Thursday, October 2, 2008

"Retail investors seek haven in gold coins amid crisis"- They're Early (or Late)

Just to be clear, this is not a precious metals site. On the other hand, everything is connected and the PM's are an area you have to be aware of.
The macro situation is: We are in the early stages of an historic unwinding of credit. The leverage in the financial system has built up over the last 25-30 years and will not be wrung out in a month or even a year. With that backround there is no current investment rationale for gold other than an end of the world scenario (and just who will be bidding up your holdings in that case?).

On Tuesday we posted "The Financial Times Sings Praise of Gold. They're wrong.". Yesterday commenting on the third FT story of that day in "Wealthy investors hoard bullion" we said flatly
"we disagree with the macro thesis."
The first part of today's headline is from MarketWatch. Don't take the simplistically contrary approach that "if it's retail investors, it must be wrong". Retail investors are usually late to the party but they can be right for years at a time. It just happens that in this case they aren't (currently)
From MarketWatch:
As the crisis on Wall Street deepens, retail investors, who can't afford the high cost of trading in the futures markets, have been increasing their holdings of gold coins as a safe haven.

The U.S. Mint said last week it was temporarily suspending sales of American Buffalo gold 1-ounce bullion coins after soaring demand depleted inventories. The Mint had previously halted sales of American Eagle 1-ounce gold coin in August.
"Tightness in the gold market is fairly normal in a time of financial stresses," said Dan Ferris, writer for DailyWealth, an investment newsletter. "We've seen high demand for gold coins because the news about banks is all bad."

Investors tend to snap up gold as the final tangible asset when the economy falls into turmoil. Some gold dealers said they have seen unprecedented demand for coins and bars as the financial crisis on Wall Street and Europe intensified worries about a global slowdown...MORE
Gold is trading hands at $859.30 down $28.00. Here's an odd headline and rationalization, again from MarketWatch:

Gold falls after Senate approves bailout plan

Gold fell more than 3% Thursday as the U.S. Senate's approval of a revised $700 billion bailout plan boosted the dollar, reducing dollar-denominated prices of the precious metal.
Gold for December delivery lost $27.80, or 3.1%, to $859.50 an ounce on the Comex division of the New York Mercantile Exchange.
"In short term gold is likely to remain in a softer mood as approval of the U.S. rescue package will no doubt boost the dollar and investor risk appetite," said James Moore, an analyst at
If you recall, last week the story was, "This bailout is so inflationary that gold is going back to $1000 this year". Here's a Reuters story from Monday:
Private banks rethinking gold, seen next big buyers
Private banks could be the next big buyers in the global gold market, helping drive prices higher as they consider restocking bullion bars that were sold off in calmer times, the top HSBC gold trader said on Monday.

Jeremy Charles, chairman of the London Bullion Market Association and global head of precious metals trade at HSBC Bank, also said he expected central banks around the world to put the brakes on their plans to sell down gold reserves as they see other assets deteriorate, lending further support to prices.

"I think the institutional investors and private banks in particular will all be reconsidering their strategy. My belief is they are likely to want to own some gold again,"he told Reuters on the sidelines of the LBMA's annual conference. The current generation of private bankers destocked their gold holdings in the 1980s and 1990s to pursue higher-return investments in recent years, but are now seeing the wisdom of the previous generation's gold holdings, he said....MORE

Just two last thoughts. Where were these bankers in 2001 when gold bottomed at $252? The price quadrupled in seven years before pulling back 26%. I'm not buying it. (right now. that will change and I'll try to give you a heads up)