in the meantime, I maintain my numismatic gold coin collection built up over 40+ years, plus my gold mining ETFs and my investment in a pre-IPO gold mine in the Philippines. I own property abroad and high quality dividend paying shares but what I do not own is sovereign debt. What is in over supply can only decrease in price. That’s my survival strategy plus the abilty to earn a few shekels as a writer/consultant.

  6. Gold has been held artificially low, and China has taken full advantage of this by buying. The real cause of any potential gold rush is not just the lack of confidence in fiat currency, but the trend for shifting away from the dollar as the global reserve.

    Members of the so called BRIC’s nations (Brazil Russia India China) plus Iran have, I believe, recently agreed to trade together using alternative currencies to the dollar. So that’s all the worlds most densely populated emerging markets – rejecting the U.S. dollar as the De Facto trading currency.

    While the ECB and the FED continue to print money indefinitely and thus debase their currency to buy up worthless bonds, elsewhere there is talk of a new global reserve currency, and gold is going to be part of that standard.

    One paper dollar was once redeemable for one silver dollar, yet today it takes over forty paper dollars to buy one silver dollar. To my admittedly layman’s understanding, all this means the U.S. dollar is set to go tit’s up in the near future, which is why Germany is quite keen on seeing the gold that is supposedly held for it by the fed.

      • It certainly is there: it’s just that everytime the Germans want to see it, everyone at the Fed is out having their hair done. Even Bananabux Bernanke.

  7. Those that do not understand Gold will perish. I’m fed up with all these people who say you cant eat it etc…… Let them eat pizza,GM all the better the fools.

  8. It seems the anti-gold brigade are far more irrational about their dismissal of gold than those who hold it as a hedge. I see it as an alternative currency which cannot be printed into oblivion. For those that do not see that, perhaps they should remind us dimwits that you can’t eat Canadian or Australian dollars either, however wise it might be to diversify some of one’s assets out of Sterling.

    But if you trust the banks and the government, good luck.

  9. Pingback: John Ward – Analysis : The Dramatic Change In The Status Of Gold – 29 December 2012 | Lucas 2012 Infos

  10. ‘Demand For Gold “CombiBars” Soaring’

    http://www.zerohedge.com/news/2012-12-24/demand-gold-combibars-soaring

    I think I have posted this before….
    As an aside, I see that Obama is now ‘hopeful’ a deal can be done. What a frickin’ farce, it would be a pantomime if the players weren’t short-termist, self seeking, devious scumbags whose only intention is to enjoy the show. How many times can they roll out the same format? Time and time again we see these ‘scenarios’ taken to the wire only for some compromise to be reached that could easily been achieved way before it gets to this stage. Same old same old.

    • The only problem I can see with these ‘combibars’ of gold mentioned at ZeroHedge is how to determine the face value of the one gram square of gold when using it to pay for something. As the price of an ounce fluctuates throughout a day and across timezones, would that mean that if it is used as currency (or to back currency) it’s value would change? Or would it have to be fixed and then who would decide the value daily? Would it be a different price/value in each country using it?

      One other point is that the ounce price is based on a Troy ounce not an Avoirdupois ounce (16 to 1lb), so the number of grams to an ounce is different. An ounce is 28.4g. A Troy ounce is 31.1g.

      A gold sovereign is still legal tender therefore is an actual currency of value in it’s own right. It is not a fiat currency created by a private central bank. Which is why people who own them often keep them as a hedge against inflation. It’s not what they are worth in themselves that matters. It is their worth as a store of value in relation to other asset values at any one time. Unlike food, alcohol, tobacco and other barter goods etc they don’t deteriorate and lose intrinsic value over time. A selection of all these things in your basket of commodities is a realistic position to hold IMO. Spread the risk and be prepared for any eventuality.

      • Well, I would agree with all that, and to add that, if we get to that point then, all ‘barter’ will be localised, therefore people will take a square of gold if they believe that what they are giving for it, is a good trade, so, I think it will find it’s own level, and if it is deemed that when traded further afield, that it’s value to the other party is wildly different, then we will have to compromise or not trade. Eventually we will probably end up back where we started.

  11. Oh, and I would like to correct an error I made previously: The government will not be confiscating your gold. No, that will be the mandate of the EU as, by the time they get around to that, Cameron will have sold us all down the river. We will no longer be a sovereign.

    • Yes indeed, if it’s not Cameron selling you down the river, and dithering over every issue, it’s Gordon Brown the Cyclops from Hell who gave away all your Gold and ran up the biggest debts possible.
      Then it’s Cherie Blair and Hector Sants getting the new years honours and so on. I see all this on BBC 24 news from my German holiday cottage where everything is running smoothly as usual.

