In June our sister site (L’Or et l’Argent) has run a series of articles that follow the theme of a “house of cards” starting with Greece whose only resources, tourism and olive oil are not enough to lift them out of bankruptcy and a similar situation in Portugal. The next contagion is Spain, an economic giant in comparison, where unemployment is rife and debt would reach €225 billion in 2010. Although Spanish debt continues to grow, it remains lower than France which is the largest in the euro zone. Outside of the Euro Great Britain is cited as a contender for a “house of cards” following austerity measures announced at the budget and the marginalisation  of the GBP as we through national pride refused to join the eurozone.

This is an interesting take from a European prospective and draws attention to the two trains of thought in economic growth. The 2008 economic crisis still affects us today, we in the UK and most of the western world are in an era of fragility that needs to be stabilised. We could attempt to spend your way out of it as and stabilise growth before taking cost cutting measures as was the policy of the labour party or cut back immediately and risk stifling any growth. Meanwhile across the Atlantic Barack Obama seems to believe that the US can just spend their way out of it and print more dollars.

To me, if likened to a house hold, first you must recognise your debt and here in the UK we have gigantic debts to overcome, then you must take action. Spending on plastic has its day of reckoning and eventual you must cut your card in half, review expenditure and come up with a budget  that enables you to pay essential bills  and gradually repay your excesses with money saved. The economy of the country is no different, to improve your credit rating you cut wasteful spending, improve efficiency and live within means to gradually ease the sovereign debt. Austerity measures in the UK seems to have won respect in world markets as GBP has risen both against the Euro and the USD and the FTSE 100 has recovered to over 5100. More importantly the economy has grown marginally in the manufacturing section.

I have to say I have been pro Euro particularly when we could have joined in a position of strength but now I am in many ways glad we are still separate. Despite the Euro’s recent rally there is too much of a divide between the countries in the Euro zone, the efficient North and the chaotic South to the extent that the Germans would like to get out of the Euro as they feel they do not want to support the fragility of countries in crisis such as Greece, Spain, Portugal, Italy.

Do not the French and other eurozone countries recognize that the cost of pensions will drive many countries to bankruptcy. When many Europeans look at the UK, they scoff particularly at the raising of the pension age that is likely to reach 70 over a period of time.  There average ages of retirement age varies but in most countries people retire in their fifties and in Italy and France only 12%  are working beyond 60 years old.

Citizens should realise that there is a pensions time bomb with the average continental EU state pension equating to almost 60% of salary and with a much longer period of retirement, governments cannot afford it and it will drive many countries to bankruptcy.  A recent survey of 25 countries scored the UK highly and the affordability and sustainability of our pensions and France at the bottom. Those countries with such generous pensions and early retirement ages simply can no longer afford them and it will drive them to ruin. There needs to be a massive reformation, not only to increase working age  but to reduce the actual value, which would be so unpopular that one wonders if the their governments have the guts to take the action necessary.

In another time we should be screaming at our government at the unfairness of our pensions which are the lowest in Europe but with the aging population, the ratio of workers to pensions set to double and the current crisis we are in a stronger position to survive than our neighbours. Meanwhile proposals to raise the retirement age in France have typically been met with mass protests for what is a diminutive step to fight debt.

I am not suggesting by any means that there is reason for complacency in the UK situation and there is still danger of stalling economic growth as the cuts bite deeper but at least we have recognised the seriousness of sovereign debt while other bury their heads in the sand.

In the fragile countries of the eurozone, where sovereign debt could precipitate a financial collapse and even  in countries that fear the contagion, people are turning to gold as a protection and nowhere more so than in the strongest economy, Germany, where there is unprecedented investment in gold. In Britain we do not have a history with private individuals turning to  gold but rather we might buy a gold coin for commemorative purposes.  We are fortunate that we have so far not suffered hyper inflation, major currency devaluation or physical invasion so we do not hoard gold or in general even understand how gold can protect family wealth even though we have some of the best conditions in the world for gold investment. No VAT, no Capital Gains Tax on legal tender gold coins and up to 40% tax relief if we use gold within a Self Investment Pension Plan (SIPP). We need to save more to pay for our retirement and make wise investments, diversify our portfolios, utilise SIPPs and last but not least be aware of the potential of gold to protect our wealth.

Maurice Hall

People are questioning whether the bull  run on gold over the last decade reached its climax with the December 2009 high of $1227 and we are on a downward slope. Let’s compare the conditions in 1980 with today and we will find that they are quite different.

1980

In 1971, the United States suspended the free exchange of U.S. gold for foreign-held dollars, then in 1974 lifted its four-decade ban on the private purchase of gold. At that time, gold bullion was being traded in European markets at highs approaching $200 an ounce. In 1975, the U.S. government began to sell some of its holdings on the open market and in 1978, along with most other nations, officially abandoned the gold standard. After being released from government control, the price of gold soared and touched $850 in January 1980.  In the three years before 1980 gold price grew eightfold  as the result of mainly fear but also greed

In Dec 2009 the gold price soared to $1227 per ounce. So was this the zenith and comparable to the 1980 high? Was this the end of the bull market that was running for almost a decade?.

There are many differences between 1980 and today not least of which the world is not the same following the most significant financial crisis since the great depression of the 1930’s, global warming threatening our existence and the economic balance between East and West swinging to the East. In 1980 the cold war still raged, the Berlin wall separated East and West Germany, and Eastern Europe was in soviet control, the Russian bear was feared. We must also remember that gold in real terms is trading at only half of the high reached in 1980 as the $850 to day equates to approximately $2200 when inflation is applied.

Political Fear – The Soviets had  signed a “bilateral treaty of cooperation” with Afghanistan in 1978, but by the next year relations had deteriorated and  the Soviet Invasion of Afganistan, which began around Christmas 1979, was a terrible global shock., Russian forces seized all major governmental, military and media buildings in Kabul, including their primary target – the Tajbeg Presidential Palace, where they killed President Hafizullah Amin and announced on Radio that Afghanistan had been liberated

It was a slap in the face to a cold war America.

At the same time the Russians were building up their strength  in southern Yemen close to Saudi Arabia and the oil fields. Also in Bulgaria’s border with Yugoslavia, a liberal communist country, whose 87 year old president Tito solely responsible for binding the  Serbs, Croatians and Muslims together since the end of WWII was very ill.

Iranian fundamentalists took over the US embassy in Tehran in November 1979 anther slap for America.  Ayatollah Khomeni became supreme leader in December and relations ships with Sadam Hussein’s Iraq were at an all time low eventually leading to the Iran –Iraq war.

