In “celebration” of the 40 year anniversary of Nixon “closing the gold window” there has been a fair bit of news in the past week.
Biggest perhaps was that Venezuelan president Hugo Chavez became a gold bug. He announced not only were they nationalizing the nations gold mines but they were also recalling $11 billion worth of gold reserves held in European and US banks. This news seems to be what caused gold to spike well up into the $1800 level (actually it just touched $1900US now as I finish writing this. In NZD terms gold has risen from $1850 to over $2300 in a month!). The rationale behind this move may be arguable – we’ve seen opinions that it is merely so western governments will have less hold over Venezuela in the case of any sanctions being taken out against the country. It could also be argued that the Venezuelans don’t necessarily believe all their gold is where it’s meant to be. It seems likely Hugo also has noticed the steadily devaluing US dollar and would like to make sure they actually have the gold they think they do and nabbing the gold mines is a way to get some more for nothing (the joys of being a gold miner!).
However in the long run this announcement could be positive for gold for 2 reasons.
1. Nationalising the mining industry, if history is anything to go by, is likely to lead to less gold production in Venezuela. A government controlled mining industry is likely to be less efficient than private companies would be. In fact the high likelihood is that before too long Venezuela won’t have a mining industry as the odds of further development are slim. Although with the Venezuelan gold mining industry reportedly only mining 11 Tonnes of gold a year this is small change compared to global production. Also the gold is now very unlikely to leave Venezuela and will rather be added to the governments gold reserves. So less gold makes it into the international markets. Granted this may not have a massive impact but in a tight market less supply, by even only a relatively small amount can count.
2. Perhaps the larger factor potentially affecting golds price in the shorter term, is whether the 99 tonnes of gold they are bringing home from the likes of the Bank of England and JP Morgan Chase etc is actually currently sitting in these banks vaults. There has been much discussion of central banks leasing out gold reserves keeping the price artificially low. The likes of GATA have also shone a light on the subject of gold price suppression by bullion banks actively shorting gold (some of whose names are co-incidentally(?) amongst the list holding Venezuelas reserves). The theory here would go that these same banks might now have to go to the market and buy back the gold they have previously sold in order to actually deliver the gold Venezuela has requested. This could cause a very sharp rise in the price of gold. i.e. Increased demand + same supply = increase in price. Especially when you consider than in the 2nd quarter of 2011 the global demand for gold was 919.8 tones according to the World Gold Council. So 211 tonnes is well over 20% of last quarters global gold demand – quite a significant number that could affect gold in the shorter term.
The other interesting point about this is the fact that only 99 tonnes is held with the Bank of England and the rest is with bullion banks. We would have expected most nations gold was held with the BoE or with the Federal Reserve in the USA? So the fact that over half of Venezuelas gold reserves are held with bullion banks is very interesting indeed.
Part way through writing this we’ve just stumbled across a King World News blog post written by Ben Davies of Hinde Capital calling for gold at $2100 in a matter of weeks, chiefly due to the Venezuela announcement.
He comments that this transfer of gold will be the biggest transfer of gold this century and could spur other governments and financial institutions to also consider repatriating their gold. He also draws the parallel to last weeks anniversary of Nixon closing the gold window in 1971 as it was Charles De Gaulle requesting the return of France’s gold from the US that caused Nixon to remove the final link of the dollar to gold. Davies believes that if a number of holders want their gold returned home that this could have a dramatic impact upon golds price.We don’t know if this will come to pass, as we can think of many reasons why gold should be due to correct. But he makes a good case. You can also listen to the full interview with Ben Davies at King World News.
The other interesting move this week was the fact that with the US stock market falling (the Dow Jones index was down 4.7% for the week), gold continued to move in the opposite direction as it has done recently. This is in contrast to the big stock market falls of 2008 which saw gold fall sharply too and silver fall off a cliff. So it seems that gold may be decoupling from stocks whereas for the past couple of years it has traded largely in unison with stocks – what is commonly referred to as a “risk on” trade. i.e. Stocks commodities, gold silver etc all rise together = risk on. Versus Treasury bonds rising (a.k.a. interest rates fall) = risk off.
This points to more and more people recognizing gold as a safe haven. Gold and silver mining shares have also held up well in recent weeks even in the face of the broader markets falling sharply.
Anther interesting factor of the past week has been silver holding up well even with the abundance of bad global economic news. Silver has significantly greater industrial applications than gold and so is more susceptible to changes in demand from industry due to a global slowdown. However in the face of all the recent bad news silver has actually rallied sharply. Over the past few days rising from $39 to $43.60 as I write. This speaks to silvers monetary characteristics slowing starting to take over from it’s industrial characteristics.
With gold now hovering around $1900 it will be interesting to see where it stops in the shorter term. It has seemed due for a correction for some time now. It wouldn’t be a surprise to see a fairly hefty fall at some point once enough new comers are on board. However gold could fall to $1400 and still be in a long term uptrend. Will it happen? It wouldn’t be a surprise but there have been plenty expecting a plunge for some time and it hasn’t arrived yet. So we could just as easily see further rises in the short term. Ben Davies $2100 doesn’t seem that far off now and in the time it’s taken to write this article it’s gotten significantly closer! We continue to live in interesting times!