Gold Corporation
(trading as The Perth Mint)
ABN 98 838 298 431
310 Hay Street, East Perth,
Western Australia, 6004,
Australia
A statutory authority under the
Gold Corporation Act (1987) of
Western Australia
Founded in 1899, the Perth Mint is
an integrated precious metal
operation refining circa 10% of
world gold production; servicing
investors with legal tender bullion
coins and bars and the Perth Mint
Depository custodial facility;
providing collectors with innovative
and high quality numismatic coins;
supplying mints with precious metal
blanks; and operating a leading
Perth tourist attraction.
BLOG WATCH 11 APRIL 2012
OVERNIGHT MOVEMENTS
Perth Mint
Spot
th
Closing 10
th
Opening 11
Change
Gold
USD
$1,655.96
$1,666.10
+ $10.14
Silver
USD
$32.03
$31.96
- $0.07
Gold
AUD
$1,608.67
$1,628.00
+ $19.33
Silver
AUD
$31.12
$31.23
+ $0.11
PREDICTIONS
Commerzbank: “likely even to see prices below $1,600
short term … but by the end of the year he expects gold
to move above $1,900/ounce. Exactly how high will be
dependent on the aggression of monetary easing carried
out by central banks”
Standard Bank: “forecast gold prices to average $1,790
an ounce in 2012 … expects the prices to move higher,
most likely in second half of 2012”
DEFLATION, HYPERINFLATION AND THE ALCHEMY OF RISK
Talking of volatility, Zero Hedge has Artemis Capital’s latest research paper on the
topic. It is pretty heavy going but will be of interest to those following the seeming never
resolved deflation/inflation debate. I’ll do my best summarising their key points.
Artemis argue that investors currently have “a profound emotional fear of deflationary
collapse”. The result is they are overpaying for insurance (i.e. financial products) that
they believe will protect them against deflation. Artemis see the high cost of this
insurance as being “driven by forced participation in risk assets from artificially low
interest rates and financial oppression.”
In other words, investors would rather protect themselves from deflation by holding
cash, but with cash rates so low (resulting in negative returns after inflation) they have
been forced to go into stocks but compensate by bidding up insurance on these as they
really don’t like the risk of stocks. Note that some of that “I’m losing on cash but don’t
want stocks” money is flowing into gold.
Artemis then ask what happens “when all these buyers look to cash in on their
expensive tail risk insurance all at the same time. The jackpot is a lot smaller when
everyone owns a winning lotto ticket. All that expensive protection will likely
underperform expectations ...”
Artemis paper then moves to focus on a risk they think is not being considered by the
market – hyperinflation – noting that “it is not currently fashionable to talk about the
risks of hyperinflation in modern developed economies. If you merely mention the
concept you are quickly relegated to being an apocalyspe junkie, gold bug, or someone
who spends too much time looking at the Mayan calender.”
However, they feel that “during this period of unprecedented fiat money creation a
devastating period of long-term inflation is worth serious reflection” and see an
opportunity in the fact that the risk of hyperinflation is not being correctly priced. The
reason is that conventional thinking sees “hyperinflation in the developed world is
impossible because the velocity of money is close to zero. I find this argument flawed
because #1) it ignores economic history and #2) it forgets velocity of money is a
psychological concept first and an economic concept second.”
Artemis support their “psychological” point by quoting Jens O. Parsson: “An explosive
rise in velocity thus accurately marks the point of obliteration of an inflated currency,
but it does not cause itself. People cause velocity, and they only cause hypervelocity
after prolonged abuse of their trust.”
Blogger FOFOA makes the same point more directly: “Hyperinflation … is actually the
loss of confidence in the currency. First comes the loss of confidence (hyperinflation),
then, and only then, comes the massive printing to keep the government and its
obligations afloat.”
Artemis, while noting that “industrialists that made a fortune buying hard assets for
nothing” during the German hyperinflation, argue that “as institutional and retail
investors herd into commodities, farmland, and gold they ignore the powerful leverage
afforded to them using extremely long-dated [out of the money (OTM)] call options and
model-free variance” which “ideally you would sell your OTM call option at the height
of the hyperinflationary episode and then reinvest the money into physical assets.”
