Gold Investment in 2012: The Bullish and Bearish Signals

Key factors from this week’s GFMS ‘Gold Survey 2012′…

THIS WEEK saw the launch of ‘Gold Survey 2012′ by Thomson Reuters GFMS, the world’s foremost research firm focusing on precious metals. For those weighing up the pros and cons of making a Gold Investment this year there were both bullish and bearish signals, writes Ben Traynor at BullionVault.

Here are some highlights:

Bullish Signals

1. Gold Investment demand is expected to set a new record in 2012

GFMS expects Gold Investment demand to be the main driver of Gold Prices this year, as it was in 2011. Furthermore, the consultancy expects investment demand for gold to set a fresh all-time high of close to 2000 tonnes in Gold Bullion terms.

A key driver of Gold Investment, says GFMS, is likely to be ongoing loose monetary policies adopted by the world’s central banks.

“A corollary of all this monetary largesse,” says GFMS’s global head of metals analytics Philip Klapwijk, “is fears about resurgent inflation, and that becomes all the more likely if oil prices motor higher should tensions get any worse between Iran and the US.”

2. Physical Gold Investment demand continued to be strong last year

Investment demand for physical gold saw “an excellent performance” last year, Klapwijk told the audience at the London launch of ‘Gold Survey 2012′.

Europe, China, Thailand and the Indian subcontinent all saw growth in physical gold bar investment (investors in North America, as Klapwijk pointed out, tend to prefer Gold Coins to Gold Bars).

On a global level, combined demand for coins and bars was 1543 tonnes – a 30% gain on 2010, and a new all-time record. Indeed, the majority of Gold Investment in 2011 took the form of physical investment, GFMS says.

The significance of this is that investments in physical gold tend to represents “stickier” investments than other forms of getting exposure to the metal (for example buying Gold Futures) – meaning it would probably take more for such investors to exit the positions they’ve built.

 That said, there is obviously a limit to most investors’ stickiness. A lot will depend on whether, as GFMS expects, the economic environment will continue to be supportive of Gold Investment, with negative real interest rates and fears of inflation prevailing in most parts of the world.

3. Scrap supply appears to be flat

On a global level, scrap supply fell by around 50 tonnes 2011 – equivalent to almost two thirds of the year’s Gold Mining production growth. This was the second consecutive year-on-year fall for scrap supply.

Only Europe saw significant growth in scrap Gold Bullion supply last year (old jewelry, gold watches etc.), most likely the result of distressed selling prompted by the Eurozone crisis.

North America and Latin America meantime posted modest scrap supply growth. East Asia and the Indian subcontinent meantime saw scrap supply fall, as did the Middle East, where it dropped by over 100 tonnes.

Although GFMS says it expects scrap supply to rise this year, another traditional source of supply – central banks – is expected to be absent (see below). GFMS points out there was a “secular increase” in supply from scrap, producer hedging and official central bank sales between 1987 and 1999 – a factor which it reckons contributed to the lackluster Gold Price during that period. 

By contrast, supply from these sources has been flat since 2000, despite a sharp jump in scrap supplies at the onset of the financial crisis. This period in flat supply has broadly coincided with gold’s bull market.

4. Central banks are expected to keep Buying Gold

GFMS expects central banks to remain net gold buyers this year, although there may be a slight dip on last year’s figure, with net official sector buying having risen 491% year-on-year in 2011.

The swing to net buying by central banks is a key factor behind the flat supply picture of recent years that was noted above. Signatories to the Central Bank Gold Agreement have made what GFMS calls “trivial sales” in recent years, while emerging market central banks have been Buying Gold in significant quantities.

 

Bearish Signals

1. Gold Mining supply is expected to continue growing this year

Worldwide gold mine production rose for the third year running in 2011. Last year saw an annual gain of 2.8%, or 78 tonnes.

New Gold Mining operations contributed 47 tonnes of supply, while Africa was the region that saw the strongest growth, increasing production by 51 tonnes (despite its largest player, South Africa, seeing a five tonne drop).

