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The Bullion Report For Dec 7, 2011: Will November's Golden Harbor Continue?

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Dec 8, 2011 2:41 am

With all of the economic turmoil that took place last month, investors who owned gold as a safe haven appeared to benefit. During the month of November gold ended with a 1.9% gain in US dollar terms. This is now the seventh month this year which saw the dollar falling against gold. Will gold maintain this haven status heading into the close of the year or will the market see an exodus as investors clear their books in the final quarter?

[i]Past performance is not indicative of future results.

***chart courtesy of Gecko Software[/i][/center]

The international issues have so far supported fresh forays into precious metals. Gold's gains were evident against other currencies, not just the US dollar. The euro dropped 5% against gold in November. The British pound fell nearly 4% against gold. The Aussie dollar fell nearly 6.5% and the South African rand by 5%. Thus, gold again protected investors around the world during the past month where heightened concerns abound from the global financial crisis. Gold is now more than 20% higher in dollars and 18% higher in Euros and pounds during 2011. And gold is only 9% below the record nominal high of $1,920/oz reached in September. If investors maintain the current skepticism regarding currency stability it seems likely that gold will flirt with those September highs sometime in early 2012.

Demand for gold has increased in recent months and years, however, there is plenty of room for additional investment to take place. HSBC estimated in December 2010 that gold remains less than 0.14% of global investable assets. That figure certainly seems to allow room for growth. Many analysts involved in the gold markets believe that precious metals are seeing a sustainable trend and investment, and monetary demand is set to remain very robust in the coming years.

That the gold price has improved and proved resilient is perhaps due to a reawakening of inflationary concerns and continued skepticism regarding economic and currency policy.  Last week China's central bank cut the reserve requirement ratio for its banks for the first time in nearly three years to ease credit strains and shore up borrowing concerns. While many felt that move was due to housing concerns in China, it no doubt will have an impact of fanning the flames of inflation internally in China. And since China is the most significant player in raw material purchases, any excess inflation could lead to an even faster spike in global inflation the next time markets get a fresh round of quantitative easing.

Don't forget the surprise move by a group of central banks, where they reduced the dollar swap rates. That action had the immediate impact of rallying equity markets as it was orchestrated to do. Broader markets have responded with substantial price increases. Reducing the swap rates seems akin to printing money as dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want - like to shore up bets made by European banks that went wrong, and at a later date, return them.

Markets previously experienced a similar “temporary dollar liquidity swap arrangement” with 14 foreign central banks back in December of 2007 (several months before the Bear Stearns collapse and nine months before the Lehman Brothers’ bankruptcy) which allowed easier access to Fed's subsidies. The joint action by some of the world's major central banks to boost dollar liquidity and provide cheap dollar funding to European banks seems very much like the world economy is facing another “Lehman moment”. Bottom line is this, the central banks worked in concert to provide liquidity for other currencies. That coordinated central bank action will result in a further increase in the global money supply and the consequent debasement of fiat and electronic currencies and inevitable devaluation of the dollar and of all major currencies.

Additional liquidity cannot help but eventually lead to higher inflation rates. At some point, investors will have to be on the lookout for the impact to appear in commodity values, many of which are also experiencing lower than normal inventories. While there are legitimate concerns that Chinese economic growth is slowing, the fact that more money will be available to chase around goods is apt to heighten demand and pick up the pace for hoarding certain commodities. Chief among them could be gold as it lends itself to the favored choice for a store of value during inflationary times. This may very well set the tone for Chinese-based purchases of gold to help fuel another gold rally.

Lastly, there appears to be a growing consensus in both Europe and in the United States, one that feels we must choose a different path. The Tea Party, Occupy Wall Street, the protests in Greece, and the increasing tensions abroad are all signs that people no longer believe in the system we’ve got and want a different one. There is evidence that economic troubles are reaching a crisis level, and although this theme is often played up in the media, it appears increasingly relevant as more and more people in the streets get involved. Now, no one is suggesting that things have reached a point of no return, but they sure seem to have gotten broader attention and frustrated the masses.


The world is by no means on the verge of complete ruin, but without a doubt the latest action is seen by an increasing number of economists that we are acting with urgency to avert economic slow downs. “Risk on” has become a new buzz phrase and it these fears of aversion to risk and that will likely continue providing a safe haven demand for gold.  Despite November being an extremely volatile month, one which saw sharp losses in many bond markets and all major equity indices internationally, gold was higher in all major currencies in November. The very limited supply and rarity of gold means that the increase in allocations to gold from minuscule levels is sustainable and will likely continue for many years as investors seek safe harbor given the radically changed nature of the global financial and economic landscape.

[b][i][u]Disclaimer:[/u][/i][/b] The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.