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  13. The Market Oracle from Sheffield is very good and has gold trading in a range for the next yr between $1550 and $1800. So going no where.

    He also says gold has really had most of its gains in the last 10 yrs, so much better places for your money. A better trade would be to sell all your gold and put it in UK housing (Not London). Start earning a return on that money which has risen in value over the last 10 (or 5) years.

    http://www.walayatstreet.com/

      • @ colin

        There is some ….shall we say….’controversy’ …as to where gold and silver is going.
        Perhaps they are both a convenient vehicle that stores value for the very long term, can be handed from generation to generation, and need not attract any taxes or day to day costs. A case of investing what you will never need again is the mentality that I would consider. Any return to some form of gold standard may attract an immediate windfall, which would be very pleasant, but given the agility of financial accounting today, is somewhat unlikely .
        There must be many options available for day to day yield which is yet another strategy.

  14. To gold bugs, whose are arguements are persuasive, but anything looks better than the CB strategies of the BOJ, UK, US and ECB currently.

    However I think Keynes’ words are worth recalling namely that markets can remain irrational longer than one can remain solvent.

    If the link is formalised between gold and money again IMO the ride up to it is likely to be very rough for gold and silver and any PM.

    It is likey, according to a recent ZH article that the downward pressure on gold has been in part due to margin calls on other types of more illiquid investments than gold currently.

    The major problem is the lack of documentation of vast quantities of investments/bets and therefore accurate counterparty validity especially with London allowing rehypothecation to infinity.
    Finally whilst I am venting my spleen bernacke seems to me incredibly vain and has fallen in love with his thesis re the 30′s depression and can not believe he might be wrong about his solution although Japan followed his ideas and has lost 20 years to stagnation whilst interest rates were near zero and government deficits ballooned.

    • Is anything that Keynes ever said worth listening to? Given the s**t soup that his system has turned into. Not that I overly blame him, I just don’t think he’s any sort of authority on wealth.

      • CL esq,

        I differ with your dismissal of Keynes.

        Today it is all too easy and lazy to assign
        The moniker Keynesian on too many so called economic gurus.
        Keynes’ General theory was compiled in an era when the US and Uk were the leading industrial nations and most importantly had substantial trading surpluses and very low levels of government debt.

        I believe if he would have answered, if asked what he would do with the current mess the world is in he would answer that he would not start from here.

        I.E. I am sure he would have object to many if not most of the economic manipulations of statistics and the constant lowering of governence an, the glorification of consumerism, the growth of the financial sector as he hated the rentiers plus the printing of money that did not go to direct infrastructure or productive capex projects etc etc.

        To smear a dead persons work is not a sign to me that I am in the presence of a more knowledgeable or worthwhile listening to’expert’.

        Applicable context is all and lazy labelling is worthy only of the talking head charlatans IMHO

  15. Good to see that practically every viewpoint around the subject has been raised. So I ask myself, why have confidence in conventional attitudes and interpretations regarding precious metals and the world economies? We’re too far gone.
    I’ll be keeping my mind open and an eye on the course of future developments in my immediate environment.

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  17. Nothing like Gold to provoke a heated debate, here’s a mental exercise. Imagine that you are a time traveler and you can go back (or forward) 50 years. You can take something of value with you, what do you take, £50 notes??

      • Reverse aging mode or not, I’d take the archives of the daily racing form for 1963 — a few weeks worth should do. If really greedy bring along the financial quotes for the decade. I wouldn’t go 50 years into the future for all the money or wealth on earth though. Pointed in that general direction though.

  18. I wish I knew which way the Gold price will go. I own some of the stuff and I’m starting to regret it. Far too manipulated.

    Now where did I put my Tarot cards…..

  19. All of you have missed the mark about the value of gold.

    If you visit any museum worth the name there is one thing in common in all of them:

    - Gold Jewellery, often thousands of years old.

    - Gold is the most malleable metal. It is yellow and shiny. You can make it into beautiful objects that women like to wear. It is easily done, just visit any goldsmith and watch if you are allowed.

    - The prospect of gold jewellery, preferably lots of it, will turn almost any woman’s head in your direction from the age of puberty onwards.

    That is the true and enduring value of gold. You do not go to the farmer and ask for grain and meat in exchange for your gold. You go to the farmers wife.

    To put it crudely; in any society, gold buys you pussy, lots of it. Always has, always will.