Gold mine production has entered a “new era”, Klapwijk told the London launch, with GFMS expecting a further 3% growth this year. 

2. A lot of Gold Investment is required just to maintain current prices

Rising mine supply contributes to what GFMS terms the gold market “surplus” – the difference between combined mining and scrap supply and fabrication demand (jewelry plus industrial uses).

GFMS estimates that this leaves a “surplus” of gold supply equivalent to around 110 tonnes. Gold Investment therefore needs to take up that slack.

At current prices “purchasers of bullion need to take gold to the tune of $130 billion out of the market for it to clear,” said Klapwijk this week. One attendee at the launch asked whether there might be a case for saying many western investors are now overinvested in gold.

Klapwijk agreed such a case could be argued, and that many wealth investors interested in gold have probably already built their positions. He also pointed out that institutions such as pension funds and sovereign wealth funds – where Gold Investment remains relatively rare – could still offer some scope for growth.

3. Hedging activity by miners can now only be a source of supply

For much of the 1980s and 1990s, gold miners would hedge their price risk by selling future production forward to lock in the current price, adding to current supply and putting downwards pressure on the Gold price.

This process went into reverse as the bull market got underway. With Gold Prices rising, producers began to de-hedge, buying back positions and thus contributing to gold demand.

Measured as the total outstanding forwards and loans, plus gold options positions weighted according to their sensitivity to movements in Gold Futures (i.e. an option’s delta), producers’ overall hedging position last year was equivalent to 157 tonnes of Gold Bullion. Last year was the first year in over a decade that net hedging was positive, the producers in aggregate adding six tonnes to their combined position.

By contrast, hedging positions were equivalent to around 3000 tonnes in 1999 and 2000. Most of the de-hedging – which contributed to the demand side – appears to have been done.

“[Producer hedging] cannot be a source of demand in future,” said Klapwijk.

“It can only be a source of supply. The question is: how much supply?”

Klapwijk noted, however, the most of the hedging seen last year appeared to be related to specific mining projects, adding that there seemed little appetite for strategic hedging against a fall in Gold Prices.

4. Gold jewelry demand is expected to fall again

Gold jewelry fabrication demand fell 2.2% in 2011 – though given the rise in Gold Prices, the fact that the fall wasn’t larger led GFMS to describe this source of demand as “resilient”.

The bulk of fabrication demand was again accounted for by developing countries, where gold jewelry is often bought for investment as much as adornment purposes. 

Although most of the world’s regions saw a fall in gold jewelry fabrication in tonnage terms, there was a slight gain in Russia and more significant growth of around 40 tonnes in East Asia, which “boils down to China” said Klapwijk.

Despite this eastwards demand pull, though, GFMS expects gold jewelry consumption to fall again this year, citing high Gold Prices and a slowdown in global growth. Jewelry consumption however “is still expected to remain above 2009′s historically depressed level” says GFMS.

The Outlook for Gold Prices

Weighing up the above factors, and many more besides, GFMS forecasts an average Gold Price in 2012 of $1731 per ounce, with a range of $1530 to $1920. 

Klapwijk adds that “a push towards $2000 is definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely event for the first half of the year”.

Of course, short-term gains are not the primary reason most people make a Gold Investment, especially not those Buying Gold in physical bullion form. From developing nations in the East to the quantitatively eased economies of the West, people are turning to gold as a vehicle for defending the value of their wealth and an insurance hedge against tail risks. 

The dynamics behind most Gold Investment will continue to play out well beyond the end of this year.

Thinking of investing in gold?…

Gold Price vs. Platinum

See where platinum prices drop below the Gold Price…? Not pretty, is it…?

“YOU COULD have made a lot of money buying platinum and selling gold since Lehman Brothers,” said Philip Klapwijk, executive chairman of GFMS today, answering analyst questions after launching the precious-metals consultancy’s new Gold Survey 2012.

