Vietnam speculators cause "unstable psychology"

The Vietnam Government saga against its people's preference for gold continues. Commodity Online reports that after the gold price "skyrocketed" the State Bank of Vietnam allowed private companies to import "5 tons of gold to help stabilise domestic markets and supplement local supply. ... 'Taking advantage of the situation, speculators in the domestic market had speculated, and manipulated, causing unstable psychology among people even though the amount of Gold in the market is still high' [State Bank of Vietnam] said. The State Bank of Vietnam also said its consistent policy is to stabilize the dong’s value, and it is risky for people to buy and hold gold at the moment..."

I'd say its risky to buy and hold the dong whereas holding gold would indicate a very stable "psychology"!

The Mint is humming

Nigel Moffatt, Treasurer of the Perth Mint, breaks from his leash with some really bullish statements in an interview with The Australian newspaper:

He said he could see no end to the gold boom.

"If you're in the US or Europe, what on earth are you going to put your money into?" he said. "You wouldn't touch the equity market at this stage. Interest rates are low, and frankly precious metals are a hell of a good way to go. I can't see anything around to stop it. Bit it won't go northwards in a straight line because people will always be taking profits."

And then this morning an interview with the ABC:

The head of the Perth Mint says the price of gold will continue to rise, even after hitting another record of $US1,720 an ounce.

Nigel Moffat says the mint is fielding calls from all over the world from investors wanting to jump aboard the gold juggernaut.

If this continues I'm worried he is going to become a media tart. If he gets a stint on TV then I think I'll call a temporary bubble top.

Weekly wrap

Some blogs that caught my eye last week. First is The Burning Platform with Edward Gibbon's five marks of Rome's decaying culture from his book The Decline and Fall of the Roman Empire:

1. Concern with displaying affluence instead of building wealth.
2. Obsession with sex and perversions of sex.
3. Art becomes freakish and sensationalistic instead of creative and original.
4. Widening disparity between very rich and very poor.
5. Increased demand to live off the state

I think it would be fair to say we are close to ticking all of them. Second is Steve Keen on the RBA's setting of the cash rate:

The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. ... This analysis raises a number of interesting questions:

1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
4. How could any economist get their forecasts wrong, particularly on the up-side?

Very much Wizard of Oz man behind the curtain. Third is Mark Tier at economics.org.au with two takeways on small/no government, which speak for themselves:

"... when the income tax was introduced in 1913 no one in his right mind would have suggested a top rate of 90 percent. In fact, there was considerable support for capping the income tax at 4 percent. This was shot down by those who argued that specifying such a maximum rate would mean the income tax would rapidly rise to that (then) horrific level. Can you imagine living in a world where an income tax of 4 percent is unthinkable!?"

"On January 24, 1848, the California gold rush began. But it took eighteen years for the U.S. Congress to enact a mining law to regulate such discoveries. Meanwhile, gold production in California boomed. How could that have happened without a governmental framework to recognize mining claims, register titles, and regulate disputes?

The miners created their own. They established districts, registries, procedures for establishing and registering a claim and buying and selling claim titles, and a system for resolving disputes. Officers were usually elected, including the recorder of claims."

Finally, we have a report by Mineweb that I think few PM commentators will pick up, but which I think is a good signal that gold is on the move into the mainstream. Mineweb reported on Thomson Reuters buying GFMS which "will enable Thomson Reuters to offer clients analysis of metals markets alongside its news and prices". This is a sign to me that smart money is moving into gold, as they are the only ones who can afford a Reuters feed. The mass market (dumb?) money follows much later, which is when we'll see a real bubble.

A cartoon that should concern all PM investors

The cartoon below (h/t Nathan's Economic Edge) is a warning to gold and silver investors.

Instead of focusing on how and why there are no productive investment opportunities, the cartoonist demonises the cash "hoarder". Yes, you must spend your cash to help pull the debtors out of their problem. If you won't, then next they will charge you to hold cash - see BNY Mellon's negative interest rates. By the way, if that did come to pass it would be amusing because one of the (mis)criticisms of gold is that it costs to hold it and it doesn't pay a return - well if more banks copy the BNY Mellon action then neither will cash.

