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 retestedin 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!