Economic Fear – The 70’s were a period where inflation was spiraling out of control, stagflation unemployment, oil embargoes and subsequent spike in oil prices spread gloom and despair.  In 1979 inflation in the US was at 12% and was in double figures in most western countries  In the UK the winter of 1978-9 was known as the “winter of discontent” and during 1979 nearly 30 million working days were lost due to strikes.  Debt in the USA had risen to almost $1 trillion and the dollar was weak.

Another catalyst that shook the markets was Bunker Hunt’s run on silver. Hunt, an oil billionaire, his brother and friends by October 1979 had bought up all the silver paper propositions to the tune of 192 million ounces.  In early January 1980 , it became evident that COMEX intended to change the rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th. Of course, the CFTC promptly backed up the ruling. The escape hatch for the Hunts and some of the other large longs was simply to convert their futures contracts into physicals, On January 17th silver hit $50/oz, Bunker had continued to buy. At that point in time the Hunt’s silver position was worth $4.5 billion dollars. This caused chaos as there was no silver to be had to supply and the Hunts were driven to ruin.

Oil revenue to Gold – The rapid rise in oil price produced a sudden surge of wealth in  Saudi Arabia and the Gulf States  and enormous sums were diverted into gold. This was further accelerated by the fall of the Shah which exposed vulnerability of people in power in the Middle East and led them to protect their positions. It was common for Saudi dealers to bid for 50-100,000 ounce in a morning and one bank was asked to buy 300,000 ounces for a single client.  Speculators also used the opportunity to dupe the market to increase the price of gold by bidding for huge sums  through a Gulf bank giving the impression that Arabs were pouring money into gold, a story carried by media for some time.

Greed – Of course speculation reached the phase of public awareness which is always the last phase close to the peak just before the decent.

The world was in turmoil and inflation was out of control so everyone was scared. When people are scared fiat currency is not enough. They return to traditions going back to the beginning of civilization to secure wealth in physical gold that gives portability and liquidity. During times of crisis and fear gold rises and individual governments can’t stop it; but in peaceful times governments are able to maintain control. The future of the American economy and American power did not feel at all certain. As a safe haven in times of panic and strife, gold simply reflected that fear. As soon as the emotion subdued and rationality returned  the buying panic quickly subsided and turned to selling phase taking down the price.

The Fall – Prices will rise as supply cannot meet demand but in 1980  when the price touched $850 all over the world people began dishoarding their coins and  old jewellery in an unprecedented scale to the extent that dealers were running out of money to pay for the re cycled gold and Refinieries  had more than enough scrap gold. Thus supply quickly out grew demand.

In early 1980, Paul Volcker’s (Fed Chairman) new Fed policy began to bite. U.S. interest rates began to skyrocket. As they rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted. There was a rush out of Gold and back to Dollars. The Dow was already rising in 1979 and really took off in 1982.

The gold price dropped off dramatically after its January 1980 high in short because people lost their fear as inflation the bane of the 1970s was finally coming under control, interest rates and the stock markets rose making other investments more attractive. Supply was greater than demand and the Middle abruptly exited the gold market.

2010

The financial crisis that rose its ugly head in 2008 and continued through 2009 is comparable to the fear generated in 1979-80 and was one of the reasons for the rise in gold as people sought a safe haven. The dollar has been weak, a norm for a corresponding high gold price and this was catalyzed by India buying 200 tonnes from the IMF to drive the price to the December high.

The Future – The difference between 1980 and today is that in 1980 we were exiting a terrible decade and the future looked bright economically. Today the future is far from bright and whilst we have managed the worst financial crisis since the depression and are even complacent; but the truth is we are not out of the crisis. The economy is recovering slowly and is still very volatile and in the UK we have £1.4 trillion in sovereign debt to face. According to the IMF spiralling sovereign debt in Europe, the US, and Japan has emerged as the top threat to the world economy and risks setting off a fresh financial storm. The eurozone is heading for one per cent growth this year, limping out of recession under the threat of a sovereign debt crisis. The main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion. The economies of Ireland, Spain and Portugal will shrink. The US’s ratio of total debt to GDP is likely to exceed 90% this year, making it more indebted even than Spain and Portugal. It is similar to Weimar Germany but for different reasons and has printed trillions of dollars of fiat currency which will eventually lead to debasement. The dollar is weak and is likely to get weaker. The Chinese Yuan is undervalued but it is not in China and the worlds interest to drop the dollar just yet but the time will come and dollar will fall. The Chinese are on the unmistakable path towards challenging the dollar and the ultimate aim is financial supremacy The dollar’s status as the worlds reserve currency is under threat and both Russia and China are pushing or an alternative in which gold must surely take a part.

Today we have a world of low interest rates where it is almost impossible to obtain an interest rate that does not lose on the capital invested each year when taking into account inflation and tax. With the right gold product tax on profit can be eliminated.

In 1980 Central banks were auctioning off gold, today central banks are turning to gold as many countries increase their gold reserves. Last year India bought 200 tonnes from the IMF to meet its international commitments. China has increased its reserves to 1054 tonnes and announced its intent to continue buying.

India is currently the largest consumer, China the largest producer and second largest consumer and Russia were not players in 1980 and it is these countries where the demand is currently driven. China is consuming all it can produce and quietly everything it can buy with out upsetting the price.

Public Awareness – In 1980 public awareness led to speculation and to frantic selling of gold, de hoarding which was contributory to the drop in price as the amount of scrap gold created an over supply. Today you can hardly open a newspaper or watch television without seeing an advert to persuade you to sell your old gold. This is the reverse of 1980 as the refineries need the re cycled gold to ease the demand. Also investment has not yet reached the public awareness stage. From the chart below  you will see that there is no slide just a correction which is normal

In conclusion gold is still a safe hedge, the world is uncertain with threats of sovereign debt, inflation and the weakening of the dollar. Gold is finite all the gold ever produced would fit into a 20 metre cube. As mining becomes more difficult production costs are rising to almost $800. The demand from the East cannot be met so demand is greater than supply and there will be more pressure on supply as the gold fields dry up. I have seen an analogy where more gold can be extracted per ton by harvesting old mobile phones than the majority of modern mines. Were are currently in a period of correction fed by a certain amount of complacency but trends indicate that we should see a breakthrough of $1300 by Q4 2011.

Maurice Hall

If you search the web for information on when and how to buy gold and in what format you will get a wealth of advice on both the indicators and how to get the best return on your investment.  You may also see warnings from fake coins, tungsten in gold bars to loss of value on resale as dealers take there cut.  More of this later as there are certainly pitfalls that are easily avoided.