The white metal recovered faster than gold over the next 32 months, writes Adrian Ash at BullionVault. But then, it needed to, having dropped two-thirds of its Dollar price between March and December 2008. And since last summer, platinum has slipped back below the Gold Price per ounce – something seen on 3 brief trading days amid the global meltdown following Lehmans’ collapse.

Prior to that, you have to go back to the recession starting 1991…the peak of the “strong Dollar” which spooked the world into thinking deflation was looming in 1983-84…the global stock market’s once-in-a-generation low of 1982…and gold’s big tops of Jan. 1980 and Dec. 1974 to find platinum cheaper than Gold Price.

GFMS’s Klapwijk said today it was “interesting” to see gold overtake platinum prices so quickly again. But terrifying – or very worrying at least – might be closer to it.

“There’s a case to be made for the white metal trading at a premium to the Gold Price,” as Klapwijk said. Their scarcity in the earth’s crust is about the same (between 3 to 6 parts per billion), but platinum is very much more diffuse. On the demand side, it’s plainly more “useful” than gold too, with one third of annual output going to industry and another third going to make auto-catalysts. Fully 85% of gold demand, in contrast, is for store-of-value or adornment. But there’s the rub.

Gold is preferred by the vast majority of investors, as Klapwijk noted, a fact you could attribute to 5,000 years of constant investment use, everywhere and by every culture which has discovered it – a history which gold shares with silver alone. But Klapwijk’s second point was stronger than that. Instead, he noted gold’s relative lack of industrial use. And that makes it a far better defense against the kind of economic turmoil witnessed in the mid-70s, early ’80s, in 2008 and again since summer 2011.

Over the last 9 months in particular, Europe’s economic crisis has affected its vehicle demand, GFMS said, and that means lower demand for diesel engines and thus platinum-based catalysts. Gold may have suffered similarly lower jewelry demand in the West, but Eurozone investors have stepped in to pick up the slack. And according to GFMS today, together with pretty much everyone who studies this market, their Asian counterparts are Buying Gold with both hands regardless.

Considering a Gold Investment today…? Make it simple, secure and cost-effective like nowhere else by using world #1 online, BullionVault…

Gold and Silver Prices Weekly Outlook for April 9-13

Here is a short overview and an outlook for the upcoming week of April 9^th to April 13^th; this includes a short description of the main news items, public speeches, and events that may have affect precious metals prices during last week.

Gold and silver started very strong last week and thus continued their upward trend from the previous week, but then the minutes of the last FOMC meeting were published. In the minutes it was strongly suggested there is no need for the time being for any further intervention by the Fed (i.e. no additional stimulus plans) until the U.S economy will show additional signs of slowdown. Many commodities prices reacted the following day and plummeted including gold and silver prices. The following day gold and silver bounced back a bit as a correction to their fall. By the end of the week The U.S. labor force didn’t rise as many had expected: according to the recent U.S. employment report, the number of non-farm employees rose by 120,000.

As I have already explained in the April gold price monthly report, historically, as the non-farm payrolls rose gold price tended to decline; this correlation was mostly due to the effect this news had on the U.S dollar; the news of the moderate increase in the U.S. labor force during March could affect bullion prices in two different directions: it could have a positive effect on gold and silver prices because this slowdown might rekindle the speculation around another stimulus plan to be issued by the Fed. I think it’s still early to consider this figure as a shift in the economic growth of theU.S.

Alternatively, the table below shows the correlation between the news of the U.S.non-farm payroll employment changes and the daily changes in gold and silver prices on the day of the U.S. labor report publication. This table suggests that (all things being equally) gold and silver prices may moderately decline coming Monday.

During last week gold price sharply decreased during last week by 2.5%; Gold price ended the week at $1,630 /t. oz.

Silver price also sharply fell on a weekly scale by 2.32%.

The Euro sharply declined against the U.S dollar during last week by 1.84% (on a weekly scale); on the other hand, other “risk” currencies such as the Australian dollar and Canadian dollar only slightly depreciated against the U.S dollar during said time. The drop in Euro/USD, AUD/USD and USD/CAD may have been among the factors to pull gold and silver prices down during last week. If this downward trend for both metals prices will continue, it could have a negative effect on bullion prices during the upcoming week.

