The Queen of England Asks Economists – ‘Why Did Nobody Notice?’

 
 
-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

Today’s AM fix was USD 1,696.50, EUR 1,297.32 and GBP 1,051.38 per ounce. 
Yesterday’s AM fix was USD 1,694.75, EUR 1,299.16 and GBP 1,051.46 per ounce.

Gold was up $1.30 or 0.08% in New York yesterday and closed at $1,711.30/oz. Silver slumped to a low of $32.21 and ended with a loss of 2.6%.

Gold was not able to break $1,700/oz on Friday and prices are on course for their 3^rd consecutive weekly fall, as investors focus on the looming fiscal cliff talks where little progress has been made.

Like an old western movie, with wind and dust blowing around, Obama and Boehner are holding out waiting to see who will “draw” or concede to the other’s plan to avert the fiscal cliff. Last Sunday, they exchanged counteroffers to their original campaigns.  Yesterday evening just an hour after U.N. ambassador, Susan Rice, (not a Republican favourite) removed her name as a candidate for Secretary of State, the U.S. President and Speaker of the House met for an hour and still agree to disagree.

U.S. industrial output figures for November are published at 1415 GMT.

There is a decrease of liquidity in the gold bullion market with many institutional players taking profits, closing out positions for year end, and heading off for the Holidays all contribute to a lack of momentum in the market.

Spot silver hit a one month low in the prior session of $32.21. This is also its third weekly fall, and its longest period of weekly drops in 7 months.

Queen Elizabeth II and Prince Phillip visited the Bank of England’s gold vault and wonders like most people how the things got so bad. 

Back in 2008, when the monarch visited the London School of Economics she described the credit crunch as ‘awful.’ .  Fast forward to 2012, the heart of Europe’s  4 year-old debt crisis while the Queen of England hears a financial expert compare the debt crisis to a flu epidemic or an earthquake, as hard to predict. This comparison is truly patronizing and an insult to the Queen’s intelligence.

Although I am not English have some respect for your elders, especially your Queen, Britons!  Pensioners in England can recall hard times during the World War when items like sugar were a luxury.  In this new era of credit you have people complaining if they can’t borrow to have their new BMW financed to match their Cotswold’s country house or Spanish holiday home.

The Queen was informed that since financial risk has been managed better (need we mention Libor?) than it was in the past, people became complacent.  She smiled and said, ‘But people had got a bit...lax, had they?’

Her Royal Highness also suggested that the Financial Services Authority may not have been hard-line enough in its policing. She said: ‘The Financial Services – what do they call themselves, the regulators – Authority, which was really quite new … it didn’t have any teeth.’

It’s rather ironic that the tour showed the gold vault since a good portion of the UK gold reserves were sold off from 1999-2002, when gold prices were at their lowest in 20 years.  Hopefully so called financial experts can learn from the Queen as quantitative easing and money printing only debases currencies and strengthens gold which is not controlled by sovereign monarchies or governments.

Yesterday, Dr. Constantin Gurdgiev, a former non-executive member of GoldCore’s investment committee wrote “Some thoughts on gold’’ on his blogspot at True Economics.com in reference to an the Irish TV program Prime Time’s presentation on the yellow metal.

Prime Time’s program covering gold is undoubtedly one of the rare occurrences that this asset class got some hearing in the Irish mainstream media. Which is the good news.

Not to dispute the issues as raised in the program, here are some of my own thoughts on the question of whether or not gold prices today represent a bubble.

A simple answer to this question, in my opinion, is that we do not know.

Short-term and even medium-term pricing of gold (in any currency) is driven by a number of factors (fundamentals), all of which are hard to capture, model and value.

For example, currency valuations forward suggest that gold is unlikely to experience a sharp and protracted correction in the US dollar terms, if you believe the Fed QE4 is likely to persist over time. In euro terms, potential for devaluation of the euro implies pressure to the upside to the gold price. Yen price is also likely to play longer-term continued devaluation scenario. Things are less certain when it comes to Pound Sterling price… and so on. Here's just one discussion on one of the above effects:  Soberlook.com

Another example: drivers for prices on demand side that include rather volatile regulatory conditions in the major gold demand growth markets, such as China and India.

In short, things are much more brutally complex than the PrimeTime programme allowed for.

The reason for this complexity is that gold acts simultaneously (as an asset) in several structural ways:

1) as a simple bi-lateral long term hedge for inflation, equities and currency valuations

2) as a medium term (albeit not entirely persistent) hedge for some asset classes (e.g. equities)

3) as a short term speculative instrument to some investors

4) as a backing for numerous and large volume ETFs

5) as a benchmark backing for numerous and relatively large volume synthetic ETFs

6) as a store of value

7) as a risk management tool for complex structured portfolios

8) as a bilateral safe haven against equities and bonds, political and economic risks, systemic financial markets risks, etc.

These relationships can be unstable over time, can require long time horizon for materialization and are 'paid for' by assuming higher short term volatility in the price of gold. That's right - while PrimeTime contributors spoke about gold price 'correcting' or 'bubble bursting' none seemed to be aware of the fact that if you want to get something you want (hedging and safe have properties being desirable to investors), you should be prepared to pay for it (price volatility seems to be a good candidate for such cost of purchase).

No matter what happens in the short- to medium- term, gold is likely to remain the sole vehicle for the store of value and risk hedging over the long-term. It did so over the last 5,000 years or so and it will most likely continue doing so in years ahead. This property of gold is well established in the literature and is hardly controversial.

There is one caveat to it - due to instrumentation via ETFs, there are some early (and for now econometrically fragile) signs emerging that some of gold's hedging properties might be changing. More research on this is needed, however and only time will tell, so in line with PrimeTime, let's stay on the RTE side of Complexity Avoidance Bias on that one.

There is an excellent summary on what we know and what we don't know about gold by Brian M. Lucey, Trinity College Dublin Professor.  Available here

Last year I gave a presentation at the Science Gallery on some properties of gold: Read here

Not to make this post a lengthy one, let me summarize my own view of gold as an asset class:

In my view, gold can be a long-term asset protection from the risk of expropriation, inflation, devaluations, and tail risks on political and economic newsflow side etc.

To me, gold is not a speculative (capital gains) instrument for the short-term and it should not be acquired in a concentrated fashion - buying in one go large allocations. Gold should be bought over longer period to allow for price-averaging to reduce exposure to gold price volatility.

Gold allocation should be relatively stable as a proportion of invested wealth - different rules apply, but 5-10% is a reasonable one in my view.

Of course, any investment portfolio (with or without gold) should strive to deliver maximum diversification across asset classes, assets geographies etc.