You may be driven to gloom and despair when you come across many hypotheses on the dangers of Fiat currency, whereby central banks are printing money and devaluing currencies be that USD, GBP or the Euro. You will certainly not be comforted by articles on Sovereign Debt £1.4 trillion coming up in the UK, the greater and more dangerous debts of the US, Japan, and the current difficulties with Greece, Italy,  Spain and Portugal in the Euro zone. We have already seen the collapse of Iceland and some former eastern European countries and Ireland on the brink (UK citizens who hold money in our Post Office should be aware that this is directly with the Bank of Ireland who is now 1.9 billion in debt). If you delve further you will see more political manoeuvring in the East and Russia, where there is a drive to move away from the USD as the reserve currency, additionally China has a long term strategy for financial domination. You may be forgiven for feeling that the world as we know it will come to a halt as you listen to many experts predicting an inevitable systemic crisis that would make  2008 pale into insignificance and global contagion would cause capitalism itself to collapse.

I am not saying we should ignore those warnings, far from it but the optimist would have some faith that the western world could stabilise, otherwise we will not be concerned with gold and money but food and weapons, and yes you will find that advice already common amongst the growing number of survivalists in the USA.  There will no doubt be rocky roads to follow, financial difficulties, pressures on currencies, but currency is not money.  There is no doubt that many people will be looking for a safe haven, an insurance policy and the only world wide respected haven is gold.  This gold must not be in the form stocks, un allocated gold at a bank or certificates but physical gold which is tangible either held secured at your residence or in a vault where you own it.  Even the survivalists after the guns and ammo recognise that a stash of gold coins would be necessary as a medium to exchange for supplies.

I would say that the majority of investors are optimistic enough to believe that we will overcome a financial crisis to a greater or lesser extent and not be plunged back into the third world. There is no doubt that we are in an investor “safe haven” and even the most optimistic are and should be hedging by diversifying part of their portfolio into gold.  We in the UK have always believed in our currency otherwise we would be part of the Euro zone, we have not been successfully invaded for almost 1000 years hence we have no country wide safe haven investment history. Twenty two miles across the channel, our nearest neighbour France, following a century of invasion, dramatic devaluation understand the safe haven that gold provides.  Families have survived through crisis because they put their wealth into gold napoleons and today French citizens have 3000 tonnes held privately in gold coins. Should a new crisis occur then many French families will be able to ride out the storm whereas hardly any in the UK would be in a similar position. There is a lesson to be learned here.

I have researched long and hard and think I understand the drivers, the risks the patterns.  The case for owning gold is clear but investors will always be looking for Return On Investment so clearly the timing of buying and selling is essential.  We saw in December 2009 the gold spot touch $1227 per ounce and is now holding around $1100. Where will it go is the big question and what are the drivers and is their anything to be gleaned historically or seasonally.

Let’s take a look at the drivers that keep the price low:

• The West has become complacent and does not have the level fear of financial crisis that it perceived a few months ago. The truth is that we are not out of the crisis the economy is recovering very slowly and is very volatile and we have the £1.4 trillion sovereign debt to face
• The West although no longer fearing a crisis is still tightening is belt and there is not the money around to spend particularly on jewellery. People are taking note of the volatility, companies who have vacancies are fearful of taking on new staff and unemployment is still a huge issue
• The USD has been relatively strong recently and as we al know a strong dollar weakens the gold price. Interestingly the GBP and Euro price has risen from the all time high dollar spot price due to weakening exchange rates.
• India’s private demand dropped in 2009 as people did not buy as much jewelry due to the high price although India’s central bank bought 200 Tonnes off the IMF to back its international commitments
• China is now the largest consumer and the greatest producer of gold but is playing a very political game as it is determined to increase its reserves and shed dollar assets but it does not want to do anything to increase the price of gold or weaken the dollar while it holds $2 trillion of dollar assets
• It is believed if demand continues at the current rate it will not overstretch supply.

What will drive the price up?

• At some point inflation will incur and the dollar will weaken as more money is printed
• It is likely that there will be another financial crisis that will send all the gold bugs scuttling to protect their wealth
• China, Russia and India will take up any slack in demand particularly China who want to increase their gold reserve but also have encouraged their citizens to save gold
• Central banks do not find holding foreign currencies attractive so they can only turn to gold
• There is a finite supply of gold all that has been produce in the world to date would fit in a 20m cube. It is more difficult and costly to mine and the ability to supply is falling off.

The new drive will come from the East as their central banks diversify from dollar assets and the new found prosperity of their consumers will lead to purchase of gold for jewellery and investment. Eastern currencies will appreciate as the dollar losses its status thus driving up the price in dollars over a period of time.

When is gold bought and sold?

• Seasonally – Over the last 30 years the gold price has been at lowest with remarkable consistence in the northern hemisphere summer as European jewellery fabricators and customers are on vacation with the biggest drive in the fourth quarter. This coincides with harvest and wedding festivals in the East. On average throughout this period gold bought in summer turned profitable by the end of the year. Professionals tend to sell at the beginning of the year.
• Historically – Gold has reached a high in cycles followed by quite severe corrections and periods of consolidation. In fact in the last several years gold’s peak highs have followed a super cycle of around 22 months.  Gold reached its famous high in 1980 at $850 which equates to around $2200 when adjusted for inflation so there is a very strong argument that gold still has a long way to go before it reaches its previous high and now we have in addition Russia, China and India as major players. Bearing in mind that cycles constrict and expand please look at the chart below where the next predicted super cycle high will be around 21 months from the high in December 2009 and that will be Q4 2011 and this also coincides with the seasonal trend.

When to buy and when to sell:

All the indicators point a period of consolidation, both seasonally and historically gold should reach a 2010 low in July to August probably $1050 – $1060 and that is probably the time to buy. Do not expect  an immediate significant rise but the trends show that there will be an increase towards the end of the year and probably another period of consolidation in early 2011 so time to hold your nerve.  Late in 2011 the seasonal and the super cycle trends combine and we shall reach the next peak. Conservatively that would be in excess of $1300 but many experts are expecting the next peak to be $1500 or higher. If you are a speculator you may want to take your profit now but if you consider your gold to be your insurance policy then you will hold on to it. If you are in the later category then you will hold your gold until there is a stabilisation and that would not happen until we stop printing currency and take our contractory medicine. See the article on When should we sell gold for more details

What to buy and how?

I mentioned in the opening paragraph that there are pitfalls to avoid and it is not too difficult. Apart from fakes, which can easily be avoided by using reputable sources and not trusting to buying through private individuals through auction site, everything else is designed to take away you profit.