In this outlook I use charts and a fundamental analysis to examine how the upcoming events and financial publications may affect the daily percent changes of gold and silver prices.

The video link above provides a broad forecast for the main news, public speeches and events that may affect gold and silver prices during the week of April 9^th to April 13^th; the video includes reviewing the main reports, events, decisions and news items that will come out during the upcoming week. Some of these reports and events include: U.S. consumer price index, American and Canadian trade balance, Bank of Japan’s monetary policy and rate decision, U.S PPI, Federal budget balance and U.S. jobless claims weekly update (just to name a few).

For further reading:

Gold and Silver Prices Outlook for April 2012

What Are the Potential Outcomes for Gold Price in 2012?

 

Tags: Gold price outlook, silver price forecast April 2012

Why is Turkey Turning to Gold?

Turkey has announced some interesting policies towards gold recently. What are they up to…?

WHY ARE Turkey’s policymakers suddenly so interested in Gold Bullion? asks Ben Traynor at BullionVault.

Turkey’s central bank last week raised the proportion of domestic currency reserves banks can hold as Gold Bullion – while simultaneously cutting the proportion for foreign exchange reserves to zero. 

The move came only months after Turkey’s banks initially received approval to hold some of their reserves as gold – and less than a week after reports that the Turkish government is hoping to encourage people to deposit more gold with the country’s banking system.

What ever could they be up to?

One explanation is that Turkey satisfies most of its Gold Investment demand through imports. As BullionVault noted last month, Turkey has joined India and Vietnam in turning its attention to gold as a means of addressing a balance of payments problem.

But there is another, arguably more pressing problem to which policymakers view gold as the solution: Turkey’s fragile banking system. The move to boost gold’s role in the banking system should be viewed as part of a wider strategy to stave off a liquidity crisis – whereby banks have insufficient liquid reserves to meet their creditors’ demands for repayment.

This is a potent fear in Turkey, which just over a decade ago suffered a liquidity crisis that scuppered efforts to rein in inflation and government deficits. Indeed, the Turkish Liquidity Crisis of 2000-1 is key to understanding recent policy announcements regarding gold. What began in late 1999 as an attempt to solve long-standing and deep-rooted problems ended with a banking crisis and exchange rate collapse.

In December 1999, following years of high inflation and currency depreciation, Turkey announced a stabilization program backed by the International Monetary Fund.

 ”Our program rests on three pillars,” wrote Turkey’s economic minister and the governor of its central bank in their letter of intent to the IMF.

“Up-front fiscal adjustment, structural reform, and a firm exchange rate commitment supported by consistent incomes policies.”

In other words – like many who have been compelled to throw themselves on the mercy of the IMF – Turkey’s politicians pledged to sort out the public finances and put downwards pressure on wages, and therefore inflation.

Another way they would fight inflation by anchoring the exchange rate. The Turkish Lira was to be supported by what several economists have called a “quasi-currency board”. Limits were imposed on how much liquidity the central bank could provide to banks – the idea being that if it prioritized the banking system’s daily Lira liquidity needs it would weaken the currency. 

A result of this arrangement, as one Turkish economist points out, was that the volume of liquidity in the system was “basically determined by the ‘support of the international community’ as well as the existence of ‘good climate in other emerging markets’”.

For a short while, the program seemed to work. Inflation fell, and capital inflows kept the Lira supported. In reality, though, Turkey was merely storing up problems for later. The current account deficit – the other side of the coin to those capital inflows – swelled from $0.9 billion in 1999 to nearly $10 billion by the end of 2000, according to IMF data. 

At the same time, Turkey’s banks were building up foreign currency liabilities that would later come back to bite them. One impact of the 2000 stabilization program was that it created an attractive opportunity for foreign investors. With the exchange rate now seemingly stabilized, market interest rates in Turkey more than compensated foreign investors for currency risk. 

