Cash is king, but gold is the crown prince in waiting!
Posted on 17 November 2008 with no comments from readers
‘We have just been in Bahrain and everybody is cashed up!’ one banker told me today. My reply was that if everybody is now in cash then it just has to be the wrong place to be! Thinking about it there are some very good reasons to worry about a large cash position.
Quite apart from the contrarian argument that the crowd is always wrong, you have to consider what is happening to the supply of cash. We know that with the sell-offs in global capital markets there is plenty of demand for cash, what about the supply?
Money supply out of control
Another banker today showed me a chart of US money supply growth over the past few months, and highlighted a 111 per cent increase. This compared with something like 15 per cent money supply growth in the early 1930s as the US authorities grappled with the Great Depression!
There is an absolute tsunami of money coming into the system. What happens when the supply of something exceeds the demand: the price drops. And that is exactly what is going to happen to the US dollar – the authorities are about to inflate away their debt problem.
It is so simple: the debt stays at the same nominal amount, you print more money and the real value of the debt falls. Of course in the real world that also means a bond market collapse as inflation will make both the coupon and real value fall.
I wonder how long it will be until cash is deposed as king of the investment world? My guess is that it will not be long after the sell-off ends. How long will that take? It could be at the end of the year as the hedge funds attempt to square their positions, or it might be next spring after another lurch downwards in stock prices.
The bottom for stocks will be the top for cash and treasury bonds. Then inflation will start to emerge and depose cash from its temporary throne. Who will be the new king?
Gold and silver
Step forward precious metals to take a bow. Everybody knows that gold is inversely correlated to the US dollar and that silver is leveraged against the gold price. But why have precious metals taken so long to claim their crown in this financial meltdown?
The straight answer is that hedge funds have been selling assets across the board and turning gold into dollars, or at least the paper gold of futures contracts into greenbacks. The physical demand for gold and silver has been growing strongly all the time, hence the silver coin shortage and the $3.5 billion Saudi gold purchase.
Once the hedge funds stop selling, and you always do eventually run out of assets to sell, then gold and silver prices will rally, and the rush out of cash and into precious metals will do something pretty spectacular to the price. Gold and silver stocks, languishing at a 40-year low, should jump and deliver phenomenal performance for new investors and repay the patience of long-term holders.
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From my November 12th post on NicholsOnGold.com:
The United States Treasury and the Federal Reserve are throwing a trillion dollars, more or less, into the banking system. And, there’s surely much more to come.
(I’m reminded of that wonderful repost by Nelson Bunker Hunt when, in 1980, after going broke in silver, asked by a reporter what it felt like to lose a billion dollars. Hunt shot back: “A billion dollars ain’t what it used to be.”)
It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy – including the United Kingdom and the Euro zone, China, Russia, Japan and on and on – are doing likewise.
We have never – in the history of money – seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value, in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable rise in price inflation that will propel gold skyward in the next few years.
Financial Times: 19 2008 17:40 | Last updated: November 19 2008 17:40
Sales of gold coins and bars reached their highest levels for more than a decade in the third quarter while gold exchange traded funds saw record inflows as investors sought a safe haven from the crisis in financial markets following the collapse of Lehman Brothers, the US investment bank.
The enormity of that rush into the gold market in the third quarter was revealed by the World Gold Council in its latest Gold Demand Trends report, published on Wednesday.
The industry sponsored WGC said consumers spent more than $6.5bn in buying 232.1 tonnes of gold coins and bars in the third quarter of 2008, an increase of 121 per cent in volume terms over the same period a year ago, and the strongest three-month period since the mid 1990s.
The WGC’s report provides confirmation of previously anecdotal evidence of record investor interest.
The third quarter saw media reports that mints around the world had run out of gold coins as Lehman’s collapse sparked concerns among investors about the health of the world’s financial system.
However, the WGC’s data indicates that retail investment interest in gold has been increasing steadily over the past year.
In the first three-quarters of this year, net retail investment in coins and bars reached 443.6 tonnes, 10 per cent more than all of 2007.
Germany and Switzerland experienced a surge in demand for coins and bars in the third quarter with net retail investment of 19 tonnes and 21 tonnes respectively, up 533 per cent and 500 per cent compared with the same period a year ago.
In Europe, coins and bar sales in the third quarter alone reached 51 tonnes, exceeding each annual total for retail investment demand during the entire 18½ years of available data.
Meanwhile, gold Exchange Traded Funds also saw record buying interest with inflows of 150 tonnes in the third quarter, up 8 per cent over the same period last year, with investors spending more than $4.2bn accumulating holdings in ETFs.
Lehman’s implosion in September led to a jump in ETF inflows, which surged by an unprecedented 100 tonnes in just five consecutive trading days.
Strong growth was also seen in the jewellery sector where demand reached 647.6 tonnes in the third quarter, up 8 per cent compared with the same period last year, and taking spending to $18.2bn.
India, the world’s largest jewellery market saw demand reach 178.5 tonnes up 29 per cent compared with the same period last year as consumers rushed to take advantage of lower prices ahead of the Diwali festival in October.
Total identifiable gold demand (investment, jewellery, industrial and dental) reached 1,133.4 tonnes in the third quarter, up 18 per cent compared with the same period last year. in value terms, this represented spending of $31.8bn, a record, and an increase of 51 per cent compared with the third quarter of last year.
The WGC said strong demand for gold coins, bars and ETFs had continued into the fourth quarter but cautioned that this was being offset by ongoing weakness in jewellery markets in the US and UK.
By Jim Rogers
Published: November 18 2008 02:00 | Last updated: November 18 2008 02:00
T he following are excerpts from this week’s View from the Markets interview
FT: It’s a year since we last interviewed you. You were aggressively bearish about the dollar, but you thought there would probably be a rebound and you would take that as an opportunity to get further out of the dollar. Have you made a further exit from the dollar?
JR: Not yet, no. And the reason I haven’t is because we’re in a period of forced liquidation of everything. We’ve had only eight or nine periods like this in the past 150 years, where everybody has to reverse their positions on everything. There is a gigantic short position in the dollar and they’re all having to cover as they reverse their positions, so this rout is going to go on much further than I would have expected – to my delight, because then I’ll get to sell at higher prices. I don’t know whether I’ll get out this month or this year even – maybe next year, but I do plan to get out of the rest of my US dollars, because this is an artificial rally caused purely by short covering.
FT: How will you tell when that deleveraging is finally over?
JR: I’m sure I won’t get it right, but I do hope that when there’s a lot of euphoria about the dollar and everybody’s saying, well, see, there’s no problem with the dollar . . . I hope I’m smart enough to recognise it and finally get out of the dollar, because it is a flawed and, maybe, even doomed currency.