  20. I thought you might’ve been ‘preachin’ to the choir’ with this post, John, but apparently not after reading some of the responses LOL.

    Commodity-backed currency always follows an exit from fiat currency…….that’s a historic fact.

    Gold will be the obvious choice, but I still believe silver is the better investment for the average bloke on the street.

    • In my humble opinion people are not heading towards gold as an investment as some appear to believe on this thread.

      People are buying gold because they are $hittin’ themselves, and it will be this fear that drives people towards gold both at a government level and at an individual. Fear and greed drives investors, fear and greed.

      • All fundamentally true. Gold is a get-out for cowards. Ask Warren Buffett.

        If gold is the saviour against inflation, then why the huge swings this year? $1800->$1640???

        Is this how gold works in “normal” economic conditions?

        Something amiss.

      • A get out for cowards? More like an opportunity when all else goes to the wall. I see nothing cowardly in thinking ahead and planning against what’s coming.

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  22. The recent slump in the price of Gold is, at least in part, an attempt to reduce the “annual gains” figure for the year end, so that TPTB can try to show that Gold has ended the annual year-on-year increase.

    It’s the usual stupid attempt at manipulation. The Chinese, who are the ones that matter, are having none of it; they simply laugh at us round-eyes and carry on buying. They ARE working up to back the Yuan with gold (NOT a return of the Gold Standard, just a partial backing with Gold). This will preserve their national fiat currency from the general melt-down of Western currencies.

    Gold and Silver are money. Anyone who says they are not, and even worse comes out with the utter claptrap that “you can’t eat it”, is going to have a much harder time than is necessary, when the world reserve currency changes from the USD to (whatever).

  23. Gold has nice properties that are useful in the electronics industry for example, or for wearing next to the skin. Otherwise any meaningful amount of gold would have to be kept in a lock-up some place doing precisely sweet f.a. People will also rob you for it.

    I agree with the previous posters who say it is far better to invest in a productive asset like shares in an essential business, or farmland. Something that is going to provide an income or product or service or at least SOMETHING. Gold will do no such thing, and you will worry yourself into an early grave trying to protect it.

    I still don’t see what is so special about gold, which is just as subject to fluctuations as any other. What about land, real estate, guns, ammo, food, water, oil, gem stones, antiques, shares, etc? Many of those can also counter stocks and bonds too. The pound/dollar/euro could easily collapse right this minute with no warning whatsoever, never mind in 5-10 years. Are you going to be able to buy gold from me then? It sounds corny and trite but the best thing you can invest in is yourself – new skills, tools, education and know-how.

  24. What are the fundamentals here?
    So much additional money has been printed by so many that devaluation of the USD, EURO and ALL other currencies will continue to take place into the long term. So whether its USD or a basket of currencies……what difference?
    The alternative hedges against this erosion of value are tangible things which are all more finite than currency…….some also have value directly for the holder.
    There are different problems or at least on costs to hold these tangible things into the future, …….all of them, this includes basic liquidity
    Gold has traditionally been a popular long term investment….I agree with JW that it will continue to be……

    • Gold has been desired and held as reliable wealth for the last 5,000 years. I don’t think that will change any time soon.

      You can’t eat gold, but you can’t print it either.

  25. Pingback: John Ward – The Euro Fathers : Stupid Or Cunning? – 30 December 2012 | Lucas 2012 Infos

  26. Having been in the physical gold coin business for 25 years, I will never forget the days when we could not give gold away at $250 an ounce. Back then everybody was a tech expert, then they become property tycoons, and now those same fools are buying at $1800.

    I am convinced Bill Boner and his ilk, will lead these same lemmings over the cliff, and will have a lot to answer for when the reckoning comes.

    A main driver for the price of gold is not inflation, it is real interest rates. In 1980, the real rate for Fed Funds dipped into negative territory, just like that past 5 years.

    With rates at the lowest levels in 300 years, they really cannot go much lower. In fact, if you match the 10 or 30 year gilt yield, you will notice it has been rising for some time. It is not a coincidence that gold has been falling over the same time frame.

  27. I really not understand peoples confusion when it comes to gold in these current times. Anyone with a true understanding of our economic position and of the historical and ever valid role of gold has no hesitation in accumulating it to the best of their ability

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  29. In 2012, the median loss of purchasing power to gold was 7.0%.

    Approximatly 94% of all fiat currencies lost purchasing power to gold in 2012.

    • yes the key to everything here is interest rates. When they rise debt gets ever more expensive. Interest rates are the thermometer to watch! Once they make a decisive upturn things go really pear-shaped

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