The bearish thesis for gold rests on four key assumptions in the process of being disproven. Recent gold skepticism has generally arisen from some combination of expectations for i) protracted U.S. dollar strength, ii) significant Fed tightening, iii) escape velocity U.S. economic performance and iv) further increases in U.S. equities. Since the end of the first quarter, the logic supporting each of these projections has dissipated significantly.
We have all read the latest crop of media articles challenging gold’s investment relevance. The typical approach to bearish gold analysis is to attribute hypothetical fears to gold investors, and then point out these concerns have failed to materialize. Sprott believes the investment thesis for gold is a bit more complex than simplistic motivations commonly cited in financial press. We would suggest gold’s relatively methodical advance since the turn of the millennium has had less to do with investor fears of hyperinflation or U.S. dollar collapse than it has with persistent desire to allocate a small portion of global wealth away from traditional financial assets and the fiat currencies in which they are priced.
As India continues to wage war with gold, investors are seeking out the yellow metal through any means available. Reports today suggest that there is not enough room on commercial flights into Dubai for all those investors seeking to purchase gold.
This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, “serve as a model for dealing with future banking crises.”1 Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as ‘the template’; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits.
During the third week of May each year, representatives of the platinum industry gather in London, for an event that has become known as ‘Platinum Week’. Platinum Week centers on an industry dinner sponsored by the London Platinum and Palladium Market (LPPM) which marks the anniversary of the inauguration of the London Platinum Quotation (the forerunner of the present London Fixings) in 1973.
Natural resource speculators know that past uranium bull markets offered some ’explosive’ (pun intended) upside. I have been fortunate enough to experience two uranium bull markets: the 1970s bull market, which saw a tenfold increase in the uranium price and a hundredfold increase in some uranium equities, and the bull market of the last decade, which saw a repeat of the earlier performance. If past is prologue, the stage may be set for a third uranium bull run.
“This isn’t the end of the world,” says Rick Rule. “This is a normal – and ultimately healthy – cyclical decline in a longer term bull market. This is a sale.” None of the macroeconomic, geopolitical, or global demographic conditions pointing to a long term increase in gold and commodity prices are any different today than before the metal’s price began a multi-day slide last week.
Back in 1980, just as the gold price blasted upwards past $800/oz, buyers reportedly lined up in droves at various bullion dealers to participate in the rally. Investment analyst Jay Taylor writes, “I remember 1980… there was panic buying of gold by people in the streets of New York City. They were lined up around the block to buy gold and Krugerrands at that time.” That flurry of buying ended up representing a classic top. As gold failed to move higher, the speculative frenzy soon reversed into a despondency that dragged gold into a twenty year bear cycle. For those investors who bought at the top, it was a hard lesson learned.
“If there is a risk in a bank, our first question should be: ‘Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: ‘What can you do in order to save your own banks?’”– Jeroen Dijsselbloem, March 26, 2013 1