In addition, the stabilization program lowered the perceived default risk on Turkish government bonds. There was thus an attractive arbitrage, and investors – including Turkish banks as well as foreigners – piled in. Bond prices gained, and interest rates fell, as over $10 billion in net capital inflows washed into Turkey in the first nine months of 2000.

This speculative momentum, unsterilized by the central bank as part of the terms of the program, caused interest rates to ‘undershoot’, as foreign money flowed in and domestic banks funded bond positions with short-term borrowing. Then things went into reverse.

Capital inflow had already begun to slow down in the second half of 2000, and by September had turned into a net outflow. But it was November when things really started to fall apart. Under other circumstances, the central bank might have been able to sterilize the outflows by undertaking an expansionary stance, providing liquidity to offset the outflows. But under the stabilization program, this was not an option, lest it undermine the Lira.

With market liquidity scarce, interest rates rose. Banks that were funding their bond positions through short-term borrowing found their borrowing costs rose while the assets they held went down. Many were forced out of the trade with margin calls.

In addition, rising interest rates made it more expensive for the government to service its debt. This raised the risk of default, further weighing on government bond prices. And as money started to flow back out of Turkey, the pressure on the Turkish Lira caused investors to wonder if the central bank could support it. Eventually, on December 6 2000, the IMF had to step in with a further $7.5 billion. 

However, Turkey was only allowed to use this money against a speculative attack should one occur. It could not use the money to support the Lira while lowering interest rates, a move that might have eased pressure on bank balance sheets stuffed with government debt. 

A second liquidity crisis in February 2001 saw the stabilization program collapse. Turkey entered a deep recession, GDP that year falling by over 5%.

There were other, external factors at work too, which may have played a part and which carry faint echoes of today’s environment. A sharp rise in oil prices put upward pressure on inflation and made the current account problem worse. The Dollar rose against the Euro – a problem for Turkey, most of whose imports are priced in Dollars while its exports receive mainly Euros.

Another source of pressure was the US Federal Reserve, which raised the fed funds rate from 5.5% to 6.5% over the course of 2000 – reducing the relative appeal to investors of putting their money in higher yielding emerging market securities. Today’s Fed seems very far from raising its interest rate, but as the US economy starts to show signs of improvement, investors and policymakers alike are beginning to consider what will happen when it eventually does.

Against this historical background, Turkish policymakers have taken a number of steps in recent months that they hope will be sufficient to deal with today’s threats.

The central bank’s November Financial Stability Report shows that while the banking system as a whole was viewed as still being reasonably strong, concerns were growing last year about whether it had adequate liquidity to keep things ticking over.

“It is noteworthy,” the report says, “that the weight of FX assets and FX liabilities on the balance sheet has been on the rise.”

Furthermore, banks’ Foreign Currency Liquidity Adequacy Ratio – the foreign currency value of assets compared to value of liabilities of a similar maturity term – has been falling:

In other words, foreigners have been building up claims on Turkey’s banks, while the ability of banks to meet those claims has been diminishing. Were asset values to fall too far, banks’ solvency could be called into question – and even if banks remained technically solvent, they could still face a liquidity crunch if too many of their creditors decided they wanted their money back at the same time.

Last year, as the Eurozone crisis was intensifying, this looked a distinct threat. The crisis increased the likelihood that foreign lenders, especially in the Eurozone, would pull their money from Turkey as they ran into trouble themselves, or demand higher interest rates to compensate for the greater perceived risk.

Anticipating the possibility that banks would need additional funds to meet greater payments to lenders, Turkey’s authorities undertook a number of measures aimed at boosting banking sector liquidity, which included the following:

On August 4 2011, the central bank’s Monetary Policy Committee agreed to cut its benchmark policy interest rate – the one-week repo rate – from 6.25% to 5.75%. At the same meeting, the MPC “laid the ground” for additional liquidity provision “in case of possible financial turmoil”. This included a reduction in Turkish Lira required reserve ratios – the amount of cash banks have to hold back as a proportion of their assets – as well the central bank providing foreign exchange liquidity “in case of unhealthy price formations due to a decrease in the depth of the foreign exchange market”, a measure which came into effect on October 5.

