Gold Move Mocks Monetary Policy

The market has metal on its mind. Shares are wandering without much conviction as we look at the flickering green screens this morning. But metals? That’s a bull market with some conviction, or at least a lot of momentum.

February gold traded above $1,218 yesterday and closed at $1213. Gold has closed higher 20 of the last 22 sessions. In that time, according to Dow Jones newswires, it’s up 15% – nearly double the return of the S&P 500.

Does this mean investors are starting to give up houses and shares and speculate on gold instead? The U.S. government has been forced to suspend sales of American Gold Eagle coins, according to Javier Blas in the Financial Times last week. It’s the second time the mint has had to suspendsales since Lehman went belly up in 2008.

There’s a bit more to the story, though. The mint has sold 1.19 million ounces of gold this year. That’s a 75% increase over last year. Hmm. But it’s also sold 26 million ounces of silver coins – the highest level of sales in 23 years.

What does this tell you? Well, the rational answer is that bullion or gold and silver coins are assets without counterparty risk. True, the value of gold and silver coins fluctuates with metals prices and liquidity. But your payment does not depend on someone else’s credit quality. Your payment is in your pocket.

That rational answer presumes that investors are now showing a preference for tangible assets that are…real. But is it more fear than reason? After all, a rational investor might prefer the leverage you get with gold stocks as the best way to profit from rising gold prices. That would be the easier investment strategy.

But that suggests to us the move to gold isn’t so much an investment strategy as it is a financial survival strategy. Investors are less and less worried about capital gains and more and more worried about the preservation of their purchasing power and capital itself. Gold is the ultimate expression of that worry – a flip side of the lack of confidence in modern monetary policy (or just modern money).

Gee. It’s soooo kooky to distrust central bankers, isn’t it?

Morgan Stanley appears to distrust UK central bankers. Morgan released a report yesterday, according to Ambrose Evans-Pritchard in the UK Telegraph, which highlights the risk that capital will flee Britain and the country will be plunged into a debt crisis because of a mix of political and economic factors.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK’s AAA status,” report Morgan’s Ronan Carr, Teun Draaisma, and Graham Secker.

“In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” the analysts wrote.

Hmm. No wonder gold is making new highs. And not just in U.S. dollars either. If the GFC really has become a sovereign debt crisis, the UK may compete with Dubai to see which political entity is the first to put to the fiscal sword (made, probably, of gold).

Of course those are American and British problems, but frankly there is a lot to worry about in a global financial system still weighed down by debt. You wouldn’t know it judging by the performance of stock markets this year. But we can feel it (psychic like that). And we can see it in metals prices.

Dan Denning
The Daily Reckoning Australia

December 3, 2009

Editor’s Note: This article originally appeared as “Investors to Speculate on Gold Instead?” in The Daily Reckoning Australia. To view the original article, please click here.