The New Gold Report from Erstegroup 

We are happy to present the new Gold Report 'In Gold We Trust' from our good friend Ronald Stoeferle of Erstegroup in Vienna to our readers (the download link is at the end of this article).

Among analysts employed by mainstream financial institutions, Ronald is one of the very few who actually understand the gold market. As we have often pointed out in these pages, most analysts commit the cardinal error of analyzing the gold market as they would any other commodity market.


A recent example of this erroneous approach is provided by an article at Alphaville, whose author muses about the effects of a few hundred tons of gold buying by central banks per year and waning jewelry demand on the gold price. Apparently it didn't occur to the author to wonder how it was possible for the gold price  to rise through eleven years of net central bank selling. An analysis by Moody's is mentioned in the article as well, which argues that the recent trend toward net central bank buying is a reason to be bullish on gold. It is not necessarily a bearish datum of course, but it is certainly per se not a good reason to be bullish. In fact, it is quite difficult to interpret central bank buying of gold as a bullish event, given that central bankers are on average the worst traders on the planet. The only reason not to be overly worried is that the central banks that have been selling gold in the past are not the same ones that are buying it nowadays. The buyers are generally Asian central banks that are drowning in fiat money denominated reserves which they understandably are eager to diversify.


While gold does have a well-established use value in industrial applications and jewelry fabrication, it is fundamentally different from other commodities in that its existing stock is never 'used up', but consistently grows. Moreover, the by far greatest component of gold demand is investment, or monetary demand, with the reservation demand of existing gold holders  playing an extremely important role in the setting of the metal's price in the marketplace.The annual changes of gold supply through mining and recycling and changes in jewelry and fabrication demand are by comparison of very little relevance in determining the gold price.


Gold is the market-chosen money commodity. Although it is currently not employed as a medium of exchange and thus can not be designated 'money' by the commonly accepted definition of the term, everybody knows that itwould be our money if not for legal tender legislation and the usurpation of money by the State.

The market therefore not surprisingly treats gold as though it indeed were money. Gold's use value alone can neither explain its current price nor the amount of trading that takes place in it every day. Only a handful of currency pairs can boast of greater daily liquidity than the gold market. As noted above, central banks continue to hold gold as a reserve asset, the importance of which has in fact grown markedly in recent years. So all protestations regarding the 'demonetization' of gold notwithstanding, even the issuers of fiat currency are well aware of its status.


As a result of the foregoing, analysis of the gold market must proceed along different lines than analysis of industrial commodities – gold must be analyzed as a  currency rather than a commodity.


Gold has been in a relentless bull market since making a secular low in 1999  that was successfully retested in 2000. The longevity and persistence of the bull market has brought forth claims that a gold is in a 'bubble', which are often uttered by people who have so far missed out on the advance (when they change their mind, it may be time to think about selling). Prognostications of the imminent demise of said 'bubble' have lately been proliferating again (see e.g. a typical recent example here: 'Is Gold on the Edge of a Violent Downturn?')

These top pickers – whose advice was so conspicuously absent when the secular lows were made – usually fail to mention that between the year 2000 and today the true broad US money supply TMS-2 has increased by a cool 178%, while the federal debt has increased by an even larger 200%. Neither trend seems likely to reverse anytime soon, so why should the gold price trend reverse course? Moreover, it does not seem likely that the confidence of market participants in the fiscal and monetary authorities of various countries is about to take a turn for the better. It seems far more likely that said confidence will continue to erode, as one intervention after another fails to deliver the hoped for results.

A 25 year chart of gold, showing the final 12 years of the preceding secular bear market and the bull market that has been in train since then. The bull market has been a rather steady affair, with very few excessive moves. However, it is to be expected that it won't end before such excessive moves do in fact occur – click chart for better resolution.

As Ronald points out in his report, there are quite a few reasons to believe that gold's ascent may actually be closing in on an 'acceleration' phase.

The report dissects all the relevant data in great detail – we would point specifically to the current sentiment backdrop, which is consistent with the idea that an intermediate to long term correction low in an ongoing bull market is close. Meanwhile, most of the fundamental drivers of the gold rally which we have listed in detail in a previous update remain for the moment firmly in bullish alignment.

Of course there is never any guarantee that a market will perform as one expects. For instance, the current consolidation/correction phase may well last a few months longer and lower prices may yet be seen in the short term. Furthermore,  one can never rule out the possibility that present conditions will radically and unexpectedly change. However, this appears quite unlikely given what we know about the monetary and political authorities presently in charge.