Demonisation is what PM investors can expect as metal prices increases - you will be classed as rich hoarders. Hopefully it stays at that, rather than degenerating into a "super PM profits tax" or confiscation. However, one shouldn't underestimate the politics of envy and thus keeping an eye on which category the majority of voters sit would be prudent (FOFOA's The Debtors and the Savers worth a read in this respect).

Turning $400k into $1.2m

Late yesterday the bullion desk manager let me know that one of "my clients" had sold up. By "my clients" she meant clients I knew from when I worked on the desk, which was a long time ago.

This client bought $400,000 of gold about 15 years ago and sold it yesterday for $1.2 million. He and his wife are now in their seventies and are now drawing down on their nest egg.

Sometimes I've asked myself whether working at the Mint is of any benefit to society, whether it is a productive job - we don't make anything useful like cars or food - we just melt and stamp and store metal.

It is days like yesterday however that give me a boost and make me feel like I am doing something useful.

The coming goldbug civil war and your PM exit strategy

I recently received a question from a client regarding my three point staged approach to choosing a storage method, as per the Perth Mint website:

“1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges.
2. When the environment becomes uncertain and risky, they convert to allocated.
3. When the world is at a crisis point, they take delivery of their physical metal.”

By the way, I wrote that webpage text many years ago, well before the gold bull market and when the world environment was benign.

His question was “At a crisis point why would investors opt to take delivery of their metal, rather than sell it? Isn't that the whole idea of holding precious metal?”

I found it a very interesting question, because it indicated that the investor saw only one scenario developing, what I would call “Repeat of 1980”. This scenario sees the 1970s repeating with a bubble in metal prices driven by high inflation, recession and a “mild” financial crisis.

This exit strategy assumes that just like the 1970s, the current economic environment is just a cyclical phase and we will return to “normal” at some point, in which case you can deploy your increased wealth into other (hopefully) cheap productive assets. Selling your metal for cash certainly could be profitable in such a scenario.

However, my third point was addressing another scenario, one I call “End of the Debt Bubble”. This scenario in simple terms (and probably do the complex issues involved a disservice), is that we are at an “end of cycles” as the debt levels most Governments and individuals have accumulated will not be able to be paid back. The only acceptable political solution, it is argued, will be for Governments to inflate debts away, which given the scale of the problem, will lead to hyperinflation as people lose confidence in fiat currency’s ability to hold its value. Some consider this scenario will also involve confiscation. In the case of Australia I personally think this is unlikely and have covered it in detail in this post.

This is a completely different sort of crisis, possibly also involving societal breakdown, in which case investors would be looking to take delivery (in coin form) with the purpose of using their gold and silver as money to buy goods and services or simply because they feel more secure having the physical metal in their possession in such a situation. Selling your metal for cash in such a scenario could be disastrous unless you quickly convert that cash into some other wealth preserving asset.

This is the single most important issue precious metal investors must have a view on, because if you get it wrong it will potentially do significant damage to your wealth. You do not want to have held on to your metal if we will experience a “Repeat of 1980” as you will end up selling at a much reduced post-peak price. Alternatively you do not want to have sold your metal if we experience the “End of the Debt Bubble” as you will be left with worthless cash.

Whichever scenario you favour, I suggest you read this post of mine on Deflation or Inflation .

For those who believe in “Repeat of 1980”, this post summarises the key arguments why the US won’t be able to paper over its debt problems. For those believing in the “End of the Debt Bubble”, keep in mind that the text of the post was written 20 years ago. At the time the writer was sure that it was “the End” – how sure are you that it really is different this time?

It is not something you have to work out right now as you can wait for more "data" as economic events unfold, but unlike my questioner, at least be aware that there are alternative "futures".

As the gold price increases, you will also start to see a "civil war" developing in the gold internet community on this issue. All gold commentators you read have a view on this issue. It may seem that everyone is in the “End of the Debt Bubble” but a careful reading of many commentators tells me many hold a “Repeat of 1980” view. At the moment all gold advocates are united against conventional economists and investments advisers as they have been proven right with a 10 year bull market.

But once the gold price starts to get really high, you will see commentators who believe in the “Repeat of 1980” scenario start to recommend selling your gold. This is likely to result in “End of the Debt Bubble” commentators calling them "traitors" or "incompetent" for recommending holding soon-to-be worthless cash. The passion of the current debates in our little gold internet community will be nothing compared to this.

The key will be to keep your emotion out of it, weigh up the claims, and hopefully make the right decision.