This page has been archived and commenting is disabled.
Who is going to buy gold?
This is the first in a series of what some may consider as “gold bashing” articles. I am not short gold in any shape or form. I have no axe to grind against gold bugs. I am simply presenting the other side of the argument in response to what I deem to be dishonest, gold-pimping commercials (e.g., “If gold prices went up to $5,000 this pile of gold would be worth $300,000”) that we are subjected to all day long on TV. I may be wrong, but I am honest.
Here is a trivia question for you: what country is the seventh largest holder of gold, ahead of China, Japan, and Switzerland? Well, it was a trick question: the seventh largest holder of gold is not a country, it is an exchange-traded fund, GLD. Yes, a fund that is not even five years old is the seventh largest holder of physical gold in the whole world, even ahead of mighty China.
When investors buy GLD, GLD in turn has to go out and buy gold, driving up the price. This raises a little question: who will be buying this gold from GLD when investors decide to sell it? Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash-flow analysis to value it – it has no cash flows. It is an asset where perception and reality are deeply intertwined.
Investors buying the gold ETF (GLD) are influencing the price of gold, which is fair for the most part, as otherwise they’d be buying the real thing. The ease of buying GLD creates a higher, artificial demand – but GLD is still fair game.
The violent selloff in GLD will be caused by factors that are hard to predict today (e.g., hedge-fund liquidations) but that will drive the price of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt, for instance), and the gold price could get cut in half overnight. Suddenly, perception of not being a store of value will create the reality of gold not being a store of value. The gold game will be over.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles by email, click here.
»
- advertisements -
http://www.youtube.com/watch?v=U8tH-tmZZkA&feature=player_embedded
is a picture of the future.
All cash is a short position on gold.
But, it makes sense to have a two year supply of food, generator fuel, water, and medical supplies. Be ready for what these guys in Zimbabwe have. Zimbabwe was a working, reasonable exporting country. 80% literacy.
ALL it took was keeping the printing presses printing money. That's all. plus redistribution of wealth. Just as we are doing now.
Well, that's not ALL that happened in Zimbabwe... The IMF forced the Zimbabwe government into default because they didn't like Mugabe's land repatriation program and his anti-Bush/Blair rants. The country's import channels were cut off via embargoes, and exports were drastically reduced. This caused the economy to stop completely and the government to bankrupt. Naturally the government turned to the printing presses... Sure people are panning for gold there, but they're also being gunned down for mining diamonds in the western border regions (the diamond cartel has to enforce scarcity).
It won't happen like this in the US because there is no giant unseen hand like the IMF to provoke that situation.
Back to gold - I notice that the dollar valuation of gold dropped dramatically after the 80s recession? That seems backwards since there was mega-inflation during those years? A friend says "it's always easier to find a seller of gold than a buyer of gold..."
Please forgive the ad hominem attack, but I certainly find Vitaly to be the weakest writer on here, and by a considerable margin at that. Please offer up a little more "meat" with your stories and develop your thesis in more depth.
1. I don't think anyone has mentioned an obvious problem with owning gold: The government will, in a crisis, confiscate gold, just like it did in the 30's. (Remember it was illegal to own gold for four decades--until 70's). So you would only be able to use it on the black market, so be ready to defend your gold not only from the hordes of ne'er-do-wells looting your neighbor but also the guy you are buying food from.
2. That being said I can't think of any other investment that will protect you in the coming crisis. Maybe if you can band together with family to buy a small farm and plenty of guns and ammo. That will maybe keep you safe for a while unless the "government" decides that you are a "kulak." (10 million were murdered/starved to death in the '30's for the crime of being successful small farmers.
3. After 30 years of hard work and investment, my wife and I have gone from a net worth of $0 to millions. We still tend to save but lately our attitude is spend it before they (goverment) steal it or destroy all the wealth accumulated by the middle class (but not that of the ruling clique).