Ronald's annual gold report is probably the most thorough and interesting  report on the topic issued by any financial institution in the world. It is highly recommended reading for both existing gold investors and those who are only now getting around to considering whether gold merits their attention.

We believe that gold actually merits everyone's attention, as it can play an indispensable role in portfolio diversification as Ronald makes quite clear.   Adding gold to an investment portfolio will demonstrably tend to lower both risk and volatility. Those who know relatively little about gold will learn everything they need to know in this report. Gold aficionados meanwhile will find a wealth of valuable data and information not easily available in one place anywhere else. Enjoy!


In Gold We Trust (pdf)

10 Responses to “In Gold We Trust, 2012 Edition”

  • Andyc:

    “In fact, it is quite difficult to interpret central bank buying of gold as a bullish event, given that central bankers are on average the worst traders on the planet.”


    They are in fact the BEST traders on the planet, they make just a boat load of money for their hedge fund buddies with their lousy trades all the time.

    : )

    Its a matter of perspective, the seen is that they are bad traders, the unseen is…depends on who you ask…you would have to ask the guys they are actually trading for and those guys dont work at the central bank.

    • Andyc:

      If I am a central banker at the BOE and Pater is my buddy at Bank X or Hedge Fund Y and I call him and say “quick Pater, buy all my Gold at multi decade lows because Gold is about to explode ever higher and then Pater buys and later I take it off his hands at multi decade highs….???

      Who is the bad trader?

      If I was trading for the bank, sure, that would be me but who says these guys are trading for the bank?…..not me!

      : )

    • OK, if you look at it that way, then they are actually quite good. :)

  • DocAlex:

    Dear Pater Tenebrarum!
    Can You please explain this issue to the novice:
    If we consider gold as money, its total amount in circulation should be irrelevant; in this case, isn’t exploration and mining of gold a giant waste of scarce resources, exactly like building pyramids or bridges to nowhere?

    • JasonEmery:

      Hi DocAlex. I think you are getting off on the wrong foot. Yes, gold is money. But the correct question to ask is, ‘why has it served as money for the last 5000 years’? What makes gold such a good ‘thing’ to use for money?

      The answer is that you want something whose supply does not increase so easily. The opposite of fiat paper. Imagine if G.W. Bush had said to the American people, ‘I want to invade Iraq. All Americans are hear-bye asked to turn in all your gold so we can go looking for weapons and kill the guy that tried to kill my Daddy.’ Not many takers to that one, I’ll bet. Lot easier to just start running big deficits.

      Most gold explorers go bust, as you say, but so do too most other small businesses. Only the strong survive, regardless of the industry.

      The total amount in circulation is not irrelevant. The above ground supply has increased over the centuries such that the amount of above ground gold has remained fixed at about one ounce per living person. As the planet’s population has increased, so has the number of ounces. This is important. You don’t want a situation where gold is just a concept, sitting in vaults, and people don’t even know what it looks like. How do you really know it is money, if it is just a concept, and not a thing you can touch.

      I would be in favor of a bi-metal system, with gold for large purchases, and silver for small ones. Maybe even room for copper coins for chewing gum, lol.

      • RedQueenRace:

        I think his question is better than you believe.


        “If we consider gold as money, its total amount in circulation should be irrelevant”

        is no different than Rothbard stating that once there is sufficient money to transact commerce, additional money confers no additional social benefit.

        IMO, the error here is thinking the ONLY use for gold is money.

    • Hi Doc Alex,

      It is true that mining gold for monetary purposes seems on the surface wasteful. But one must not forget that before gold became money, it was mined for non-monetary purposes and if you look at industrial and fabrication demand today you will notice that most of the newly mined gold actually goes to satisfy this demand.
      However, even expending resource to mine gold for monetary purposes is far better than using fiat money the supply of which can be increased at will. It is precisely because gold is hard to get that one can trust that it will hold its value. The resources expended on gold mining are a far smaller price to pay than the price we are paying now for using ‘flexible currency’.