From September 16, banks were able to hold up to 10% of their Turkish Lira reserves as Dollars or Euros. This was raised to 20% on September 30, and 40% on October 28.

From October 14, banks were permitted to hold up to 10% of their reserves in the form of Gold Bullion. On March 27 2012, this measure was tweaked, with banks being allowed to hold up to 20% of Turkish Lira reserves as gold, while no longer being permitted to hold gold towards their foreign currency liabilities.

It’s clear that the authorities want to make sure Turkey’s banks have sufficiently liquid reserves to meet their liabilities – and especially their foreign currency liabilities, hence the tweak to prevent gold being substituted for Euros and Dollars.

Much like 12 years ago, though, the central bank is in a bind. If it uses its reserves to provide foreign exchange liquidity, it risks inviting a speculative attack on a currency that lost 16% of its value against the Dollar last year. Similarly, if it is too aggressive in providing domestic currency liquidity it will also undermine the Lira.

Turkey has arguably run up against the limits of accommodative monetary policy. And it has turned to Gold Bullion as a potential lifeboat.

In a sense, Turkey’s banks are being encouraged to treat gold as a quasi-foreign currency – but one whose depositors are domestic citizens, who are traditionally less inclined than foreign depositors to pull their money at the first signs of trouble.

Turkey’s banks have offered gold accounts since the mid-1990s, but most of the gold in private hands – an estimated 5000 tonnes (worth roughly $260 billion at today’s Gold Price) – is still held in physical form well outside the banking system. Hence these reported plans to encourage more people to put their gold in a bank.

It remains to be seen how successful any such attempts will be – both in terms of how many people deposit and how effective that will be at supporting the banking system. But if anyone asks you “Why is Turkey turning to gold?”, answer them this: “It’s the liquidity, stupid.”

Investing in Gold? Make it safer – with investment-grade Allocated Gold stored securely outside the banking system in private professional vaults – and pay the lowest price possible when you own gold through BullionVault…

Gold and Silver Plummeted on Wednesday –Recap April 4th

Gold and silver prices changed direction; following the recent FOMC minutes release, they have taken a sharp turn down just like many other commodities prices including crude oil prices. During yesterday’s trading natural gas spot prices sharply rose again. The Euro slipped again against the U.S. dollar.

Here is a summary of the changes in precious metals and energy commodities for April 4th, 2012:

Precious Metals:

Gold price plummeted yesterday by 3.46% to $1,614.1; Silver price also tumbled by 6.68% and reached $31.04. During April, gold fell by 3.46% and silver declined by 4.43%.

The Euro/USD also declined yesterday by 0.69% to 1.3142; furthermore, the U.S Dollar also appreciated against other exchange rates such as the Canadian dollar.

Oil and Gas:

WTI price also plummeted by 2.44% to $101.47 per barrel; Brent oil also decreased by 2.02% to $122.45 per barrel;

Despite these changes, the difference between Brent and WTI oil prices nearly didn’t change and settled at $20.98/bbl. During the month, WTI slipped by 1.5% and Brent oil by 1.1%.

The Henry Hub future (May delivery) decreased by 2.28% to $2.14/mmbtu; the Henry Hub spot price sharply rose to $2.06/mmbtu; the difference between the spot and future reached $0.08/mmbtu, i.e. Contango.

A Summary of Changes for April 4th:

The table below includes: closing prices, daily percent changes, and daily changes:

 

For further reading:

• Gold and Silver Prices Outlook for April 2012
• Weekly Outlook for April 2-April 6
• Gold and Silver Prices Weekly Outlook for April 2-April 6

Tags: Gold price, silver prices

Is It Time for Gold Stocks Yet?

The following commentary comes from an independent investor or market observer as part of TheStreet’s guest contributor program, which is separate from the company’s news coverage.