4. I am a "glass half full" kind of guy but the only bright spot I can see in our current situation is that I was lucky enough to have lived in a great nation under the rule of law for almost sixty years--how many humans have ever had that priviledge?
5. I hope some of you younger people can rebuild a great nation out of the ruins of this one. I don't think I will live to see it and I don't envy you your future but all any man can do is deal with the situation he is given and try to be as good a person as the conditions will allow.
Good luck and be strong, the future of your family (and all humanity) will depend on your actions!
If the government will confiscate gold, the gold under GLD will be the first to go.
As someone who has had the pleasure of living through hyper-inflation twice (in Romania and Russia), I am a firm believer in fiat currency. That's why I buy mostly silver.
LOL
To the author: "I am not short gold in any shape or form."
Fair enough, but you make your living by selling your customers shares in yielding companies - which is a good enough idea when the economy is expanding - your income consists of the commissions & management fees, together with proceeds from your book sales (to people who want to buy equities at the moment).
If your customers go and buy gold instead, you personally make..... nothing.
the neckline of the inverse head and shoulders pattern should not be the top. Otherwise i believe it to be a faulty pattern.
" Who is going to buy gold? " ???
Gold is painting a classical technical figure named Inverted Head and Shoulders (a monster figure - visible in week period), going to test the neck line by 1000 (more or less).
"To buy" is a a great issue "these days".
http://www.chartpatterns.com/headandshoulders.htm
namaste.
who is buying gold? the chinese and anyone(as maha denniger says) with two brain cells to rub together....GLD is not gold. I doubt they even have any gold in their so-called vaults. Just another in a long line of scams to keep the sheep out of physical gold and to keep them occupied with bullshit. with physical gold and silver, you cut out the need for financial advisers and stock brokers and any one of the over 800,000 of these pig men nation wide who sit on their fat asses and tell old ladies how to invest their money. you say you don't want to offend the gold bugs. well go ahead. do your natural born thing. we don't care.
Money is printed everyday and gold is mined everyday. I think people forget when dealing with gold that it is MINED everyday! At any given time a large quantity can be dumped on the market.
The safety of an investment is overvalued even against a falling currency.
...i am holding gold and silver bullion because I have no confidence whatsoever in Ben or Tim......
...i have also moved into other currencies, but as we watch this tragedy unfold, we're going to see which governments stand behind their currencies, and which will choose to go down with the US ship of state.
so....i stand ready to move entirely into bullion -- the one thing that governments can not create out of thin air....the one thing that offers the possiblity of holding its value over the next several years.
all the rest of the chat -- deflation, inflation -- is sheer nonsense, the velocity of money, the GlD, etc. if a currency loses all credibility, the game ends.
the game is ending for the US dollar. despite Ben's best efforts to destroy everyone except a tight circle of his best friends, some of us are simply stepping out of his way and doing it now.
that's who is buying gold.
Honestly there is more misunderstood and poorly reported on investment vehicle than Gold.
This article is just another example. There will be more, hundreds more, each and every week.
Is this article bearish on gold or GLD? Does the author understand that GLD may or may not be backed by bullion? Does he understand that GLD may be converted to gold over a certain threshold? He states that GLD influences the price of gold and offers no evidence. Perhaps gold influences GLD?
Overall, a very muddled article.
You got to the same place 2 minutes after SWR. Excellent catch, both of you.
Dear Author, do you see the point here? Gaping logic problem.
And another thing; your article is titled "Who is going to buy gold?" and then you talk about GLD. These are two completely different things. An accident, or a deliberate conflation?
SWR,
Excellent catch and a concise statement of the problem with this post. In the author's defense, the conflation may not be deliberate. If the hostility from the posters could be toned down a bit, the author may learn from you rather than defend a position because he is defending his ego.
For the author, you will need to sort this issue out in your next post.
This is fight club.
GLD is paper just like CMBS...
Gold and silver are real and can buy stuff..
as mentioned no counterparty. all mine.
portfolio disclosure
PM
oil
bourbon
I'm with ya!