Buy:

• Investment gold(1) to avoid VAT
• Investment gold to include in your SIPP so the UK government will pay you back 20% or 40% depending on your income tax bracket
• Legal tender gold coins(Sovereigns and Britannias) to avoid Capital Gains Tax on profit
• From a reputable source

Avoid:

• Dealers or companies that charge a high premium
• Proof coins that can have a premium of almost twice the gold value
• Any gold coins that demand a high initial premium
• Numismatic coins as they are best left to the experts in that field
• Large bars that are difficult to liquidate
• Removing your gold from the professional system as it immediately depreciates by 10-15%

Sovereign Elizabeth II Obverse

Buying gold bullion is good because the premium is low but we would recommend gold investment coins and in particular semi numismatic coins can attract a premium differential over the gold price particularly in times of crisis. Coins have greater liquidity than bullion bars which can be difficult to split.There is  quite a choice  and that may be appropriate to the country in which you live. The Krugerand is one of the oldest and well known bullion coins and can be purchased with little premium over a bullion bar. In the UK, the British sovereign is in my opinion is the best investment,  ”safe haven” and emergency coin in the world and can be bought at very little premium from the right source with added attraction of owning a beautiful historic coin with aesthetic value.

There is clearly a case for a platform that enables the discerning investor to incorporate the factors that removes the risk and reduces purchase premium and commissions to the minimum. This mechanism did not exist until a unique platform was developed to enable the buying and selling of gold in real time with best prices and secure storage,  in France in 2008 AuCOFFRE.com.  The  UK website is currently under development and will be available very soon.

(1) Investment gold is

(a) gold of a purity not less than 995 thousandths that is in the form of a bar, or a  wafer, of a weight accepted by bullion markets or:

(b) a gold coin minted after 1800 that:

¨ is of a purity of not less than 900 thousandths

¨ is, or has been, legal tender in its country of origin; and

¨ is of a description of a coin that is normally sold at a price that does not exceed 180% of the open market value of the gold contained in the coin; or:

(c)  an investment coin as specified in Notice 701/21A Investment gold coins.

Maurice Hall

We spend much time thinking about what to buy and when to buy it, when in fact knowing when to sell is more important. The case for owning gold is clear enough.

Gold, like all other commodities, is inherently speculative. Unlike well chosen stocks which you buy to hold to take advantage of their wealth-compounding properties, you only ever buy commodities to sell later. With this in mind, when should you sell gold?

Some would say the time to sell is now. Gold just isn’t the misunderstood, widely shunned asset it was a few years ago. Isn’t the gold bull market now long in the tooth, with better opportunities to be found elsewhere?

Willem Buiter called Gold a 6000 year bubble ft.com. The late and great Peter Bernstein subtitled his book about gold “the History of an Obsession”. But much as I admire these two great minds, such loaded phraseology implies there to be something irrational about owning gold and I think that’s just plain wrong. The fact is that there is a fundamental need for a medium of exchange. Early civilisations used pebbles or shells. Prisoners have used cigarettes.

Having a medium of exchange makes life easier than under barter economy and societies have always organised themselves around the best monetary standard they could find. Until industrialisation of the paper printing process, that happened to be gold, which is small, malleable, portable and with no tendency to tarnish. Crucially, it’s also relatively finite and this particular characteristic (in combination with the others) can be very useful in environments characterised by monetary mischief.

I view it primarily as insurance against such environments. It’s a lump of metal with no cash flows and no earnings power. In a very real sense it’s not intrinsically worth anything. If you buy it, you’re forgoing dividend or interest income and the gradual accumulation over time of intrinsic value since a lump of cold, industrially useless metal can offer none of these things. That forgone accumulation of wealth is like the insurance premium paid for a policy which will pay out in the event of an extreme inflation event.

Is there anything else which will do that? Some argue that equities hedge against inflation

because they are a claim on real assets, but most of the great bear market troughs of the 20thcentury occurred during inflationary periods. A more obvious inflation hedge is inflation linked bonds, but governments can default on these too. More exotic insurance products like sovereign CDSs, inflation caps, long-dated swaptions or upside yield curve volatility all have their intuitive merits. But they all come with counterparty risk. Physical gold doesn’t. Indeed, during the “6000 year gold bubble” no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to.

There is nothing mystical about gold and I don’t consider myself a gold bug. In fact, I’m not sure I’d even classify gold as an investment’ in the strictest sense of the word. Well chosen equities (not indices) will act as wealth-compounding machines and are likely to make many times the initial outlay in real terms over time. These are investments because so long as the economics of each business remain firm, you don’t want to sell. As they say in the textbooks, you buy to hold. But gold isn’t like that. Like all commodities, it’s intrinsically speculative because you only buy it to sell it in the future.

The reason I own gold is because I’m worried about the long-term solvency of developed

market governments. I know that Milton Friedman popularised the idea that inflation is always and everywhere a monetary phenomenon but if you look back through time at inflationary crises from ancient Rome, to Ming China, to revolutionary France and America or to Weimar Germany you’ll find that uncontrolled inflations are caused by overleveraged governments which resorted to printing as the easiest way to avoid explicit default (whereas inflation is merely an implicit default). It’s all very well for economists to point out that the cure for runaway inflation is simply a contraction of the money supply. It’s just that when you look at inflationary episodes you find that such monetary contractions haven’t been politically viable courses of action.

What causes the political winds to change? A government crisis. In 2008, Ireland came very close to going the way of Iceland. They had their crisis. And historians today still refer to the inflation fatigue” in Britain by the end of the 1970s. This was our crisis. So what we learn from these experiences and others like them is that a fiscal crisis is required to force a majority acceptance of the implications of an overleveraged government. But the political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude. And while it’s true that more people are at least talking about it, talk is very cheap and no one is yet close to walking the walk. Such steps remain politically unpopular because we haven’t had our crisis yet. Given the clear unsustainability of government finances and the explosive path government leverage is on, a government funding crisis is both inevitable and necessary. Dubai and Greece are merely the first claps of thunder in what is going to be a long emergency.

Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK (witness the IMF’s recent recommendation that inflation targets be raised to 4%). Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.

Extracted  from SOCIETE GENERAL Gross Asset Research Popular Delusions by Dylan Grice

Prior to 1860 the Germinal system was adopted to create a monetary community between Belgium, France, Italy and Switzerland.  In 1803, the “germinal franc” (named after the month Germinal in the (revolutionary calendar) was established, creating a gold franc containing 290.32 mg of fine gold. From this point, gold and silver-based units circulated interchangeably on the basis of a 1:15.5 ratio between the values of the two metals (Bimetallism). This system continued until 1864, when all silver coins except the 5 franc piece were debased from 90% to 83.5% silver without the weights changing. It, however failed because these countries had to lower the fineness of their coins to curb the disappearance of silver coins.  There was no harmony between the countries.  The Swiss reduced their 2 franc coins and higher value coins to 800 thousandths.  Italy reduced their coins to 835 thousandths.  Due to the need for small coins, France overruled the Legislative Body and tentatively decided to reduce the fineness of 50 and 20 centime coins to 0.835 thousandths (law passed on the 25^th May 1864).

