Friday, April 15, 2011

Gold is Just Another Commodity

Staying on the commodity theme from yesterday. 

Is there an argument for gold being more than 'just another commodity?

Some analysts consider gold to be just a commodity and is traded as such; that gold has no monetary value (see Wednesday's post for a rebuttal). But the price of gold can be shown to correlate to the value of currencies and the trust that people have in their governments and bankers. If they lose faith in these two areas, then wealth will flow into hard assets. And the base line hard asset that is the best preserver of wealth is gold.

Moreover, gold could be acting more like the world reserve currency of late. Central Banks are now net buyers of gold, and countries like China encourage their citizens to buy and save in gold. This is done to preserve value and to exchange for goods and services later. No simple commodity acts like this. No one buys more wheat to store to use as money.

This article reflects what is happening with gold market at the moment. Read between the lines and you may see the benefit of gold right now. Jim Rickards on King World News:
“You have to put gold in a separate place and say it’s not an industrial input, it only responds to monetary vectors.  So those forces are still very much aligned in the direction of gold going up simply because the dollar is going down because the Fed wants it to go down.  That’s exactly what QE is all about which is creating inflation around the world causing other currencies to revalue their currencies upward which pushes the dollar down, trashing the dollar means that gold goes up in dollar terms.

And if it tips the other way and if the inflation doesn’t continue, if we get deflation which is also possible, we all know that gold does very well in a deflationary environment...Gold has had a great run, it has had a 10 year run and it’s hitting some new all-time highs recently and so people naturally worry about whether it’s going to turn around and collapse, is it a bubble?  It is absolutely not a bubble and the reason I say that is that when you talk to institutions, I’m talking in the $100 billion and up category, they either have no gold or they are allocated like 1%, 1.5%...If anything they are under allocated and they are catching up.

What’s interesting about the Chinese is that they need gold and they know it but they are also very savvy, they are very sophisticated.  They understand the potential market impact of this and so what they are trying to do is acquire gold through mining.  They are mining their own mines inside of China as fast as they can.  They are reaching out to places like Myanmar, a lot of people know this formerly as Burma.  They are building railway connections into Northern Myanmar so they can move infrastructure in there and take the gold out by land route or using the railroad.  So they are doing everything they can on the mining side. 

But when you take gold from mines, you bypass the market.  I mean you get the gold, but if you control the mines you are getting it at cost...instead of $1,400 an ounce and that gold never hits the market.  Can you imagine if the Chinese came into the London market with an order for 1,000 tons of gold?  Gold would double overnight, so they are smarter than that.  

Having said that, they are opportunistic and if gold pulls back there is a bid there.  So I think the Chinese bid is part of what is keeping a floor under gold.”
We can argue all we like as to whether gold is just a commodity; that it is used as one and that it's price reflects that. As we see in the above article, large investors are seeing the difference and learning fast.

Will Joe Sixpack learn before it's too late and before his wealth is stolen.

Articles of interest:

Gold and silver market trends for 2010-GFMS
See article here

Global banking system 'living dangerously'

see hereNZ Herald

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