Disclosure: long & stocked with shotguns, ammo, vegetable patches, vineyards, Leupold scopes for deer, small metal ingots, sunscreen, single malts, and COSC chronometers.
And I've got some Cuban cigars. No idea when they'll be able to resume production of those again either.
If you are NOT a gold bug, I dare you, just pick up a handfull of gold coins. It's a big rush.
Since the author of this article is a "financial professional" and he doesn't grasp the bigger picture, then his conclusion is incorrect. The buyers of gold will be all that cash "sitting on the sidelines" waiting for the other propped markets to collapse. At some point in time the paper gold game will end. No manipulation of any market can last forever; it eventually fails and a huge correction occurs.
GLD is to gold what cash is to fractional reserve banking. Little wonder why the COMEX shifted its rules to allow settlement of gold futures with GLD shares. One big scam. Even Dennis Gartman caught note of that BS. GLD is as much a piece of paper as any other and not backed by the real stuff and to use it in any way shape or form to comment on the prospects of gold market demand is, to be polite, terrible. Much like those gold pimping commercials, which are in themselves terrible, this is the other end of the spectrum. It has to be amongst the worst reported on markets out there and this just further evidence.
duplicate deleted
The article makes the basic assumption that in principle the (financial) system is sound and that GLD is in fact backed by gold. If someone believes that, fine. A more skeptical observer might note that there is a religious belief in “the market” and at the same time there are valuable assets that do not have a market price. So, an asset that can not be sold due to a lack of a market can have a high value in a balance sheet (level 3 asset.) That does not go together and moreover if real mark-to market would be introduced the financial system would be bankrupt. There are a lot of reports around that indicate that something is not right in the system, for example the Madoff scandal that was known years ago and did not get prosecuted, off-balance-sheet accounting, and two government agencies nicknamed phony and fraudy. Read a few Denninger rants or posts on HFT here to get more details. Why is GLD a gold derivative and the prospect talks in legalese about custodians, subcustodians and sub-subcustodians? If the intention of GLD would be honest, a possibility to take delivery of the metal against shares and a fee would be a great way to demonstrate that, actually the gold ETF of Zuricher Kantonalbank operates that way. Did Project Mayhem not post a statistical anslysis of GLD’ bar list? That analysis indicated something is wrong with GLD’s list. If there is ever a violent selloff in GLD it might well be because investors realize that GLD is not backed by that much gold. At the same time bullion goes up. If in today’s accounting the price of gold can not be valued, that might as well be a problem of today’s financial theories. For few thousand years that was not a problem. Moreover, the value of gold is its safety, it has never defaulted, but governments have frequently defaulted. That makes the assumption that government debt is the safest place to invest questionable. In conclusion, i take the oppoosite view.
If the intention of GLD would be honest, a possibility to take delivery of the metal against shares and a fee would be a great way to demonstrate that,
Er, there already is a way to do exactly that - buy bars or coins. The whole purpose of GLD was to minimize the costs and safety of buying physical metal. I suspect that the HSBC vault in London is significantly more secure than any of your homes. You pay less of premium over spot by buying GLD rather than coins. If you need to cash out some of your holdings, you don't get raped and pissed on like you do when you try to sell physical metal.
Why is GLD a gold derivative and the prospect talks in legalese about custodians, subcustodians and sub-subcustodians?
For the third freakin' time, GLD is backed by physical metal, not derivatives or futures contracts. Why does the prospectus talk in "legalese"? Because it's a freakin' legal document, you moron. HSBC is clearly identified as the custodian, and other banks and institutions may act as "sub-custodians" until HSBC can arrange the transfer of gold to their vault. I think it's safe to say that the transfer of $1 million of gold is not something that you do at the drop of a hat. And, if you'd bother to read the latest 10-Q, you'd find that NO gold is currently held at any sub-custodial holdings at all.