Belgium gold coin from Latin Monatary Union - Leopold II

The story began when Belgium adopted the French franc in 1830. Switzerland harmonized its currency to the franc in 1848 and Italy joined in 1861, both retaining the names of their national currencies but adjusting their values to match the franc. In 1865, this arrangement was formalized as the Latin Monetary Union. Greece and Bulgaria joined in 1867, and a number of states (Spain, Romania, Austria, Finland, Venezuela, Serbia, Montenegro, San Marino and the Vatican) issued currency following the conventions without officially joining the Union.

The basic idea was that each member country would have identical coinage made from gold and silver. While the names of the individual currencies were kept, the weights were identical, so 5 French francs were worth exactly the same as 5 Italian lire and could be used through the Union like national currency (minus a 1.25% handling charge). Each country could mint as many coins as it wanted, there being no risk of inflation due to the intrinsic worth of the metal. The following coins were issued throughout the Union:

Belgium used French gold for all its dealings and therefore made it legal tender in 1861.  The Belgian delegate remarked that because his country was situated between France, England, Holland and Germany it formed the perfect natural link for payments to these States.  Some were using gold and others silver.  The balance of the National Bank was suffering from the aftershocks of these actions which disrupted credit and trade.  Belgium, Italy and Switzerland therefore demanded adoption of the gold standard.  The agreement was signed reducing the fineness of coins worth less than 5 francs to 835 thousands.  The money supply was voluntarily limited.  Individuals could only make maximum payments of 50 francs.  Each country was also forbidden from printing more than 6 francs per capita.  A very simple system that Greece joined in 1868.

However, there were problems that eventually lead to failure. The exchange rate of gold to silver was fixed at 1:15.5, which soon turned out to over value silver significantly. The Union countries tried to unload their silver coins into other countries, so they could profit by turning them into gold. Speculators could buy 16 francs of silver, go to the Mint and strike four 5 franc coins which enabled them to go and buy a beautiful Napoleon. France’s gold was disappearing.

Germany shamelessly profited and benefited greatly from the situation.  German agents came to Paris and Brussels with silver ingots from the recent demonetisation of thalers and transformed them into 5 franc coins which were then converted into notes and then gold.  To put an end to these practices Belgium, France, Italy and Switzerland limited (1874) and then soon after suspended (1876) the striking of écus. A larger problem was that there was also a second set of subsidiary silver coins for smaller amounts, issued by each country on its own and not fully convertible elsewhere. Even though these coins had a lower silver content than the primary coins, Union members were by law required to accept up to 100 units of them at face value per transaction, very much a loss-making proposition for the receiving side. Also, while the ending of silver convertibility stopped the minting of new silver coins, outstanding ones remained legal tender. With the advent of World War I and the massive financing strains involved, not to mention war between members of the Union, the system collapsed totally, although it remained in legal fiction until the end of the 1920s.

The United Kingdom entered discussions of  Britain joining the Latin Monetary Union. The proposal involved reducing the amount of gold in one pound sterling by less than 1% to make one pound equivalent to 25 Francs and also decimalising the currency. During the period of the Latin Monetary Union, the United Kingdom was already in a monetary union with territories now commonly known as the “Commonwealth” The gold standard of the British gold sovereign existed in these territories until the outbreak  World War I.

Maurice Hall

No country has changed so dramatically as China over the last decade as it has grown to challenge the USA as the World’s number one economy.  As we entered the last decade the US dollar was strong and recognised world wide as the “reserve currency”. In China, many people  refer to the dollar as mei jin, or “American gold.” so if a Chinese person tells you that he owes you 100 American gold, don’t expect a big fortune, because he’s planning to pay you $100.  Competiveness in many diverse products meant that countries in the western world were struggling for margin and seeking new ways of cutting production costs.  We were to see production moved from Western to Eastern Europe from America to Mexico, to take advantage of lower overheads but it eventually dawned that the cost savings to enable survival could only be made in the Far East. We started to see product coming in from Taiwan and then mainland China where there was an unlimited and cheap work force.

China started the 21^st Century with $166 billion in foreign reserves, today it  has the worlds largest foreign reserves at $2400 billion and is almost 31% of the worlds total reserves and nearly double the total held by G7 members.  During this period the US dollar has been devalued by 30% and the majority of China’s reserves are in dollar assets so it is not in their interest to see a collapse of the dollar. During this period China’s gold reserves rose from 404 tonnes to 1054 tonnes.

Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar denominated financial assets.  If they keep printing money to buy bonds it will also  lead to inflation, and after a year or two the dollar will take a hard fall. Most of their foreign reserves are in US bonds and are very difficult to change. The Yuan’s exchange rates are fixed by the Chinese authorities, this lack of convertibility keeps the Yuan low against the Dollar and avoids speculation on the currency.  Labour costs remain very low and prices remain competitive.  Making the Yuan fully convertible would be very harmful to the Chinese economy as anything to undermine the Dollar’s value would destroy all their investments and the value of the Dollars they hold. In a way, the US economy and Chinese economy are inextricably linked.  The main problem Chinese authorities have is a stock of up to  2000 billion “risky” Dollars and the dilemma they have is how to get out of this situation.  The currencies and proportions of foreign currencies held in reserve are a secret but in can be assumed that after the dollar will come the Euro and Yen.

The Chinese need to diversify and according to Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy driving force. “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets”. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.  So this is the second dilemma, China does not want to raise the price of gold, as happened when India bought 200 tonnes from the IMF late last year, but still needs to acquire gold. We are already in a situation where the total world mining production is around 2500 tonnes and it is estimated that demand far exceeds this, hence you cannot turn these days without seeing an advert to buy “old gold” in an attempt to make up the deficit.

If China had bought the IMF gold on offer, the signal this would have sent to the markets could have led to a huge gold price surge and a consequent devaluation of the dollar and, given China’s enormous dollar holdings, this doesn’t make economic sense.  Far rather buy the gold under the table from its own producers and hide it from the world at large until such a time it may be economically expedient to announce it.

A salesclerk shows a gold bar with the sign of the Tiger in a Beijing department store

Since 2003, Beijing has been buying most of the gold excavated and refined locally. It was a perfect strategy. No one in the international market became the wiser and the bill was paid in yuans. Today, China has more than 1,050 tonnes in its official vaults, up 75% in six years. Its gold reserves are now the fifth-largest among national central banks after the US, Germany, France and Italy. This insurance helped mandarins in Beijing sleep easier at night.

