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Gold Fear vs Love

Commodities / Gold and Silver 2012 Apr 17, 2012 - 12:55 PM GMT

By: Jan_Skoyles

Commodities

Best Financial Markets Analysis ArticleWhy do people choose to own gold?

As I see it, there are two reasons for owning gold: one out of love, the other out of fear.

When looking at gold investment we see similar parallels drawn between past and present, East and West. The difference is, in the words of James Turk, ‘What money is and what money has become.’


In the West we seem to, as a whole, invest in gold as protection against the policy makers and their dangerous economic decisions. In the East they buy gold, because for them it has and always will be money. We used to believe it was money until the West got greedy and for some reason believed you needed more money to fuel wealth creation.

Grant Williams recently pointed us to a staggering statistic: household ownership of gold in India equates to 18,000 tonnes. This is the same amount as the both the central banks of the USA and the EU combined.

So what do they know that we don’t?

I don’t know if they sit there asking one another whether or not they think they gold market is bullish or not. I don’t know if they sit there asking if the fundamentals are still in place to create a bigger bull market than that seen the 1980s. I don’t know if they talk about gold price manipulation or the danger of gold confiscation. I don’t know, but I suspect not.

I suspect they don’t because they don’t need to. Discussing those issues isn’t what makes them decide whether or not they’re going to buy gold. They don’t present a dowry full of US Dollars because they felt more bullish about it today. No, they give gold at weddings because they know gold is money;  because they know when their children are giving away their grandchildren, gold will still be money.

It seems every week a report is released, mainly from a Western entity, that the gold price is climbing on the back of fear for rising inflation levels, the faltering Eurozone or even oil prices. In the West record amounts of gold buying has been reported by the World Gold Council. This could be partly because it is in our blood to own gold, but not in the same way as we see in the East.

The gold price

The Fear Trade, as it is often called, reaffirmed itself in early February when the Federal Reserve stated it would keep interest rates at exceptionally low levels until at least 2014. This sparked fears of inflation and of negative real rates for savers, thereby pushing up the price of gold.

However the gold price has dropped by x since the equity and debt markets appear to be gaining stability. As Rick Rule says;

‘This flood of liquidity has forced interest rates down as well as bond and deposit yields, pushing savers into longer durations and riskier instruments – including equities – and lowering servicing costs for debtors, which in turn has lowered perceptions of default risk. The markets appear more confident, and hence gold’s attractiveness as insurance is fading.’

Rick Rule also argues that the “root word of confidence is ‘con’”. Fiat money is backed by confidence alone, it is the world’s greatest confidence trickster. Unfortunately it seems the West are keeping this going whilst the East will not allow themselves to be drawn into the West’s schemes.

 East

Grant Williams’ stated in a presentation recently that there is a ‘silent battle going on over the world’s gold supply; the West has it, the East wants it, the East has the money, the West doesn’t understand this. The Eastern public has the ownership of gold embedded in their DNA, only now, along with that understanding, they also have the money.’

It has long been common knowledge that those in the East have far more respect for the safe haven of gold than those in the West. However for many years the gold buying power of the European and American central banks has dominated any reported figures.

Like the Mercator projection, financial markets and this financial crisis in particular, has its central focus on the West. This has led many to dismiss and pay little attention to any significant changes in the behaviour of the East.

However since China announced in 2009 that they had virtually doubled their gold reserves, the world has perhaps started paying a little more attention. Also since 2009 Chinese citizens are now permitted to own physical gold and silver. Judging by news reports, they have been embracing this freedom ever since. This is particularly noticeable when we saw a record number of imports from Hong Kong to China in 2011. Prior to this time China’s own mine production was able to satisfy domestic demand, however this is no longer the case.

Despite the bull-run of the gold price, the Chinese remain attracted to the yellow metal “The shortage in supply has been deepening very fast; from 48 tonnes in 2007 to 400 tonnes in 2011,” said Song Xin, chief executive of China Gold International.

In the past couple of weeks we have seen significant drops in both the gold and silver price, before further gains. When the price drops the Chinese are rushing in and buying huge volumes of the precious metals, particularly in silver. Why are they buying so much? They know that this is an inflation hedge.

