As ballyhoo’ed gold goes from peak to peak, your editor is getting airsick. One reason for stocking up on the precious metal is to protect against a dollar decline, but in recent markets a more appealing alternative has arisen, foreign stocks. These produce a yield, which you don’t get with gold ETFs or bars and coins, and are taxed less onerously as well.
Another scary element in the current gold boom is that the ETFs which own physical gold are actually selling gold now. An ETF like SPDR Gold Trust, GLD, owns bullion, but as the price of gold goes up it actually sells gold bars because its assets have risen more quickly than its shares. This does not apply to funds tracking gold via derivatives or synthetic constructions.
Moreover, the continued rise of the yellow metal depends on gold mining companies reversing their gold hedges, used to finance new production. Unless they do this, they wind up having to sell their output at ludicrous prices compared to the present levels. But the higher gold flies, the more expensive it is for miners to refinance.
The logic of buying more and more gold escapes me, given that what we are seeing worldwide is a need for measures to prevent deflation rather than inflation. Many of the same investors rushing into commodities and gold are simultaneously also buying US Treasury bonds, which makes no sense except if you are avoiding equities out of fear.
As the stock market picks up, more and more people on the sidelines will be drawn back in. To pay for their stocks, they will sell gold. And there is no alternative purchaser to replace the sellers at present levels: central banks are loaded with the stuff already. T-bonds do have an alternative buyer, central banks and speculators trying to keep US yields low so that dollar-linked exports (for the US or China) can pick up and help the economy grow. Other government’s bonds have similar buyers in reserve, because their currencies are also be pushed downward.
But no central banks today are going to waste their ammunition stocking up on bullion.
What this means for our paid subscribers is spelled out below along with news from places like South Korea and Thailand, Israel and Canada, Britain and Brazil.