The Chinese people who have the highest savings rates in the world, have followed their governments lead and have been buying gold as an insurance policy and Beijing has begun actively encouraging people to invest up to 5% of their income in gold and silver. The result is that in 2009 it looks certain that China overtook India as the world’s largest gold consumer. Given China’s explosive growth, which has to be bringing ever more and more of its enormous population into the urban middle classes with ever increasing purchasing power, this ongoing rise in purchases by the Chinese public is likely to continue to expand.  There are no figures for 2009 but according to the China Gold Association it consumed 395.6 tonnes in 2008 and an estimate is that the demand would reach 420 tonnes in 2009.

In the long term China craves economic and financial power and would take the place of America if it could but it needs to free itself from the vast amount dollar asset it holds and arguably convert a substantial amount of these to gold. It wants to exchange those dollars for gold at the most favorable prices, so in the short term it does not want a high gold price nor does it want a weakened dollar as it needs to get best exchange rate for the dollars it holds. Most of the world’s gold is in private hands and not easily accessible so China’s option in the short term is to chip away quietly like an investor buying up small numbers of shares in a company before a takeover.  China for the third year running has been the world’s largest producer of gold, rising by over 11% to reach almost 314 tonnes in 2009, most of which has been sold for internal use. Also, China has pushed for an alternative reserve currency to the dollar as did Russia before them and the neutral successor is gold.

China  is playing  a political game and wants a near term low gold price to acquire its precious metal and a strong dollar to convert to other assets at the best price; but in the long term there can be no doubt that China actions will lead to a sustained increase in the price of gold.

Maurice Hall

India is the worlds greatest user of gold mainly in jewellery but the article below, first published in Hindu Business Line, describes how India has found comfort in gold by raising its gold reserve to meet international commitments. What is also significant is that the “new comers” to the gold market and now amongst the leaders, India,China and Russia are revitalising the role of gold as a reserve currency as faith in the USD continues to falter.

Ten years ago, almost to the day, Robert Mundell, the Economics Nobel laureate for 1999 predicted that, over the next decade, gold would play a very major role in the world’s central bank reserve systems. As it turned out, the world took almost that many years to realise the importance of his forecast; today, most European central banks and the US Fed hold more than 60 per cent of their foreign currency reserves in gold. Mundell made his prognosis against the grain because, all through the previous two decades, the central banks of developed countries had been selling their gold; in 1999 the Bank of England sold half its official gold reserves, as did its European peers. That trend has reversed only of late as the volatility of the dollar — the official reserve currency — has forced central banks to review gold as a stabilising reserve currency.

It is against this backdrop that the Reserve Bank of India’s decision to buy 200 tonnes of gold from the International Monetary Fund for $6.7 billion recently must be viewed as a welcome step in fortifying its foreign exchange reserves. One of the paradoxes of India’s hugely successful efforts since 1991 to shore up its reserves (currently estimated at $285 billion) is that they are mostly in a basket of foreign currencies that are subject to volatility and disruptions. With the dollar increasingly under stress since the huge build-up in the US economy’s deficits and the Fed’s pump-priming, most central banks, and particularly those of the emerging economies, have been looking to hedge their reserves. Gold prices move inversely to dollar values, which is why the Chinese and Russian central banks have been steadily building up positions in the yellow metal. The RBI purchase will not alter the reserves portfolio substantially; before the recent purchase, just 3.5 per cent of the total was in gold, but the move is part of a plan to buy more of the precious metal in tune with the trend among the world’s central banks to diversify their asset base. It is still too early to visualise the global trend’s impact on the dollar as the world’s reserve currency but the increasing popularity of gold purchases among central banks will certainly revive the Russia-Brazil inspired discussion on an alternative reserve currency.

For India, the most comforting factor in this purchase, apart from the psychological one of helping the IMF raise resources for its lending programme, is the distance it has travelled from 1991 when, with just one billion dollars in reserves, it pledged some 60-odd tonnes of reserve gold to meet international commitments.

The current consolidation shows signs of weakness in dollar terms but not in Euros or pounds. The Euro is currently  11% stronger against the dollar and the British pound 16% stronger, so investors in those zones have seen that percentage increase over the gold price rises since the start of 2009 in real terms My technical indicators would be flashing warning lights if USD 1,091 were not to hold. Theoretically, we could fall back to the USD 1,000 – 1,030. In pounds terms, if £670 were not to hold, we could fall back to £620 – £640.

If USD 1,091 holds or if we have a false breakout, then the upward trend that started last autumn will probably continue until April / May 2010 and we can still expect to reach an objective of USD 1,400 – 1,500 (which is equivalent to about £900 per ounce, depending on exchange rates). If the consolidation continues downwards, this means that the last peak of USD 1,226 (£742) represents the end of the intermediate bull trend that started in September and indicates that we can expect an extended consolidation period before a new bull market develops. The maximum fall that we are likely to see will be 10% from the current level and will be due to panic selling from the £605 – £610 support zone, which also corresponds to the very long term moving average for this bull market (moving or rolling average = technical method of smoothing a graph showing an upward price trend to provide an average price that eliminates the highs and lows ).

As is always the case, the best strategy for a long-term investor is to buy the panic (when price is driven down by panic selling) and sell the excess optimism. Nevertheless, there are two important comments on this strategy. The last peak of USD 1,226 was not due to extreme optimism or, at least, nothing like what we saw during the previous peaks of May 2006 and March 2008. It should also be noted that the difference in % terms between the price and its long-term moving average has remained quite small in comparison to the differences that were present in May 2006 and March 2008 and this shows that there is still a certain upward potential to complete the bull trend. Additionally, as the difference is much smaller than during previous bull trends, the likely fall from current levels is also much smaller. It’s this that makes me suggest that liquidating one’s investment to avoid a possible fall of 10% whilst possibly missing a 30% rise in few weeks or a month is not a good strategy at all.

It’s the very long term moving average (the 325 day moving average) that has always allowed me to identify the best purchasing opportunities in this bull market. Only the 2008 crash has broken this moving average during the last 7 years but we should not have our heads in the clouds as a new crash on the market would not involve the gold price this time in the same way as in 2008. Why? Because institutions and traders sold their assets in a panic sell off in gold due to deleveraging (mainly hedge funds and other institutionnals) and perhaps central bank manipulation. During that time, most people weren’t aware of the dangers and did not think we were on the verge of a collapse of the financial system. The resulting bank closures would leave them prisoners to a possible monetary revision with a massive devaluation of paper money, the cash, that everyone was accumulating. Most people were unaware as to how serious the situation was! If a new crisis were to occur, I believe that gold will not be sold in the same way because the institutions and central banks, alerted by the 2008 crisis, are now much more aware of the terrible risks related to their system. Obviously, if there were to be a new crash, traders looking at the short term, speculators looking for margin calls and other weak individuals will sell all their positions on gold and this may cause a temporary decline, at the start of the panic. This will then be followed by many professionals and bankers taking advantage of the situation to make MASSIVE purchases of gold metal.

