Gold On Sale, Says The Rational Investor

Gold On Sale, Says The Rational Investor by Frank Holmes

The leveraged gold futures derivatives market is knocking down the precious metal, yet in massive contrast, this drop has ignited a shopping frenzy according to gold coin dealers. I spoke with several friends and industry experts this week who confirmed the record sales numbers for the month. In fact, American Gold Eagle sales reached 161,500 ounces in July, the highest monthly figure since April 2013. What gives?

Gold often attracts conspiracy theories when it falls so abruptly, especially on Mondays. Interestingly, in a recent article on Zero Hedge, ABC Bullion out of Sydney, Australia, details some of the speculation behind the precious metal’s beat down, which I’ve also discussed in my blog.

Price manipulation, or a “bear raid,” could be a factor. Last week, gold prices experienced a mini “flash crash”—the first one in 18 months—after five tonnes of the metal appeared on the Shanghai market. Whether front-running or fat fingers are to blame, the sell order for what many are calling a bear raid was initially thought to have originated in China, but we now believe it came from New York City.

Did investors anticipate China’s negative flash purchasing managers’ index (PMI) last week? China is the largest consumer of gold, and the PMI is a useful leading indicator of commodities demand as well as job growth.

What about the Greek crisis? This type of debt fear crisis often has the effect of boosting the price of gold, but we didn’t see that happen. Did European Central Banks sell gold down to dampen the psychological impact of the event? Understating the seriousness of the debt crisis may have prevented investors from seeking gold as protection.

Conspiracy theories or not, I believe none of this tarnishes gold’s sustainable allure. It’s important to look at the two key demand drivers for gold: the Fear Trade and the Love Trade. The Fear Trade is related to money supply and negative real interest rates. The Love Trade comes from the purchase of gold due to cultural affinity and the rising GDP per capita in Asia and the Middle East.

I’ve always advocated, and continue to advocate, a 10 percent weighting: 5 percent in gold stocks and 5 percent in bullion, then rebalance every year.

From Crisis to Opportunity

Take a look at the chart, which shows the bearish trend is obvious.

And yet many investors are still buying. In an interview this week with Money Metals Exchange and in talking to Bart Kitner, founder of Kitco, both conversations confirmed that smart investors are enthusiastically buying gold during this downdraft in prices.

Rational Investors Know a Deal When They See One, and Feel One

With so much gloom and doom in the media surrounding gold right now, you might wonder why coin sales are soaring at multiyear highs. The reason is pretty simple: Gold is on sale.

High net worth individuals and other savvy investors realize that even now, as herds of people are rushing for the exit, owning gold is one of the best ways to manage systemic risk. They follow that Greeks had their cash in banks frozen like in Cyprus only a few years ago.

Ray Dalio, founder of Bridgewater Associates, said it best: “If you don’t own gold, you know neither history nor economics.”

Indeed, some investors fail to take a long-term perspective on gold. Their sentiment toward the metal extends only as far back as the most recent selloff, induced by the strong U.S. dollar, weak global manufacturing activity and fears that interest rates will soon rise.

Many investors have that “sinking feeling” with a deterioration in global PMI, leading economic indicators, falling commodity prices and the threat of rising U.S. interest rates. Many have raised their cash levels due to decelerating global growth prospects. I’ve written that bad news is good news because when governments accelerate monetary policy, this can be a good opportunity for investors to add to their gold exposure.

I’m not the only one who takes this position. Besides the investors gobbling up American Gold Eagles, central banks around the world continue to buy, hold and repatriate bullion. The U.S. Federal Reserve maintains its 8,133 tonnes, the most of any central bank. Germany, the Netherlands and other countries have brought home mounds of the yellow metal in the last 12 months. China has increased its reserves 60 percent in the last six years. And Texas is in the early stages of establishing its own gold depository, the first state to do so. If there were no faith left in the metal, why would banks even bother with it?

At the same time, massive amounts of paper money are still being printed. In fact, the International Monetary Fund has asked the Bank of Japan to be ready to increase its monetary stimulus further, according to Bloomberg. Let the paper printing roll! In the U.S., where quantitative easing was supposed to have ended back in October, the Fed’s balance sheet is still within 0.3 percent of its all-time