By David Banister

NEW YORK (TheStreet) — One of the most common questions I field from my forecast and trading subscribers is can we buy gold stocks yet? We have seen gold consolidating and correcting, following a 34-month rally that I discussed last fall was going to top out around $1,900 per ounce. This type of rally went from October of 2008 to August of 2011 and we saw gold rally from $680 to $1,900 per ounce during that time.

In order to work off the bullish sentiment that was at parabolic extremes, gold is required to spend a reasonable amount of time in relation to the prior 34-month move to wash out the sentiment and create a strong pivot bottom. While this continues, the gold stock index has taken it on the chin as money rotates out and into other hot areas like technology and the Internet 2.0 social media boom. To wit, the Market Vectors Gold Miners ETF(GDX) peaked out last fall around 67 and current trades under 47 as of this writing.

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However, there may be a silver lining developing in those dark mining stock clouds very soon. It does appear that we are in the fifth and final wave of this pessimistic decline in gold stocks, per my GDX ETF chart below. A typical bottoming pattern ends after five clear waves have taken place, and in this case I have targets between $43 to $47 per GDX share for a likely pivot low in Gold stocks. Contrarian investors may do well to begin picking the better names in the sector and “scaling in” over the next short period of time.

Gold itself has recently corrected from $1,793 per ounce to $1,620 in the last several weeks. This has spooked the crowd out of gold and put further pressure on the gold mining stocks as well. Should Gold hold the $1,620 area and rebound past $1,691 you will see the gold stocks take off just ahead of that. From these 43-to-46 levels, the GDX ETF will provide very strong returns to investors with iron stomachs.

Buying Gold in Financial Repression

There’s no escaping financial repression. Apparently. But what about Buying Gold…?

SUDDENLY financial repression is everywhere, writes Adrian Ash at BullionVault. Apparently there’s no escaping it.

The forced imposition of real losses on savers, aimed at cutting the real value of government and banking debt, financial repression has become a hot topic for analysts and hacks alike. Yet no one’s talking about how to wriggle your way out. Which is odd. Because the classic escape from financial repression – Buying Gold bullion – has never been easier, nor more cost-effective.

The Financial Times alone has printed 15 stories about financial repression in the last month. Only two mention Buying Gold bullion. Worldwide in English, says the archive on Google News, financial repression has been featured in 103 stories in the last fortnight. Yet scarcely one-in-four mentions gold. Half of those only mention it to contrast today’s enforced losses in government bonds with the return of capital promised under the classical Gold Standard of 1870-1914.

Why run for exit marked “Bullion”? No one’s debt, and no one’s liability, gold cannot suffer default, unlike government bonds or cash-in-the-bank. Rare and tightly supplied, it cannot be created at will – aka “inflated” – thus depressing its value. And since gold never pays any interest, its yield cannot be repressed any further. It is what it is, and it does what it does, i.e. nothing at all, eternally indifferent to mankind’s latest wheezes, diktats and frauds.

An incorruptible element when you trade only fine gold (as the international wholesale market centred in London does), gold doesn’t even rust. And for savers trapped or coerced into holding guaranteed losses on prescribed investment products inside their own borders, physical gold is a stateless asset wherever you own it.

So, in all this blather about financial repression, we ask again: Where is the gold?

The finance industry’s sudden interest in financial repression is unsurprising. Real interest rates, after inflation, have now been squashed below zero for more than three years in the US and Europe, and nearer 10 years in Japan. Fund managers running the world’s $30 trillion in pension savings must all invest a certain, ever-larger portion of that cash in their domestic government bonds. The yield paid by those bonds has fallen sharply as central banks have created money to push national-debt prices higher, while the supply of inflation-linked bonds has been capped well short of unmet demand. And while bankers get a good deal, at face value, by sitting on tax-financed bail-outs and then printing the difference between what they charge borrowers and what they pay savers, they too have to keep an ever-greater chunk of their core reserves in “Tier 1″ assets. Meaning government bonds. Including those issued to raise the cash to rescue the banks.