The 2008 crisis was financial but the next will be monetary because the financial health of countries will be in doubt with the possible bankruptcy of several of them. I don’t have to tell you what the best thing to own in a monetary crisis is –  gold . We could see massive selling of government bonds and people seeking refuge in anything tangible which retains its value. Under these circumstances, the leading beneficiary will be gold!

The weakness in the gold’s price that you have detected recently is due to credit conditions being tightened in China. China dominates the markets these days. World markets often undergo a strong correction in the two to three months following a change in its monetary policy. Traders are anticipating this at present and have sold their assets in raw materials and emerging markets, which is the reason for the weak gold market. If the correction on the stock markets is only 20 – 30 % then this is not the start of the next crisis but only a market correction. In practice, all the money that was used to support the economy in 2008 will eventually end up in the economic circuit and this is why stock markets have continued to be bullish despite poor economic indicators.

Inflation will inevitably reappear sooner or later. The next crisis too, but it could occur later than the pessimist are suggesting because the re-launch plans and monetary injections are still supporting the markets. We are currently in the eye of the storm. We can expect to see the price of some agricultural products increasing during the following months, for fundamental reasons, and this will have a negative effect on the lives of many people who have already been severely hit by the crisis. Violent demonstrations can be expected. Some people, who have lost everything, simply have nothing more to lose, as Gerald Celente said.

In short, my view is that we have two options for the gold market, the best and the worst, either gold returns to the bull trend that started in September and reaches an intermediate peak of USD 1,400 – 1,500 in April/May or gold will continue its correction as a zigzag until June with an average floor of about £630 then stay flat during the summer before rising again in the autumn with an objective that exceeds USD 1,500 as the first signs of inflation returning become visible or we see the first effects of the sovereign risks that will effect some countries at that time. One thing is certain, 2010 will not be boring on the financial markets!

based on an article by Léonard Sartoni up dated by Maurice Hall

Recently gold has taken a significant correction from a high of $1,226 an ounce it fell to $1,075 – about 12% in two weeks. It fell by more than $50 in one day the greatest fall ever.  Should we be jittery that this is the end of the dramatic rises we have seen so far in the 21^st century or is it a correction that will recover and rise above the high recorded in December 2009?

Recent History

As gold has been with us for 6 millenniums , recent history could be described as very recent but lets stick to the last 30 years, Golds previous high, where it rose to $850 per troy oz.  in 1980 was subsequent to the Russian invasion of Afghanistan. If the thought of gold rising to over $1200  made people nervous it is put into perspective by remembering that by taking inflation into consideration, the $850 in 1980 is around $2500 today so the price has to more than double to reach the previous high. In 1980 gold was in a bull market with only a few currencies. Now the bull markets contain all major currency and the new giants of India and China.

Historic correction pattern – I would suggest that the current correction follows a historic pattern as the chart below taken over the last 10 years shows.  The December  correction from high to low was 12% that has now almost halved with the current price of $1140 to 7%.  Below the chart shows four quite brutal corrections ranging from 10 to 22% from the highs to lows followed by a period of consolidation and subsequent rises usually for around 9 months .

Historic dips and recoveries are a repeated pattern (rise 6-9 months, heavy correction. Consolidation before upward trend

Current gold correction should ease and rise to + $1400 by mid year

Mechanisms for Investing

Paper Gold – 95% of the worlds gold business is unallocated in which you do not physically own your gold.

• Mining Shares – no different than speculating on the stock market
• Futures – is a way to trade gold at an amount and price decided today for a delivery at a time in the future. You do not have to pay the full amount, but the dealers margin usually anything up to 20%  and you do not own the gold. This is pure short term speculation and subject to market moves and if you do know what you are doing your investment will evaporate
• Gold backed Exchange Traded Funds (ETFs) are securities designed  to accurately track the gold price.  Under an ETF a trust owns the gold, and you are a beneficiary of a debt owed by the trust and backed by its gold. This form of investment is better than a future but  probably more appropriate for investment institutions. If there was a panic and gold ETF investors try to take delivery of gold in exchange for their paper shares, gold funds may find it difficult to meet that demand.
• Gold Certificates – are normally unallocated gold with an option to convert to allocated but at a high cost. An investor in unallocated gold does not own that gold and is subject o the insolvencies of the vendor
• Bank Gold – this is always unallocated in effect you become a bank creditor and do not own the gold so any problems with the bank and your investment is at risk or total loss

Physical Gold

• Jewellery – Not an investment mechanism
• Large Bullion Bars - The main argument is that you can buy and sell your gold for very little premium and the rising gold price is great for ROI,  at the same time you hold a tangible asset. Bullion is not subject to VAT but is subject to Capital Gains.  The main disadvantage is that a large bar has a large value to initially purchase, your asset is not mobile and has moderate liquidity. If you own a 1 kilo bar it is not easy to sell off 100 or 200 grams
• Small Bars – Similar to Large bars but require a greater premium to purchase but do not require such a large initial outlay.
• Bullion Coins – e.g. krugerrands.  These are relatively new coins that are purchased for the value of their gold content and are of defined weights, they are in effect the same as small bullion with a small premium over the same value of gold in a bullion bar. Many bullion coins are not particularly attractive so is no different from bullion and are not subject to VAT but are subject to Capital Gains Tax unless they are legal tender.
• Semi-Numismatic – Sovereigns, Napoleons etc.  These are beautiful coins that have aesthetic, historic value.  Due to supply and demand they attract a premium ( value over and above the gold value) and depending where they are bought and their condition, the premium varies. The quality of the coin is an essential aspect, those which are in poor condition ( unless extremely rare), are only worth their gold value less dealers cut and are melted down. Sovereigns which are legal tender are VAT free and also free of Capital Gains Tax. Beware of Uncirculated and Proof coins as though undoubtedly high quality the premium is such that for a proof coin you pay double the gold value and that could never be recovered on resale.
• Numismatic – collectors coins that attract high premiums due to their collectability which is subjective in the collectors eyes and can only be re sold if wanted. Rare Sovereigns can be numismatic and may be VAT free if the premium is less than 180%.

