As you might surmise, we get a lot of questions about the precious metals market. Given the popularity of our recent article ‘What Casey Research Staff Are Buying This Summer,’ we decided to address a few recent queries…
Q: Should I be worried about the silver fix disappearing? Could this happen to gold?
Jeff Clark: The London Bullion Market Association (LBMA) decided to do away with the 117-year-old silver fix process after allegations of manipulation and Deutsche Bank’s subsequent withdrawal as one of the constituents. That left only two banks on the panel, an insufficient number if they wanted to continue the tradition. A process is thus underway to determine a new daily benchmark price, which is important since many entities need an agreed-upon price for large transactions.
There are a number of entities jostling to be the provider of this valuable service, which is supposed to be decided this month. However, it shouldn’t impact the silver price itself, and in fact will probably be good for the industry. The process should be more transparent and efficient, and it will probably be electronic instead of by phone.
A potential glitch would be if there was a delay implementing the new program. The final fix in its current form is scheduled for August 14, and the industry will want to see a viable, state-of-the-art system in place well before that date. Some analysts think there will be a scramble to meet that deadline.
One factor in determining the likelihood of gold going this route could depend on the success of the new silver fix program. Gold has two “fixing†prices per day, so it would need to be equipped to handle twice the activity. But a more modern and automated system wouldn’t be a bad thing. It could also remove some of the doubt surrounding manipulation of the price.
Whatever the new system might be for silver, and whether or not gold goes a similar route, has no bearing on the reasons to invest in precious metals or our long-term bullish outlook. Gold and silver are money and a store of value, regardless of the process used to determine a daily benchmark price. So, no, we’re not worried about this.
Q:Â How does the recent revelation of Chinese loans being backed by nonexistent gold collateral impact the gold market?
Kevin Brekke, Managing Editor, World Money Analyst: Some gold bullion was used as collateral for multiple loans, whereas other bullion collateral has gone missing or never existed. The former will not likely have any impact on gold demand. The latter, however, could lead to gold purchases if the gold is needed to meet fabrication or other obligations.
Yet, as China is the world’s largest gold producer, and domestic production is not exported, any bullion purchases will likely be filled within the country and have no impact on the global stocks of the metal or supply/demand dynamics.
The bigger issue here is that of stewardship and the critical importance of the custodian. All gold-backed ETFs rely on a custodian for the safekeeping of the bullion. As the Casey Metals Team has consistently advised, knowing who acts as custodian, and understanding its history and reputation, is vital before investing in these products. Caveat emptor is the name of the game.
Q: If the stock market crashes, will gold crash too? What about gold stocks?
Jeff Clark: Some gold investors worry that if the stock market falls, so will gold. It’s understandable; in a major market crash, everything gets hit, at least for a time. When the market crashed in October 2008, gold dropped by a third—before rebounding and ending the year up.
We’ve measured every decline of 10% or greater in the S&P since 1975—the year gold again became legal to own in the US—and tracked the performance of both gold and gold stocks during those declines (we used the broader S&P 500 Index rather than the narrow, 30-stock Dow Jones Index). The data might surprise you…
