Here it is:
Case for gold – just not now
By John Dizard
Published: May 3 2009 14:01 | Last updated: May 3 2009 14:01
While I believe we will be in a secular bull market in gold for several more years, it’s time to be not just cautious on the metal, but an outright seller. April brought some hope to the gold bulls, with a brief break above $900 an ounce, based in part on the notion the Chinese government was about to ease out of its dollar reserves and into gold. But that was based on a mistaken read of Beijing politics, and some naïve ideas about the utility of the metal as a reserve asset.
The Chinese government has been sending a series of messages to the US administration about the risks of its optimistic budget plans. Most of those are not so veiled hints about international monetary system “reform”, ie de-dollarisation. A couple of weeks ago, though, the State Administration of Foreign Exchange, which manages the largest part of the country’s foreign currency assets, announced that its gold holdings now came to 1,054 metric tonnes, 70 per cent higher than it had previously reported.
This was consistent with China’s line that it is not a captive customer of the US Treasury’s but Safe’s announcement was taken far more seriously as a trading signal than it should have been. Andy Smith, a veteran gold trader in London, points out that “Safe is not that high up the policy food chain”. He’s right – it’s a subsidiary of the People’s Bank of China, not an independent power.
As Mr Smith says: “They had been under pressure to show they were performing on their grand strategy for diversification. They had to do something, so they pulled their gold purchases out from the mattress. These were not new purchases, but old stuff they hadn’t got round to reporting before.”
Nevertheless, this was good for some front page headlines, and gold, which had just moved slightly over $900, moved further up on the announcement. It was what the Wall Street fiduciaries call a sucker’s rally.
Beijing does have a problem with finding enough liquid assets in which to park its reserves, but it is effectively impossible for gold to replace the dollar. The PBOC’s main strategy, which is trying to come up with some composite, or commonly agreed, international reserve currency, is problematic, but has more possibilities.
The logistical issues with replacing the dollar with gold as a means of payment are hard to overcome. If you need to pay for a tanker full of oil, you can have an assistant trader do a wire transfer with dollars or euros in five minutes. To transfer the same value of gold from one place to another takes far longer, and far more paperwork, even if it’s just moving the metal from one cage at the New York Fed to another. If you are actually shipping it from one continent to another, the shipping, security, etc is expensive and clumsy.
Gold is a good store of value, but much more practical for individuals with millions, or institutions with hundreds of millions, rather than countries with hundreds of billions.
And, unfortunately for the gold bulls, the store-of-value story only works as long as you can afford to store value. If you need cash to pay bills, you unstore it. GFMS Ltd, the statistical service, reports that scrappage, or gold recycled through dealers to be melted down, was over 500 tonnes in the first quarter, a normal quota for a full year. That would offset the buying by the gold exchange traded funds. Mitsui believes scrapping could be over 1,000 tonnes. Whatever the number, distressed sellers have been weighing on the supply, and now the psychology, of the market.
Dennis Gartman, the trader, Canadian closed end fund manager, and market analyst, says: “I don’t think gold recovers for a long time. The gold ETFs probably have 25-30 per cent too much metal in them. That will be liquidated. You will be surprised by how far down it goes.” Mr Gartman is also a long-term gold bull, but that is very long term. Like years. In the meantime, he says, “I can see gold going back to $750 with ease.”
Just eyeballing the charts, that looks a reasonable level, but I believe the metal bounces down to its lows within a few months, and begins to recover by the end of the year.
What brings it back? The investment demand for gold is driven by inflation and systemic risk. Outside Zimbabwe, we don’t have an inflation problem right now, and the sanguine reaction to the auto bankruptcies tells me that systemic risks have been substantially mitigated. Or, rather, the perception of those risks.
No later than the end of the third quarter and the beginning of the fourth quarter, though, the public is going to become aware of the next wave of systemic issues. Outright defaults, not just bad marks, in part from commercial real estate and leveraged corporate loans, will require politically difficult recapitalisations in the US. European institutions will become more obviously distressed.
So you will want to own more gold, but there’s no reason not to wait until it gets close to, or past, $800. |