  • debeerr:

    This is repeat of my comment on a previous Acting Man article;
    “One Response to “Credit Market Charts Update July 6, ACTA Dies, Final Woolfson Prize Entry by Jonathan Tepper Online”
    July 7, 2012 at 02:56
    I refer to Mr.Tepper’s commentary on Page 18
    July 2012

    In truth, the gold standard is already a barbarous relic. All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices, and employment, and are not likely, when the choice is forced on us,deliberately to sacrifice these to outworn dogma… Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age.
    John Maynard Keynes in “A Retrospective on the Classical Gold Standard, 1821-1931″
    The modern euro is like a gold standard. Obviously, the euro isn’t exchangeable for gold, but it is
    similarly restrictive in many important ways. Like the gold standard, the euro forces adjustment inreal prices and wages instead of exchange rates. And much like the gold standard, it has arecessionary bias for weaker countries. Under a gold standard, the burden of adjustment is alwaysplaced on the weak-currency country, not on the strong countries. Almost all of the burden of thecoming economic adjustment will have to fall on the periphery.Under a classical gold standard, countries that experience downward pressure on the value of theircurrency are forced to contract their economies, which typically raises unemployment because
    wages don’t fall fast enough to deal with reduced demand. Interestingly, the gold standard doesn’twork the other way. It doesn’t impose any burden on countries seeing upward market pressure on
    currency values. This one-way adjustment mechanism creates a deflationary bias for countries in arecession.What modern day implications can one draw from the gold standard-like characteristics of the euro?Barry Eichengreen, arguably one of the great experts on the gold standard and writer of the highlypraised
    Golden Fetters
    , argues that sticking to the gold standard was a major factor in preventinggovernments from fighting the Great Depression. Sticking to the gold standard turned what couldhave been a minor recession following the crash of 1929 into the Great Depression. Countries thatwere not on the gold standard in 1929 or that quickly abandoned it escaped the Great Depressionwith far less drawdown of economic output.
    The sooner countries left the gold standard, the sooner industrial production bounced back
    .The stark evidence of abandoning the gold standard and returning to growth is shown by thefollowing chart by Barry Eichengreen. (Red arrows have been added to indicate the dates countriesleft the gold standard: Britain and Japan 1931, US 1934, France 1936. The yellow lines show theevolution of industrial output afterwards.)
    Source: The Origins and Nature of the Great Slump, Revisited by Barry Eichengreen

    The said chart is found by clicking on the following link

    My comment follows:
    Such growth in the period covered by the chart essentially came about by commencing and continuing significant money printing by the central banks – on cessation of such currency debasement the economies quickly fell back into a severe recession/ depression.

    Shows what misleading stuff is out there even by supposed credible authors.

    The temporary spike in economic activity did not come about because the said nations left the gold standard- it came about solely because leaving the gold standard permitted creation of fiduciary media on a grand scale which would not have been possible under a gold standard. It was a an economic recovery based on goosing the money supply and this fact was there for all to see once the money stock stopped growing and started to contract again which prolonged the Great Depression until about the middle of the 1940′s.”

    I now wish to state that since the removal of what was left of the gold standard currency in the early 1930’s that fiat currency monetary policies have caused tremendous currency debasement everywhere and together with fractional reserve banking practice are the 2 most insidious financial evils we face today.

    Well,Mr.Tepper might wish to explain the absence of solid economic growth in most countries in recent times regardless of the huge monetary largesse as stated in Pater’s article (above) and in other recent posts. Indeed the ECRI has this week stated that the USA is in recession as we speak. Perhaps Mr. Tepper might volunteer that there has not been enough monetary expansion and fiduciary media created. If so, Mr.Tepper would then reach the economic genius status enjoyed by Mr. Kriugman and his ilk.
    As Pater correctly points out the flawed monetary and economic policies are likely to continue and there are no signs of any reversal in such policies. Unless and until such reversal happens gold investments are very likely to prove beneficial in the months and years ahead. IMO the present and next several weeks are likely to be a very good time to buy in the PM sector.

    Buy low and sell high.

    • In addition to your points – I obviously agree that the economy can not be helped by inflation and devaluation – I would point out that there are still very important differences between the euro and a gold standard. One of those is the manner in which balance of payments imbalances are resolved: in the euro area the TARGET2 payment system allows for the surreptitious central bank financing of current account deficits and capital flight, something that would not be possible under a gold standard.
      Secondly, the euro remains a fiat currency; for instance, ELA financing of bust banks is only possible because euros can be created ex nihilo. In this manner unsound credit continually escapes liquidation and hangs around the economy’s neck like a millstone.

  • jimmyjames:

    Thanks for posting this-

    The guy must have read my book-

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