Type of Investor

• Speculator – someone who is looking for short term gains and would normally use one of the gold instruments rather than physical gold.
• Investor – Again may be looking at the longer term gold instruments but may well want to take advantage of the rise in the gold price by owning physical gold
• Saver – Will want to own physical gold, take advantage of any upturn but whose prime purpose is to insure their wealth for the future

Reasons for investing Physical Gold

• Tangible Asset - Gold cannot  be printed like money. Governments worldwide are debasing their currencies as they print money.  It’s the oldest form of wealth in the world and does not rely on any third party promises. Gold is a “currency”
• Limited Supply – Less than 2000 tonnes per year Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.
• Demand greater than supply –  A World Gold Report said that investor activity had picked up strongly in the 4^th quarter of 2009. An important part of this demand is long-term in nature, likely driven by positive sentiment toward gold’s supply and demand fundamentals and the corresponding price outlook.
• Diversification – Portfolio protection -Most experts  agree that investors should be diversifying between 5-10% of their portfolio into gold
• Insurance What is the purpose of insurance? Of course, it is to protect you against the unknown and the unexpected. You can’t risk not having it in your life, even if you never have to use it. Gold is an insurance policy just like on your car or your home. Given the current financial uncertainty are you comfortable with owning gold through a paper deed, especially if there is no formal audit procedure to verify your share. The primary and most obvious advantage to owning physical gold over paper gold is that it’s yours unequivocally. Gold and particularly recognized gold coin is universally accepted as money anywhere in the world, regardless of culture, language or local currency and can be convert it to goods and services.

Even in a relatively stable environment but with turmoil in the stock market gold has performed very well. It can be said that gold performs well in bad conditions but stocks and shares performance rises in good times. We are now in a bad time with economies struggling to rise out of depression so gold is very attractive and safe form of investment.  According to a recent article in the Sunday times gold was the only investment that beat inflation over the last 10 years. One of the best ways to beat inflation is to own real assets

Recommendations

Gold Coins – Modern bullion coins such as Krugerrands represent good value as they can be purchased at only a little more premium or even similar to small bars; but we believe that older semi –numismatic coins such as Sovereigns, Swiss Francs, French Napoleons, American Eagles etc.  are a better buy. In the UK the coin of choice will always be the Sovereign. For small quantities these coins will cost more than bullion coins but in larger quantities the if they can be bought at 2-3%  above the premium on Krugerrands, they are the best buy.

In times of crisis when the demand increases the premium will rise under the law of supply and demand, thus on top of the gold value you may be able to sell at a higher premium.  The Sovereign is a beautiful coin, so has aesthetic and historic value, insures your wealth and has a liquidity that is recognised through world

Summary

• Gold is the best way to protect your wealth
• Gold should account for 10% of diversified portfolio
• Every one should hold some gold coins to hedge against systemic failure

Maurice Hall

Robert Cohen trained as a metallurgy engineer and manages the Canadian company Dundee Wealth’s Dynamic Precious Metals Fund. Here he shares his opinion on gold’s potential:

During the implosion caused by the Latin American debt crisis and the savings and loan crisis during the eighties, gold had a stratospheric rise, private and institutional investors were looking for a defensive security during a period when the dollar’s value was in doubt.
Other reasons also favour an increase in the price of gold which should stay in the 900 dollar zone and could even reach 1,000 dollars. One of them is obviously the fall in the dollar, which should continue, especially compared to Asian currencies such as the Chinese Yuan.
The increase in global liquidity also favours an increase in the price of gold. The current rate of growth of global liquidity, defined as the amount in the American exchange reserves and the currency base, has reached a record level of 28 %.

Given the current uncertainty in the capital markets, the economic slowdown in the USA and elsewhere and the crisis involving residential and investment property, it is highly unlikely that the level of liquidity will fall in the near future.
Gold is still relatively affordable, given that supply is limited and investment demand is increasing.

Gold provides protection against inflation, currency devaluations and the stock market volatility.  It also has a low or negative correlation with the main types of assets, especially stocks and bonds.

You undoubtedly know gold’s internal value and you recognise its value as a defensive security but do you know its protective value? In fact we also consider that gold has the ability to protect its owner from arbitrary decisions taken by governments. We believe we can protect ourselves equally well from internal currency devaluation following price increases (reduced purchasing power) as from an external degradation of the currency such as an exchange rate devaluation. In this respect, we are often reminded of what has actually happened in countries where successive devaluations after the Second World War has led to people suffering losses of wealth that in many cases was mitigated  to a certain extent by people transferring their money to gold

You may recall that gold cost 250 US Dollars per ounce in 1999. Remember, one ounce is 31 grams. It will now cost you around 1085 US Dollars for an ounce which is a price that has increased more than four fold in eight years. So, is it too late to but any? And how do you invest in this precious metal?

A small snapshot of the gold market: following a peak of 1200 US Dollars in Nov 2009, gold has remained at the 1080-1120 US Dollar level which are historical levels. At this price, despite everything, hasn’t the gold shot its load? Isn’t it too late to get on the market?

If you look at the price increases and decreases, there is still an enormous potential because the 1980 record price was 850 US Dollars. When adjusted for inflation, 850 US Dollars would be the equivalent to 2,200 US Dollars nowadays. That still leaves some growth potential.

However, this has to be considered in context: 1980 was just prior to the Iran-Iraq war so conditions were also very special and the price fell by 40% during the next two months. Gold can be very volatile. However, the current increase has been more constant and this leads us to believe that there is real demand and real growth potential. Société Générale analysts forecast that gold could increase by 50 -100 US Dollars per year for the next few years. These same analysts suggest that 5 – 10% of a portfolio or wealth should be held as gold.

Every forecast of inflation and, more particularly, deflation suggest that the price of gold will rise.

Could eggs be a useful currency?

Let’s imagine it’s 2018. The western world has gone through years of deflation then the flame returns as massive inflation repeating what happened in Germany in 1923.

John was still selling luxury yachts on the Côte d’Azur in 2008. Following the financial crash and the economic crisis that followed it, he now rears a few chickens on a farm on the outskirts of a small town in the Auvergne. In this article, he talks to us about his most recent discovery in a world where every day brings its new rules. He explains to us the characteristics of a good currency.

I arrive in the village square which is already full of people and a lay out my farm produce at my feet: pairs of chickens with their feet tied together and baskets of pats of butter wrapped in leaves, lying on a base of fresh and smooth eggs. I have some concerns because the Euros, which we usually use in the country, they have been refused by everyone since the State started issuing them willy-nilly. The screens where you enter the amount for a credit card transaction are no longer big enough to display the amounts that have to be paid for our everyday requirements. We are now a country without currency. What’s going to happen?

I think I will get the old Sovereigns out from their hiding place behind the bookcase, tomorrow…