For once this time really is different, notes Grant Williams in his latest letter, and the New Cold War is, as you can see from the chart below, apparently not even remotely troubling. In fact, gold is trading below where it was when the Russians first dipped their toes in Ukraine to test the water:
So when it comes to gold, there are the thinkers, like Koos; there are the traders, like the millions day-trading GLD for a penny here and there; and then there are the holders. The question for all of them is the same: why?
Traders of gold don’t want anything to do with physical gold. They are happy trading pieces of paper — scrapping amongst each other for pennies (and in some cases making a lot of them), but the “gold” they buy and sell could just as easily be Microsoft shares or an ETF that tracks lumber. It’s all about the price — not the ownership.
Many investors who claim to “own” gold as an insurance policy do so through the ownership of ETFs such as GLD. That’s just not the same as owning metal, I’m afraid. Doing that, you’re simply one of the traders. You’re NOT a holder.
Individuals (and institutions) who buy physical gold and hold it, unencumbered, outside the banking system are true holders. They aren’t about to alter their position in any meaningful way just because the price moves a few percent against them (or, for that matter, for them). They own gold as an insurance policy, and until the reason for owning it is proven wrong, they hold onto it.
That just leaves the central banks.
One could make the case that, given their consistent selling over a 40-year period, they are anything but holders. One could also say that, given the sudden about-face they made in 2009, they are nothing but traders (though trading far bigger trendlines than most).
But the simple truth is that, just like the investing public, they too are split — though not into traders and holders but rather, it would seem, into holders and buyers.
Ask yourself these four questions:
The last time the world faced a meaningful threat of a large-scale conflict between East and West, the gold price soared. This time it hasn’t moved. Why?
With gold consistently pouring into Eastern Central Bank vaults in exchange for dollars, what happens if there is another sudden panic of some sort and investors (including central banks) suddenly decide to stampede into gold en masse like they did in 2009?
Why are the most rapacious buyers of physical gold a group of countries that last time we saw an exponential rise in the gold price had no meaningful currency reserves but that now amongst them own a staggering 46% of total global reserves?
If you had the power to create money out of thin air as, for example, the PBoC can, can you think of a reason why you might want to convert as much of it into gold as you possibly could?
Just like George Smiley, if you can come up with plausible answers to these questions, you might just be able to figure out the ending to a tale of intrigue that has captivated millions around the globe.
I know how I think the story ends...