Seriously, do you do ANY research at all before posting your drivel, or do you just take another pull from your bottle and type away?
Kevin, if you get angry at my arguments, please attack the correct ones.
I know how to buy bars and coins, the argument to be able to take delivery is not buing bullion but keeping the ETF honest.
I did not read the actual prospectus myself, but got the info from a source I believe to be trustworthy.
Moreover, there is another legal issue: What is the claim against the custodian? If it is not my fully allocated bar in the custodians vault, but a general claim against the custodian.
AS PM pointed out, The custodian has a huge short position in gold.
In case of bankrupcy a holder of GLD lines up at the end and the holder of bullion continues to smile.
Kevin,
Dude, you are freaking out. You must have a substantial position in GLD. If the posters who say that there is probably little or no gold held by all these different facilities are fucked up and wrong, why flip out this bad? Let them perish in their wrongness. I think you are worried they are correct. The post we saw above, summing up all the dishonesty we already know about, I gotta be honest, I am forced to keep an open mind that anything involved with finances is not what it says it is. The atmosphere is that bad.
I hope I don't sound antagonistic, but I am worried for you. If you have been ripped off, I bet there is still time to fix it.
1) Do you work for GLD or someone affiliated with GLD? Just curious.
2) Were you aware HSBC is in the top two commercial shorts on comex? (JP Morgan is the other). Would that at all change your position?
The idea that a vault in London is more secure than physical metal may be technically true, in that it might have expensive alarms and vault doors ,etc, but during any sort of bank runs, system failure, extended swift outage, etc it really doesn't help you to have your gold stored in a vault in another country. I mean, we already saw the tentacles of the IRS reached into UBS in Switzerland.
To me owning GLD is a substantial risk that I am not willing to take. Coins and bars do not have this risk. Furthermore I am not trading my coins ,so what is the problem between a spread of spot vs 5% over spot. It is a non-issue unless you are trading.
Yes maybe if you have millions of dollars you want to move into gold , but if that is the case, you are better off making your own storage and insurance arrangements and having bars transferred to you from the spot or futures markets. I would trust goldmoney or bullionvault far more than I would trust the GLD ETF.
Where did Kevin go?!
The analysis was of silver-- haven't gotten around to gold yet. But agree I think the ETFs are silly. They defeat the purpose of owning gold, which is that it is an asset outside the corrupt financial system which has no counterparty risk.
Gold is great! We have done very well with our physical holdings. I would like to trade some for a Zero Hedge coffee mug. They even sell it by the gram, nice little ingots from switzerland. I buy larger bars myself in order to keep the premiums down.
Everyone will by gold. Some will just be later to the party.
Disclosure. Out of the markets and real estate 1 year prior to the crash. 80% into physical gold and silver. 20% Single malt Scotch and other barter material.
You should check out the facilities at Hong Kong International Airport...
I Think the question should be who trusts wallstreet who trusts the treasury and who trusts the gov .I trust the gold in my hand it is tangible and it exists it lives in the moment
I THINK WHAT WILL HAPPEN FIRST IS THE PERCEPTION THAT THE US IS BROKE AND GOLD WILL SKYROCKET TO THE INFINITE SKIES.
THE DAY WILL COME.
GOLD WILL PREVAIL
Yeah, right. I saw the movie, Nathan was collecting the jewelry to make the golden calf...fast forward to Moses and move along please. We have real work to do.
When investors buy GLD, they buy a paper derivative on an asset designed to hedge against broken paper promises. It's like buying a paper gun or paper food to protect against "the end of the world" gold bugs like to discuss.
Derivatives squared, as mentioned in a comment above, since GLD can be used to settle futures contracts! This, too, shall pass and the subsequent gold rush will rocket the physical gold price higher when the COMEX defaults. It is no longer a question of if, it is a question of when. The GLD ETF will default when placed under stress and the herd will be given back their paper tickets - right before the gold price doubles or triples.