They do note that this strategy “assumes that financial institutions and major
exchanges remain solvent but it is not hard to see government intervention being used
to prevent widespread bank runs.” I think they have a point about common bank runs,
it’s just that I can’t see anyone caring about a run on a bank’s long-dated out of the
money call options. As a result, many prefer their hyperinflation insurance in the form of
gold, where they don’t have to worry about counterparty exposure or relying on
assumptions about how government (composed of people with potential for “profound
emotional fear”) will act in the future.
CANNY INVESTORS NOW PRICE SENSITIVE
Jeffrey Christian of CPM Group makes a number of good points in this interview with
Hard Assets Investor.
He sees investment demand as the key driver of gold prices, with investment demand
being “driven by investors’ perceptions of economic conditions.” However, he sees
investors realising that “the world is faced with really major problems and these
problems are long term in nature. And the solutions are going to be long term in
nature.” The result is less desperation or urgency by investors to buy gold immediately
following negative economic news, so while he thinks “investors are going to continue
to want to buy historically large amounts of gold … they will become more pricesensitive.”
A shift by investors to a more long-term view and canny buying on dips would be a
welcome change as the Mint has often seen clients rushing in on increasing prices
rather than dollar cost averaging in.
Jeffrey notes that gold ETF investors “buy gold, they don’t sell it. They very rarely, as a
whole, are net sellers of gold.” This doesn’t surprise us as we see similar behaviour
although we are seeing a bit more churn in the past few years. He speculates that the
money flowing into the ETFs is “new investors to physical gold. So we don’t know how
committed they’ll be. If they are like the other 80 percent of the gold investment market,
they’ll probably be very sticky, and they’ll keep the gold. But we really don’t know. So
there is that risk there.”
That last point about the risk of ETF gold being sold is important. ETFs are a double
edged sword in that by making it easy for people to buy gold, they also make it easy for
them to sell. ETF holdings are currently sticky because they are being held by “early
adopters” with conviction and some rationale for buying. As gold begins to get on the
radar of the mass market, this interest is likely to be less committed and simply chasing
higher prices (less fear, more greed). As a result, I would not be surprised to see gold
volatility increase as the ETFs allow those newer investors to express their emotions
with the click of a button.
Following that point, Jeffrey observes that “gold ETFs have an outsized influence on
investor perceptions about gold prices. Now you’ve got 15 percent of the market
showing the market what they are doing. And a lot of people assume that that
represents 100 percent of investment demand.” So we could have a bit of a feedback
loop occurring with new money watching the flow of its money into/out of ETFs and
reacting to that, ignoring the fact that there is another 80-85% of physical demand in
other parts of the market.
INDIAN DEMAND SLUGGISH
Mineweb reports that Indian demand “picked up slightly at the start of the week after a
three-week-long jewellers' strike ended, but dealers said demand was surprisingly
sluggish” confirming what the Perth Mint is seeing. Quoting UBS: "Last week, Indian
demand only became impressive when gold traded below $1,620," Gold needs
sustained demand out of India to give it a strong base and we will let you know when
this happens.
LONG-TERM HOLDERS WORRIED
P Radomski of Sunshine Profits reports that they are now “getting worried e-mails and
questions from investors who are holding long-term positions. This is an indication that
sentiment is scraping the bottom and that is usually seen at major bottoms.” Perth Mint
has not seen this sort of reaction from its Depository client base, with only small
amount of liquidations.
GOLD MOVING OUT OF BANKING SYSTEM
In this King World News interview, Egon von Greyerz reveals that he is “seeing big
money moving gold they own out of the banking system and into the vaults outside of
the banking system. People are simply not trusting the banks. … As long as you keep
your gold within the banking system, you do not know who the gold belongs to. The
gold could be encumbered. … We are also seeing large money flows into physical
gold right now.”
DOW-GOLD TO HIT 1
Bob Janjuah quoted by Zero Hedge: “Clearly fiscal and central bank activism and
experimentation have, to date, succeeded in stretching out the cycle, but ultimately I
still fear and expect the S&P500 … to trade at 800, and the Dow/Gold ratio to hit parity
… before we can begin the next multi-decade bull cycle. I think the battle between
central bank inflationist policies and the natural cycle of deflationary debt deleveraging
will continue to be attritional, and it may drag well into 2013 and 2014.”
Bron Suchecki
11 April 2012
[email protected] | +61 8 9421 7379 | www.perthmint.com.au/treasury
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