3 Factors That Could Take Gold Higher From Here


This week:

  • High Yawn Factor in Precious Metals Prices

  • A Punt on the Gold/Silver Ratio

  • 3 Factors That Could Take Gold Higher From Here

  • Latest IMF Report on NZ Banking Risks

High Yawn Factor in Precious Metals Prices

The past week has not seen a great deal of action in precious metals land. Yawns all round really. You can see in the chart below that Gold in NZ dollars has been in a very narrow range the past week between $1980 and $2015. Even over the past month the range has only been about $70, between $1980 and $2050. We remain firmly in the realms of “cheap” in our opinion.

Silver has traded in a slightly wider range than it’s yellow cousin, but still not a lot of movement over the past week. However, it has also risen during this first month of the year, while NZD gold is actually down so far in 2013. While the range in the chart below may look similar to gold, in percentage terms the range for silver has been much greater – approx 5.5% versus 3.5% for gold.

A Punt on the Gold/Silver Ratio

So silver has been more volatile but has also outpaced gold so far this year. We didn’t mention this in our prognosticating last weekbut we reckon a good bet this year is for the gold/silver ratio to fall during 2013. It’s currently at 53.5 having started the year at around 55. So we will keep a close watch on this in 2013 as we think the numbers 50, 47.5, and maybe even 42.5 could be tested before the year is out.

(If you’re new to the ratio – it is simply how many ounces of silver it takes to buy an ounce of gold on a given day. And being where it is is one of the reasons many people prefer silver over gold as it is seen to have more “upside”. Personally we like a bit of both.)

3 Factors That Could Take Gold Higher From Here


So there isn’t a lot to get excited about in the price action of the metals currently. But we wonder whether this range trading will last much longer with a few factors at play at the moment:

1. Race to the bottom/Competitive devaluation/Currency Wars – choose your label but with Japan really upping the ante in the battle for the weakest currency, this will eventually be gold/silver positive. New PM Abe will likely appoint a central bank head in a couple of months most likely someone in line with his print and devalue philosophy.

2. US Debt ceiling – we’re almost a month away from the deadline to “resolve” this issue. Obama says he won’t be negotiating so it will be interesting to see what shenanigans get pulled this time. If the ceiling is increased this will likely be reflected by the gold price. If it doesn’t (highly unlikely) the US would default and all hell would break loose, also likely gold positive.

3. Germany to repatriate gold reserves from France and USA – In case you’d missed it this is potentially a very big announcement yesterday. You may recall it was French president Charles de Gaulle who was the first of many to ask to be paid in gold by the US in the late 1960’s that eventually forced Nixons hand to default, err, I mean “close the gold window”. Germany is not the first to pull gold reserves from the west in recent times – Chavez beat them to it when he bought back Venezuela’s gold from London in 2011. But Germany is the first of the big wigs (and the 2nd largest holder globally) to do so. It will be interesting to see who follows.

So we’ll see if our guess of a dip before a rise to new highs eventuates. These 3 factors might help keep any dips at bay or at least short lived.

This Weeks Articles

In case you missed last week’s email we reviewed the performance of gold and silver in NZ dollars for 2012 and also polished up the crystal ball with a guess for 2013.

Gold and Silver in NZ Dollars: 2012 in Review and What Lies Ahead?

2013?What Will Gold Do This Year?

Well this week Jeff Clark of Casey Research also looks at golds performance and what may lie ahead for it in 2013. You can also see how gold has gone in comparison to bull markets in other assets in the past and make up your own mind about whether we are close to bubble levels or not.  Read More.

CollapseEconomic Collapse: A Leading Indicator of Better Times to Come

Plus the always passionate and exuberant Darryl Schoon demonstrates why a paradigm change is coming and gives an interesting book recommendation that we’ll have to check out ourselves. Read More.

OMFIF: Gold Will Play a Special Role

Here’s a new abbreviation for you OMFIF or Official Monetary and Financial Institutions Forum. These guys have just released a reportthat concludes that “Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds.”

While there wasn’t anything earth shattering in the report, these guys are the think tank for the likes of central banks and sovereign wealth funds, so talk of gold making a return to play an important part in global currencies is a big deal:

‘Whether the world moves into full crisis with the end of the euro, or whether we have a recovery, or whether we experience something in between: all paths lead to towards a multi-currency system, in which gold’s role is likely to become more significant.”

The OMFIF head goes on to state that:

“With the evolution towards a constellation of multiple reserve currencies, gold – as an asset that is no one’s liability – will play a special role. Gold will neither replace fiat currencies, nor be the dominant ‘currency’ in the system. But it will become increasingly sought after and will attract a higher level of attention from policy-makers and financial market practitioners. “

This is far from our preferred approach,  but a not at all surprising conclusion (given the makeup of the organisation) that they would say “Gold will neither replace fiat currencies, nor be the dominant ‘currency’ in the system.” 

Nonetheless it is still a big deal that an organisation such as this has produced a document outlining how the internationalisation of the Chinese Renminbi will also lead to gold playing a major role in the future global monetary system. Here is another surprising remark from the report to end with:

“Most crucial with respect to the role of gold,the previously dominant Western economies have attempted to dismantle the yellow metal’s monetary role, and – for a variety of reasons – this has comprehensively failed.”

Latest IMF Report on NZ Banking Risk

If you are a glutton for punishment and want to read the latest IMF report on NZ banks here you go: Riveting  IMF Report

The abstract saves you a lot of time though:

“The paper finds that, given New Zealand’s conservative approach in implementing the Basel II framework, New Zealand banks’ headline capital ratios underestimate their capital strength. A comparison with Canadian, UK and Australian banks highlights the impact of New Zealand’s more conservative approach. Stress tests in the paper show that four large New Zealand banks could withstand sizable stand-alone shocks to their exposure to either residential mortgages (calibrated on the Irish crisis experience) or corporate lending. However, combined shocks to both residential mortgages and corporate lending would put more pressure on the banks’ capital. Given high bank concentration and large offshore wholesale funding needs, the merits of higher minimum capital requirements for systemically important domestic banks could be considered, together with other measures to be implemented. “

So in a nut shell, NZ banks are safer than most but would be at risk if something big bad and ugly happened. Probably didn’t need a 22 page working paper to reach that conclusion. 

If something big and bad happened we doubt “higher minimum capital requirements” would make too much difference.  Because of course, modern fractional reserve banking means it is up to a government regulator to arrive at a “safe” capital ratio, but if every customer comes knocking at once, as they are free to do, then no bank is solvent. So the IMF can write all the reports they like but it will not change that the global system relies totally upon the confidence of the people to stay afloat.

Gold and silver remain the insurance against the system failing – and we continue to think insurance is on sale at the moment:

1. Email: orders@goldsurvivalguide.co.nz

2. Phone: 0800 888 GOLD ( 0800 888 465 ) (or +64 9 2813898)

3. or Online order form with indicative pricing 

Have a golden week!

Glenn (and David)


Ph: 0800 888 465

From outside NZ: +64 9 281 3898

email: orders@goldsurvivalguide.co.nz

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The Legal stuff – Disclaimer:We are not financial advisors, accountants or lawyers. Any information we provide is not intended as investment or financial advice. It is merely information based upon our own experiences. The information we discuss is of a general nature and should merely be used as a place to start your own research and you definitely should conduct your own due diligence. You should seek professional investment or financial advice before making any decisions.

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