Commodities | - Part 5

The Enduring Value of Gold

Somehow, it doesn’t seem likely that anyone will stumble upon $10 million worth of Bitcoins, say, about 150 years from now, similar to a California couple recently finding tin cans full of gold coins buried in their back yard.

When these coins were buried, gold was, literally, money.

The paper currency that the North and South printed around that time both ended up being worthless as the nation went through the entire 19th century with near-zero inflation while having all sorts of technological advances and strong economic growth.

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WGC Gold Demand Trends for 2013

The chart below, appearing on the first page of today’s release by the World Gold Council of their Gold Demand Trends – Full year 2013 tells you just about everything you need to know about what happened in the gold market last year, save for the important point that nearly all the ETF sales were in the West and most of the jewelry purchases were in the East.

Records were set for the combined total of jewelry demand and bar/coin demand while another record was set for the lack of demand for the relatively new ETF category that, basically, began in 2004 in the left-most portion of the chart.

WGC Gold Demand Trends 2013

Overall demand fell 15 percent and, since the gold price is set in the West, this goes a long way in explaining why prices plunged last year. But, cost-sensitive buyers in Asia stepped up their buying as boatloads of physical bullion made their way from London and New York vaults to Switzerland and then into mainland China, never to return to the global market.

It should be interesting to see what this chart looks like in a year or two and to see who the rubes really were in 2013 – Asian investors who bought the metal as prices were falling or investors in the West who never really liked the metal, never actually owned any of it (because they held it in ETFs), and thought they were getting out while the gettin’ was good.

My bet’s on the latter…

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Learn from Buba

This is a pretty remarkable commentary about the opaqueness of the physical gold market considering that the story appears in the Financial Times (alternate link here).

I mean, it’s one thing for someone like Glenn Beck to be looking askance at the difficulty that Germany has had over the last year in repatriating a small portion of its gold reserves from the vault of the New York Fed in the video below, but it’s quite another for one of the world’s most respected financial news organizations to be doing the same thing.

From the Financial Times:

In the “armchair farmer” fraud you are told: “Look, this is your pig, in the sty.” It works until everyone wants physical delivery of their pig, which is why Buba’s move last year caused such a stir. After all nobody knows whether there are really 260m ounces of gold in Fort Knox, because the US government won’t let auditors inside.

“Won’t let the auditors inside”? That sounds a lot like Mr. Beck.

Commodities Supercycle Not Over?

Via the Economist’s Daily Chart feature comes the graphic below in defence defense of the view that the most recent commodities supercycle has not yet run its course.

From the short article accompanying the chart we learn that current China growth rates of about 7.5 percent today is the equivalent to 12 percent growth back in 2008.

As for the chart, it’s kind of hard to glean too much from the 19th century data since there was virtually no inflation the entire time. The notable exception was the Civil War period when both sides issued lots of paper money before order was restored.

Of course, things really changed when WWI started and the Fed began operating…

This item at The Economist provides a handy scorecard for asset class and stock market performance for various countries around the world, some of which make the impressive U.S. equity market returns in 2013 look quite pedestrian.

After a dismal showing last year, precious metals are starting out 2014 with a bang. It will surely be interesting to see how long that lasts.

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