One can certainly try to time their trades or investment, as with any asset class, and "buy the dips" works in bull markets. Until the Dow to gold ratio gets back to one (or lower), why fight the clear and obvious long-term trend?
I wonder why Obama, Ben B, and Timothy not selling gold in Fort Knox? C'mon guys, gold is useless. I dare you to sell it to accelerate the collpase of the dollar.
one has to wonder whether the US gold reserves are even there or whether they have been forward leased into the market via bullion banks. The US now lists gold as 'deep storage'. Does this mean it is still in the ground? I agree lets do an audit of the US gold reserves as well as the Fed and settle these questions once and for all.
I wonder who is on the other side of Barrick's 9,000,000 ounce hedge?
http://www.kitco.com/reports/gfms_2009.pdf
Copyright GFMS Ltd - August 2009 - Brief extracts may be reproduced only for the purpose of criticism or review and provided that they are accompanied by a clear acknowledgement as to their source and the name of the copyright owner.
"Net producer de-hedging remained limited in the second quarter, with just 0.98 Moz (31 t) removed from the global book. This left the global producer hedge book, at end-Q2, at 14.73 Moz (458 t) in delta-adjusted
terms."
"Barrick Gold did not convert any of its project gold sales contracts from fixed to floating price structures or vice versa. It should be noted that
although Barrick Gold is the holder of the largest hedge book, almost the entirety of its project gold sales contracts do not have interim delivery
dates before the end of 2017 with, dependent on counterparty consent, the flexibility to extend these terms."
What a nice, considerate counterparty that must be.
"With the majority of the global hedge book still under the
control of two main players, namely Barrick Gold and AngloGold Ashanti..."
This is why I stay the hell away from ABX (but seemingly they get pumped all the time by every talking head, go figure). Prefer GG.
Several attempts have been made to audit gold storage at Fort Knox. All have been blocked. Pretty widely understood amongst gold bugs that the USA has a naked position on physical gold. Deep storage may well mean 'not mined yet', as several companies do indeed forward sell gold they haven't extracted yet for hedging purposes. Not a good idea to invest in these if you think a PM surge is coming.
Yup deep storage means ground.
If you mean sell my GLD, I have, I don't trust it. If you mean sell my gold, it's not time for that yet.
I will kiss your ass on the post office steps and give you 2 troy ounces of gold as an advertising budget to the event if there is more than a 1/10 the gold in fort knox that was there at last audit.
You assume that the gold is still there. Why not end all conspiracy theories by an audit?
+1
Nobody knows what its worth but everyone knows what Amazon is worth right? GLD's market cap is $33B. Amazon's is $34B. Who is going to buy Amazon's shares?
Better yet, the top 10 sovereign gold holders in the world reportedly hold only $850B of gold at $1000 an ounce, less than the combined market caps of BofA, GE, JPM, Berkshire, WFC and Oracle.
When investors begin to realize how small the entire gold market is, relative to paper assets where they draw comfort, which asset do you think will have more difficulty finding buyers?
Excellent point about the relatively small total supply of gold held by central banks, assuming the numbers are even relatively close to correct.
Well who says GLD actually has the gold it claims and if it does, who is to say it hasn't been swapped and sold already? I am quite certain you cannot prove they have the gold they claim and that it hasn't been encumbered in some other fashion.
As to this pile of gold commercials, I have probably seen one of them to 20 of the we want your junky worthless gold. Even my wife can see through those commercials.............
Those who fail to learn the lessons of history are doomed to repeat them. At one point during the great depression owning 1 share of a gold mining company would net you 56 dollars every quarter. This is a game of control that is evolving along it's various snags. People do not understand what destruction of fiat fractional reserve money systems world wide will mean. It will mean that the usual methodology of empowering through money will no longer work. No supernatural rise to power of Hitler when that supernatural rise to power was a very natural 100 billion dollars of cash flush. You're crazy if you think gold will get dumped on the open market to continue a faltering fiat money system.