Best of the Week
Most Popular
1.Gold And Silver Voodoo Analysis Price Forecasts - Austin_Galt
2.UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - Nadeem_Walayat
3.Silver Price At or Very Close to an Important Low - Clive_Maund
4.Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - Michael_Noonan
5.Gold and Silver Bear Phase III Dead Ahead - Rambus_Chartology
6.Stock Market Major Selloff Looms - Zeal_LLC
7.Inflate or Die! When Leverage Fails and Market Hope Turns to Fear - Ty_Andros
8.Gold Price Very Close to an Important Low - Clive_Maund
9.Market Forecasts for Stocks, Gold, Silver, Commodities, Financials and Currencies - EWI
10.U.S. Aggression - Will Russia and China Hold Their Fire? - Paul_Craig_Roberts
Last 5 days
Europe Is Crumbling Into Economic Collapse - 2nd Oct 14 - Raul_I_Meijer
Gold Stocks Stealth Rally - 2nd Oct 14 - Gary_Tanashian
U.S. 30 Year US T-Bonds Voodoo Analysis - 2nd Oct 14 - Austin_Galt
Top Approaching in Berkshire Hathaway Stock? - 2nd Oct 14 - EWI
Stocks Interesting, Junk Bonds at Fair Value, Bill Gross Who Cares? - 2nd Oct 14 - David Tepper
Gold Will Surprise In More Ways Than One - 2nd Oct 14 - Bob Loukas
“Back Door” Method For The Government To Pay Down The Federal Debt Using Private Savings? - 1st Oct 14
Dow Stocks Index And The No Mercy Cycle - 1st Oct 14
Why China Thinks Gold is the Buy of the Century - 1st Oct 14
Forex Volatility Predicts Bottom in Gold and Silver? - 1st Oct 14
Stock Market Wil-e-Coyote Moment May Have Arrived - 1st Oct 14
Europe Teetering the Ddge of a "Japan-style" Deflation - 30th Sept 14
Economists Economic Atonement - 30th Sept 14
Everything You Need to Know About the Stock Market S&P Index Until Christmas - 30th Sept 14
Singapore Becoming Global Gold Hub - Launches Kilo Bar Contract And Gold ATMs - 30th Sept 14
Germany Fights on Two Fronts to Preserve the Eurozone - 30th Sept 14
Turn the Tables on the Gold and Silver Market Manipulators - 30th Sept 14
U.S. 2014 Election Business as Usual - 30th Sept 14
Gold - Time to Buy the Dip? - 30th Sept 14
Urging Investors to Stay Liquid for the Coming Gold Stocks Boom - 30th Sept 14
The Japanese Deflation Myth and the Yen’s Slump - 29th Sept 14
Epic Investor Optimism that Can Be Reversed Only by a Huge Stocks Bear Market - 29th Sept 14
Russia’s Gokhran Buying Gold Bullion In 2014 and Will Buy Palladium In 2015 - 29th Sept 14
The End of Monetary Policy - 29th Sept 14
Here's What Rising Interest Rates Really Do to Your Shares - 29th Sept 14
Is a Credible Stock Market Top Forming? - 29th Sept 14
Silver Price At or Very Close to an Important Low - 29th Sept 14
Gold Price Very Close to an Important Low - 29th Sept 14
Nihilism And The Unknown Future - 29th Sept 14
Stock Market S&P, NAS Change In Trend? None Apparent, But A Caveat - 29th Sept 14
UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - 29th Sept 14
U.S. Aggression - Will Russia and China Hold Their Fire? - 28th Sept 14
Currency Wars and the Death of the Euro - Audio - 28th Sept 14
Obscure Maritime Law Practically “Guarantees” Profits for These Energy Companies - 28th Sept 14
Stock Market Primary IV Underway? - 27th Sept 14
Darwin And The Climate Apocalypse - 27th Sept 14
The Global Middle Class and Copper Consumption, A Stop Spike Event - 27th Sept 14
Can Money Save The Climate? - 27th Sept 14
Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - 27th Sept 14
Debt and Inflation Consquences of American Fear - 27th Sept 14
U.S. and Global Confidence are in Divergence - So Are Stock Markets - 27th Sept 14
Are U.S. Cars About to Crash? - 27th Sept 14
Why the U.S. Created and Armed ISIS From Libya to Syria - 27th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Most Exciting Event in the History of Technical Analysis

Are Gold and Silver Really Protecting Value?

