Friday, 15 March 2013

Buying Gold - The Good, The Bad and The Ugly


Firstly, one must distinguish between owning physical gold and paper gold. Many banks and institutions and even funds will offer investment options whereby one can ‘own’ gold at the spot price. Subsequently, the value of your ‘gold’ account would increase alongside the value of the spot price, likewise it would decrease in value with a 5% decrease in the spot price.

This kind of ownership can be enticing to some as this obviously bypasses a number of factors such as the 1‐3% premium paid to the broker for buying physical gold and of course the cost of actually storing the physical gold safely.

The danger of course with this investment in paper or perhaps more appropriately ‘illusory gold’ is that in the event of the bank running into difficulties, then the value of your ‘gold’ would not be honoured and your investment would be lost! This scenario should not be ruled out in light of banking collapse such as Lehman Brothers, Merrill Lynch and of course Bear Stearns in the U.S.

Another Alternative to buying gold and perhaps the most popular with the masses is via ‘shares’. Of course we can quote many success stories here such as RIO TINTO, BHP BILLITON and hundreds more. Buying shares in the correct gold mining entity can in fact yield extremely high % returns even over a short timeframe, although it does not come without its obvious risks.

Firstly, a successful investment into gold mining shares relies not just on the increase in the price of gold, but heavily on the continued success and strategic functioning of the management. If something goes wrong at the higher level of management this could have dire consequences for the share price. Furthermore, mining shares trading on an index such as the FTSE100 or the DWJ IND AVG can also be dragged down by other negative or external stimulus not specific to the price of gold or their internal functioning. In general, it is safe to say that investing in mining shares can indeed have more upside potential than physical gold, but carries with it far more variables, and consequently is far higher risk.

Finally, last but not least‐the ownership of physical gold bullion. Whilst unattractive to the masses as it requires cost of storage, arrangement of delivery and obviously more than ‘a click of a button’ to sell, this is in fact the ONLY true protection against inflation, economic volatility and frankly another market collapse.

If we put politics and stockbroker ‘chit chat’ to one side we see the cold raw facts. 1‐Gold bullion has risen by 500% over the past 10 years, and has increased in value every year without exception for 10 years. Furthermore, countries such as China, Russia, India, Italy, France, USA (supposedly), Philippines, Indonesia, Azerbaijan are all currently buying, In fact stockpiling gold. Yet the FTSE 100 has rallied to 6530 points‐just 202 points shy of where it was in 2007 (6732) prior to the banking collapse that claimed the lives of Lehman bro’s, Merrill Lynch, Bear Stearns and resulted in effectively doubling  the US national debt.

To say the least, it is interesting to note that the powers that be seem to be buying gold (albeit relatively cheap gold at 1600USD troy ounce) whilst speculators are buying the FTSE100 (even after Britain lost its AAA credit rating a mere 4 weeks ago!

Yet, I must re‐iterate, the above is merely a string of fairly logical observations. If we believe the media, the game is over for Gold the European and US economies are well on the way to recovery and we can all get back to normal‐take on more debt, mortgage what we can’t afford, and of course buy up shares in the ‘phantom’ FTSE100 Bull rally! What I cannot grasp however are their reasons for such claims!

Again the facts speak for themselves. The current UK national debt is 2.2 TRILLION USD an increase of 10% from last year. Unemployment is still approx. 7.7 % (2.2% higher than 2007). Interest rates are still 0.5% with banks failing to pass on these rates to buyers!

Furthermore, the National debt of the UK compared to GBP Is 91%! This means that 91% of all income from UK goods and services comes from debt (creation of debt‐borrowing). 30% is considered a healthy amount and indicates a country can pay its future debt from its good and services/revenues. For example Russia is 8.2% Australia is 27%, china is 16% and the USA is 75%. This means the only possible way for the US and UK to ‘survive’ economically next year, and the year after, is to create even more debt! 

When viewing these statistics in addition to the fact that nations seem to be mass buying gold it does far more than merely suggest that things are about to change‐and change rapidly indeed!
On the contrary of course if we listen to the politicians (and many FTSE investors seem to be doing just that) then there are in the words of the great Benjamin Disraeli ‘lies, damn lies and statistics’.  This seems to be the current avoidance of reality of attitude we are seeing primarily in the US and UK.  Of course Mario Draghi and Germany are doing everything to keep Europe united and will continue to feed the ‘weaker’ countries such as Greece, Portugal, Spain, Ireland, the pill of austerity until at which time their insanely high taxes force the people to vote a government that vows to take their country out of Europe! Then we have the domino effect and we effectively go back perhaps 10 or even 20 years. To the time where Spain/Portugal/Greece were cheap holiday destinations and they derived their income from just that (as well as perhaps oranges).  

The million dollar question (not that I like to even use the word dollar) is when will this happen? 

This is difficult to say, but it seems apparent that certain European countries are getting ready for this potential or in fact inevitable scenario, by buying up gold, or in Germany’s case demanding their gold back from fort KNOX USA, and ensuring the public that the stock market and European supranationalism is still the path to the American dream!

by David Carter & Simon J Thomas

PM Trading (Europe) Ltd.

T:   +44 203 137 2691

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