By Mark Rogers

The other morning a friend of mine who deals in antiques including gold and silver, rang me up to ask me whether I thought the price of gold had bottomed out or would fall further, and when and by how much it would rise.

I reflected that there is simply too much uncertainty about the euro crisis, the motives behind the Deutsche Bundesbank’s recalling of its gold from New York and Paris, and Basel III to be able to say anything about the price except be watchful. Of course there are those who are known to call the shots accurately, but even they cannot be relied upon: past performance is no predicator of future performance.

This of course is the well-known Humean scepticism, that just because something has happened before is no reason for it to happen again. In broad terms, and especially of human behaviour, this is a reasonable position to take, and it is Nassim Nicholas Taleb who has popularised this attitude in financial affairs as “black swan” events, although his own adherence to what in his hands has become a doctrine has practically paralysed him (see the essay on him in Malcolm Gladwell’s What the Dog Saw).

How do we know? Let me give an example that happens to be to hand in Nudge (already mentioned here). In describing the activities of unpractised investors the authors Thaler and Sunstein note: “Their market timing was backward. They were heavily buying stocks when stock prices were high, and then selling stocks when their prices were low.”

Surely, though, this is only knowable with hindsight. At the time they were buying, presumably the investors thought or had been advised that the price was right, i.e. low, in relative terms. When that turned out to be incorrect and the prices fell, they sold, and for an equally valid reason: not to lose too much given that they now had new information.

A Gold Standard?

So where is the price of gold likely to go? One school of thought suggests that the price of gold is artificially low because of the uncertainty created in the market by paper gold, the ETFs that are so abundant – and this is surely likely to be correct. Be that as it may though, what else is going on?

At the end of the Second World War, Germany’s gold was divided into four, with one quarter being held by the Bundesbank, and the other quarters kept in London, New York and Paris. There were two reasons for this: one to have leverage on the Germans doing again what they had twice already done, and, more immediately, to prevent the Soviets from grabbing too much gold should they mount a successful invasion on West Germany.

Two and a half years ago the Bundesbank repatriated the quarter held by the Bank of England; towards the end of last year it made claims for repatriation of its gold in New York and Paris. Why? Well, one reason may well have to do with the very public argument between the Bundesbank and the ECB over the latter’s quantitative easing: the Bundesbank rightly says that QE is damaging any chance of recovery of the euro, and therefore the repatriation of the gold may well have something to do with shoring up the German position should the euro finally collapse. Remember, we noted at Christmas 2011 that Deutsche Marks were in circulation, though certainly no-one knows how many there are. But would it not be a fine irony if Germany were the first to exit the euro, with a Mark backed by gold!

Elsewhere, as Ambrose Evans-Pritchard noted in The Telegraph on 17 January 2013, the buying of gold by central banks presages a return to a gold standard. He is wary about this return, and thinks it will only work as part of a tripartite system underpinning value. Whether the latter can work is very uncertain, as it effectively puts gold in a competitive position rather than an absolute one and therefore gold would surely not operate as a brake on the ambitions of politicians, and thus in effect be no gold standard at all.

However, there is a simpler explanation for these purchases: Basel III. The latter’s revision of gold as a Tier III asset to Tier I was no secret, and so central banks having been asked by the Basel Committee to revise their attitude towards gold have done so in the only proper manner – by buying it. This ought to stimulate the price, but perhaps the reason it has not is that gold buyers and investors are waiting to see just what might happen as a result. The Basel III accords should have come into force on 1 January 2013, although there were several pleas from central banks towards the end of last year for deferment, until next year in some cases. Already the Reserve Bank of India has announced it will not implement Basel III until April at the earliest.

There therefore seems to be a degree of nervousness in relation to gold at present: but it does seem like a good time to buy.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

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"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."