The emerging markets now seem to be buying gold not just out of love, but also out of fear.

The reasons for owning gold today are as important as they ever were, in fact increasingly so as the reckless behaviour by politicians and central banks in the West continue. For as long as these individuals continue to debase the money supply then the case for owning gold remains. But I suspect even if they do stop, and regardless of which monetary system they turn to, those in the East will continue to stock up on physical gold.

Of course GATA state that Russia and China’s buying activities are indications of them taking advantage of the gold cartel’s gold price suppression scheme. And why shouldn’t they? But I suspect they would be buying gold anyway, it just so happens that we’re in a major financial crisis and our financial ‘stewards’ feel the need to ‘manage’ the he gold price.

Russia, judging by their Central Bank’s website, is a lover of gold. As we wrote last month, they are rumoured to be involved in gold currency agreements with India and Iran. Whether this is true or not I suspect we won’t find out for a while. But they are protecting themselves against something, particularly as they are now the world’s 5th largest producer, and they export zero tonnes of that mined.

Reasons for central bank’s buying activities, particularly in China are oft cited as a way to get back at the US Dollar. The US debt that they hold is rapidly losing value, the move into gold is a sure fire way to protect the country in the future. They are moving away from what Jim Grant calls ‘return free risk’.

Restoring faith in the Constitution

But it now seems that there are some Westerners remembering that their roots were built on the foundations of the gold standard.

In America there are currently lawmakers in 13 states seeking approval from their state governments to introduce a new currency which is alternate to the US dollar. This is thought to involve gold and silver in all cases. Why are they doing this?

North Carolina Republican Representative Glen Bradley introduced a currency bill last year which stated, “Many widely recognized experts predict the inevitable destruction of the Federal Reserve System’s currency through hyperinflation in the foreseeable future…In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System, for which the State is not prepared, the State’s governmental finances and private economy will be thrown into chaos. …”

He was, however, cautious in warning that the American financial system would end imminently, “I don’t necessarily believe [the Federal Reserve] is about to collapse right now…There are still a few things they can do with qualitative easing to sort of extend their survival. It’s just a question of how long. Right now we have a lot of sovereign debt going to China and Japan. When that debt stops being purchased by foreign countries, that currency is going to flood back onto American shores, potentially creating hyperinflation and bursting the currency bubble we have coming in Federal Reserve notes today.”

In Idaho Constitutional Money Act of 2012 is due to be presented to the House of Representatives later on this year.  The Act aims ‘to remove barriers and provide statutory authority for those in Idaho who may choose to do business with gold and silver coin. The bill will declare gold and silver coins currently minted by the United States Mint as legal tender in Idaho.’

Representative Phil Hart for Idaho write, “As a culture we have left the use of gold and silver as a medium of exchange far back in our past. Now only a minority of people understand the importance of a stable medium of exchange.”

The biggest fear factor of gold is seen during war and invasions; during the Second World War the Nazis, upon invading a country, would steal the central bank’s gold reserves and promptly turn on the printing presses – destruction by hyperinflation. That is the most famous example of gold as a weapon of war and colonialism. Jim Rickards mentions more on gold’s role in financial war in his book ‘Currency Wars’.

Whatever your reasons may be to own gold, its popularity has endured throughout thousands of years of monetary experiments and disasters. This time around is no different, except this time the experiment is bigger.

Protect yourself from bankers and politicians. Buy gold bullion safely and securely with The Real Asset Company.

Jan Skoyles contributes to the The Real Asset Co research desk. Jan has recently graduated with a First in International Business and Economics. In her final year she developed a keen interest in Austrian economics, Libertarianism and particularly precious metals.  

The Real Asset Co. is a secure and efficient way to invest precious metals. Clients typically use our platform to build a long position and are using gold and silver bullion as a savings mechanism in the face on currency debasement and devaluations. The Real Asset Co. holds a distinctly Austrian world view and was launched to help savers and investors secure and protect their wealth and purchasing power.

© 2012 Copyright Jan Skoyles - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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