“This is gold, Mr. Bond. All my life I’ve been in love with its color … its brilliance, its divine heaviness.”
Gold prices recently hit a four-year low, while stock prices seem to hit a new record almost weekly. So which is the better investment today?
Before answering that question, consider the latest worldwide trend. “Repatriating” gold is becoming as fashionable as quantitative easing and stimulus spending.
Germany’s central bank started the trend last year with its decision to return some of the country’s gold home from vaults in the U.S. and Paris. It was followed by a campaign called “Bring Our Gold Back Home,” but Germany has since backed off on plans to repatriate more gold.
Netherlands has already moved 122 tons of gold back home. And Switzerland voted yesterday on its “Save Our Swiss Gold” initiative, which would force the Swiss National Bank to buy gold every time it buys euros, which it has done to curb the rise of the Swiss franc.
If the initiative were to pass, Zerohedge noted, “it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.”
France could also join in. Marine Le Pen of the French Front National, who is currently polling in first place in a hypothetical presidential election, has written to the governor of the French Central Bank demanding, among other things, “urgent repatriation on French soil of all of our gold reserves located abroad” and discontinuation of any gold sales.
The gold repatriation movement is not just confined to Europe. According to the World Gold Council, China, India and Russia increased their gold reserves significantly between 2007 and 2013.
China is seeking to accumulate 8,500 tons in official gold reserves, according to Song Xin, President of the China Gold Association, General Manager of the China National Gold Group Corporation and Party Secretary. That amount would exceed the gold reserves of the U.S.
Song was quoted in China’s Qiushi magazine as saying, “Gold is money par excellence in all circumstances and will help support the renminbi to become an international currency as “gold forms the very material basis for modern fiat currencies.”
The U.S. has not joined the gold-hoarding crowd, but it’s worth noting that silver is apparently in vogue, as “sales of American Eagle silver coins by the U.S. Mint jumped 40 percent in October to the highest in 21 months, defying a slump in New York futures.”
Return to the Gold Standard?
Central banks generally are not enamored with gold. As former chair of the U.S. Federal Reserve Board explained, “Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.”
He has a point, although reducing Fed control over the economy could be the best thing to happen to the U.S. economy.
It should also be noted that the Fed, unlike many other central banks, doesn’t own gold. Among the changes imposed during the Great Depression, the Gold Reserve Act of 1934 required the Fed to transfer ownership of its gold to the Treasury Department.
We wouldn’t predict a return to the gold standard anytime soon, but the precious metal is clearly being viewed as more precious in some corners, even as falling prices, a reviving economy and the threat of higher interest rates should be holding down demand.
Why the sudden interest in this old-fashioned asset? The Wall Street Journal chalks it up to nostalgia. Russia’s new wire service/propaganda mill, Sputnik News, says: “Growing concerns over economic stagnation and unprecedented money printing have pushed European nations into repatriating their gold and as well as increasing their gold bullion national reserves.”
In other words, efforts by central banks to date have failed, so let’s see what we can do by stockpiling gold.
How’s the Economy Really Doing?
If you believe the economy really is improving and central banks know what they are doing, you probably should pass on gold. However, if you share my reservations about the Fed and the condition of the U.S. economy, you may want the protection that precious metals can provide.
While Bernanke said, “Nobody really understands gold prices, and I don’t pretend to understand them either,” keep in mind that:
- Globally, most economies are not improving and many are in a recession. As we’re reported, Europe and Japan continue to be in an economic funk, and growth has slowed in China. Russia’s economy is a disaster.
- The U.S. economy is reported to be improving, but reports of its strengthening condition may be illusionary.
Many are hanging on the latest report from the Bureau of Economic Analysis, claiming that the U.S. economy grew by 3.9% during the third quarter, up from the previously reported estimate of 3.5%.
As we’ve noted, the increasing GDP is at odds with other economic statistics that show personal income is down to 2007 levels and the workforce participation rate is near historic lows.
The day after the GDP increase was made public, other not-so-encouraging economic data was reported. For example, core capital-goods orders fell 1.3%, the second month in a row with a decline of that amount. New home sales were estimated at 458,000, which is below expectations of 471,000 – and actual sales routinely have been revised downward in recent months.
According to Zerohedge, “after GDP ‘beat’ yesterday in all its statistical instability, today was a disastrous data day for the Fed’s ‘everything is awesome’ meme …
- Mortgage Applications -4.3%
- Durable Goods Ex-Transports MISS -0.9% vs +0.5% Exp
- Initial Jobless Claims MISS 313k vs 288k Exp
- Personal Income MISS +0.2% vs +0.4% Exp
- Personal Spending MISS +0.2% vs +0.3% Exp
- Chicago PMI MISS 60.8 vs 63.0 Exp
- UMich Confidence MISS 88.8 vs 90.0 Exp
- Pending Home Sale MISS -1.1% vs +0.5% Exp
- New Home Sales MISS +0.7% vs +0.8% Exp”
Jim Quinn of Burning Platform noted, “it really isn’t hard to connect the dots and see the real economy in the real world, outside Wall Street, is a disaster and getting worse by the hour.” Among other things, he asked, “If things are going so well, why are unemployment claims surging to the highest level in 3 months?”
Based on these and other statistics, it appears that the U.S. economy is still far from being fully recovered. It may be a great time to invest in gold.