There is a parallel between the neglect of emerging markets shown by central banks (my subject yesterday) and central bank hostility to gold. In both cases, the Fed and its counterparts want to operate to reach national economic goals without having to worry about the rest of the world. Gold by definition is a global standard outside the remit of central banks.
But there is more impact on gold from the present situation. Firstly, the semi-official foundation of the system remains the US dollar. And the dollar has to be priced against something else, and other currencies won’t cut it. For that reason, the valuation of the dollar normally is against the yellow metal.
A second aspect of where we are now is quantitative easing and creation of liquidity by CBs. These policies aim to keep money cheap in order to stimulate economic growth and keep the banks from going bust.
It is not only our Federal Reserve which is boosting liquidity with unorthodox monetary policies. Similar tactics have been adopted by the venerable Bank of England, the tyro European Central Bank. and the least successful CB at fighting off deflation, the Bank of Japan. In fact a new Japanese policy for throwing money at potential borrowers to encourage consumers and producers to increase their debt has just been announced.
As long as money is cheap, the lost return from holding gold is minimal, which should encourage buyers. When and if economies are growing again and rates can rise, gold will not be as cheap, but it may become more attractive as inflation risks increase.
Central bank in general do not like to have too much said about gold prices, and they often sell gold at stupid low prices. Some emerging markets, notably China, like to buy gold when these conditions arise.
2013 was a bust for gold. Not only did the price of the yellow metal fall, but also the volume of gold held by exchange-traded funds plummeted as investors dumped the funds and also sold off their bullion and, in some cases, even their jewelry.
The bright spot for gold bugs was China, where the recently liberalized rules allow individuals to buy precious metals… and they are rushing to do so in an economy where high-yield instruments are also high-risk, and where anyone can see that real estate is over prices, and where shares have plummeted.
There is a theory out that China having overtaken India as the world’s gold-buying leader is something new. It is not.
When I visited China for the first time in 1991, I saw in a Hong Kong shop window a 2-ft high golden Buddha that was being raffled off. The winner would have to come closest to guessing the weight of the scupture. Chinese people have always liked gold, but back then they were too poor to buy it in quantity, and it was illegal to do so over the border in China. Hong Kong then was a separate Crown Colony operating under its own rules.
I bid but didn’t win.
According to Neue Zuercher Zeitung today, China’s gold buying has paid off for Swiss refineries. Because Chinese buy sheets of gold rather than bars, the Swiss are doing a huge business in melting down gold into sheets for the Chinese market. The result is that on both imports and exports, Swiss movements of gold soared in 2013.
While I remain a buyer of bullion, I also own ETFs and shares in the gold business. The best way to buy bullion, I am convinced, is via our advertiser, www.bullionvault.com, where I have done my own shopping for the precious metal. Readers are advised that the stiff know-your-customer rules the UK company imposes are offputting, but likely to be reduced (in part thanks to my lobbying the firm, based in Hammersmith, London, during my recent visit.) But by then the price of gold may have gone up further.