“Financial repression is what we are in,” concludes Robert Farago, chief of asset allocation at Schroders Private Banking in London, as if it’s news. But how do you get out? Bill Gross’s latest (and much-followed) monthly outlook for bond-fund giant Pimco is entitled The Great Escape. Yet like Farago’s comments to the Financial Times, and even Merryn Somerset Webb blogging at MoneyWeek, he dare not whisper gold by name, recommending instead “Real as opposed to financial assets…For commodities, favor inflation sensitive, supply constrained products.”

Could Bill Gross scream “Buy Gold” any more quietly? Western and Asian savers alike enjoy unparalleled freedoms in the gold market today. That may of course change, but if it does, it certainly won’t be thanks to economists, analysts, fund managers or financial journalists pointing out the door marked “Exit” to the people they’re supposed to be helping escape financial repression. Hell, one analyst from RGE Monitor, writing an 800-word report on financial repression in India last week, didn’t mention Buying Gold once. Not once. In a report on India. Which leads the world in physical gold demand. Where private households buy over 1 ounce of gold in every 5 sold worldwide!

Now, with Indian citizens long using gold to escape that miserable store-of-value called the Rupee, you might think Gold Bullion worth a mention. Especially as they already hold perhaps 16,000 tonnes of the stuff…some 10% of the world’s entire above-ground stock…equal to their bank-account holdings as a portion of gross household wealth by value. But more than that, New Delhi has now quadrupled gold import duties in 2012 so far, specifically aiming to stop Indian wealth escaping the country’s financial borders. That makes Buying Gold the stand-out topic in India’s financial repression today. It’s conspicuous by its absence in the sudden flood of Western teeth-gnashing too.

India’s 2012 tax-hikes stand a long way from banning gold imports, however. Its pre-1991 controls didn’t stop gold coming in either, with the big difference that gold went entirely untaxed as tola bars were swallowed and smuggled in from Arabia. So today in India, as in China – where the government also shows nervousness about record household demand – people still enjoy unprecedented freedom to buy gold. So too do savers here in the West.

“I propose to end a particular drain on our balance of payments…the cost in foreign exchange of gold coins coming in from abroad, the vast majority having no value other than their content of the metal,” announced the UK’s then chancellor, Dennis Healey, in April 1975.

It was barely four years since the previous ban on Gold Bullion ownership had been lifted. It would be another four years before Healey’s new ban – blocking private citizens from acquiring imported Gold Coins – was lifted in its entirety. The 1970s saw financial repression writ large, but it was only the vicious climax of enforced losses imposed on UK savers since before Hitler invaded Poland. Throughout the 20th century – and unlike today – British savers were barred from owning or trading gold just when its stateless, borderless indifference was most needed, as an alternative to the certain loss of real value being imposed by low interest rates and rising inflation.

Financial repression is not new. Our current freedom to Buy Gold is.

N.B: Gold isn’t guaranteed to make good the losses you suffer on other, captive investments amid financial repression. US citizens enduring real interest rates of minus 4.6% were allowed at the start of 1975 to Buy Gold for the first time in three decades. But as they piled in, gold promptly dropped half its Dollar value (the market had got way ahead of itself in anticipation), shaking out all but the most pig-headed investors over the next 18 months before rising 8-fold by the start of 1980.

Deregulation and the gradual end of repression then coincided with such strong interest rates that Gold Investing became much less urgent. Government and banking debt was of course a fraction of what it is today, worn down by financial repression from the post-war peaks only now re-achieved by our war on deflation.

“In such a mildly reflating world,” advises Pimco’s Bill Gross, “unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form.” Buying Gold is just such a risk – a uniquely simple and obvious one, offering a stateless escape to a borderless market today. But make no mistake: Swapping the credit and inflation risk of cash and bonds for physical gold means exposing yourself to price risk. Volatility is certain as retained wealth worldwide thrashes against its straps and manacles.

Thinking about Buying Gold today…? If you are to escape inflation and credit risk, make sure you own it, be certain your metal exists in full, and get direct access to the borderless stateless market in wholesale bullion running 24/7 only at BullionVault…

Gold Price – Getting Fixed, Again…

 

…More at Gold is still getting fixed