Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
U.S. Economy Faltering Momentum, Debt and Asset Bubbles - 23rd Oct 14
Annuities - Afraid Your Money Will Vanish before You Do? - 23rd Oct 14
What Debt Deleveraging? - 23rd Oct 14
How to Profit from Massive Spin-Offs with Just One Play - 23rd Oct 14
Evaluating Ebola as a Biological Weapon - 23rd Oct 14
Euro, USD, Gold and Stocks According to Chartology - 23rd Oct 14
Why You Should Always Be Invested in the Stock Market (Even Now) - 23rd Oct 14
Five U.S. Housing Market Warning Signs Point to Real Estate Market Downturn - 23rd Oct 14
The Better Short: Gold or Silver? - 23rd Oct 14
Focus on Graphite Companies with Green Energy and Technology Strategies - 22nd Oct 14
Crude Oil Price Hitting Bottom - 22nd Oct 14
Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - 22nd Oct 14
Gold Or Crushing Paper Debt Stocks Crash? - 22nd Oct 14
India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High - 22nd Oct 14
Bitcoin Stock Exchange Could Be "More Valuable than Alibaba" - 22nd Oct 14
Currency War - How to Profit from a Stronger U.S. Dollar - 22nd Oct 14
Banks Hold Treasuries and Make Loans- 22nd Oct 14
Gold and Silver Timing is Everything - 22nd Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VII) - 22nd Oct 14
Follow the Baby Boom to Biotech Stock Profits - 22nd Oct 14
Copper, Nickel and Zinc Won't Be Cheap for Long - 22nd Oct 14
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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