Commodities / Gold and Silver 2013 Aug 06, 2013 - 06:29 PM GMT

By: Julian_DW_Phillips

Commodities

Performance - In the Dollar?

In the U.S. institutional investors, in 2013, have sold off over 1,000 tonnes of gold holdings from the SPDR gold ETF, the investment banks, from the Gold Trust and from COMEX because they have switched from gold to equities in the U.S.

Nowhere in the world have gold investors followed U.S. investors, but have either held onto their gold or rushed in to buy up the physical gold made available to them. And this was done when prices were falling.


U.S. investors appear to have said there is no need to hold gold, we can make profits in a recovering U.S. economy. And so gold having fallen from above $1,650 to the low of $1,180 appears to have lost its wealth protective power. Or is it just out of cyclical favour?

Such an assessment overlooks it long-term role, but more importantly, its long-term value protection role. U.S. investors at institutional level have to account for their performance on a short-term basis, so usually do not have the option of investing for the long-term, riding the ebbs and flows of the day-to-day markets. And so they are not in a position to appreciate the real wealth protection value of gold. But the rest of the gold world outside the U.S. is keenly aware of its value. Hence their rush to buy physical gold as the U.S. sold it and prices fell.

So what value does gold and silver have to the foreign investors and is it relevant in these days?

Traditional Wealth Protection

To get a balanced sense of proportion in the gold world, please reflect on the reality that the U.S. accounts for around 8% of the demand for gold on an annual basis, whereas Asia as a whole accounts for around 65% to 75% of the demand for gold. The percentage that the U.S. takes this year may be higher as the demand for gold in jewelry should rise as prices are so much lower now.

But before the Indian government imposed its stringent controls on gold imports, India was headed to 1,800 tonnes of gold in imports according to their Finance Minister. China is still headed to imports of over 1,000 tonnes. All this against a total supply before prices fell of 4,500 tonnes of gold. At 8% the U.S. was a taker of 320 tonnes.

It now seems that the U.S. selling has slowed to a trickle not sufficient to restrain gold prices.

Role of Currencies in Wealth Protection.

Outside the reach of the U.S. dollar lie a host of currencies all founded on the same principles as the U.S. dollar. Each of them displays different and variable values, but currently each -before the coming changes to the global monetary system -are in some way dependent on the U.S. dollar. How? Well, in today's world as U.S. interest rates started rising, the prime impact of this interdependence was seen in the "Carry Trade's" activity. Traders (primarily the banks) have taken advantage of the low European and U.S. interest rates and borrowed in either the euro or the dollar and invested in the emerging world at very much higher interest rates. Provided Euro and dollar interest rates stayed low, and emerging world interest rates remained high, the profits were easy and reliable. The danger in such trades is the changeability of exchange rates. If emerging nation exchange rates fell then profits are wiped out quickly.

This highlights the value of gold. Locals usually have access to local gold markets without going through banks. Where they use banks they have a reasonable pricing of gold too, unless the government imposes taxes or duties. In general, gold is free of taxes such as VAT, so it can act as a currency hedge, particularly against your own currency.

This is where the true value lies in owning gold. Investors, looking ahead, have become keenly aware that the monetary aspect of gold is kicking in more and more in a growing number of countries. We take two examples to highlight this. The first is India and we look over the last two years:

  • For instance, in South Africa, in the last nine months the exchange rate against the U.S. Dollar has fallen from R6.80 to R9.9 which translates into a 46% rise in income to the mines there, against a fall in the gold price of 24%. This translates into a gold price rise of 22% in the Rand.

  • Cross to India where the gold price 2 years ago was Rs.71,350 when the Rupee cost Rs.44.08 and the dollar price of gold was 22% higher than today at $1,618.65. Today, with gold now lower at $1,324.35, in the Rupee it is now Rs.80,136 12.3% higher and the Indian Rupee at Rs.60.375 against the U.S. dollar.

Gold is therefore proving an excellent hedge against local currency depreciation even with a falling gold price! And this is the function it fulfils long-term.

But these two countries and their currencies are not the only ones to reflect this wealth protection facet.

The buying power of all currencies when taken back in time reflects a massive fall. When a country targets any level of inflation they are targeting a loss in buying power, and this is what gold protects against over the long-term.

The fall in the gold price in 2013 is a temporary correction, simply because the buying power of all currencies is designed to keep falling. Gold's long-term rising price compensates for that and will always do so.

Hold your gold in such a way that governments and banks can't seize it! Enquire @</strong> admin@StockbridgeMgMt.com

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014