This Is What Is Going On Behind The Scenes In The Gold War

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They sort of understand that one way or another they are going to get screwed because there is no way out for the US other than to keep rates in negative territory right across the yield curve.  So why would you not diversify?  And what are you going to diversify into?  Are you going to go into the euro?  I mean good grief, give me a break.

Gold is the obvious place to try to get your hands on some diversification away from dollars if you are a central bank.  I think that’s also true of private wealth.  Frankly, what I am hearing in the dialogue I have with our clients and perspective clients is, ‘Yes, we really need to take a long-term view of it.’

A lot of people look at something like this chart (from Egon von Greyerz) and they look at what the federal deficits are likely to run even on an optimistic basis on the fiscal cliff, and they are saying, ‘Yes, we better have some (gold).’  And I guarantee you they don’t have it.  They are talking about it.  So the talk is starting and I think the big buying is still ahead of us.”

“Yeah, I mean maybe Goldman can help us (laughter ensues).  Look, I’ve been saying this for years, and when you count every bar that’s above ground, the supply of mined gold is going up slowly.  It’s going up 1%, 1.5% per year.  That’s a much slower rate of increase than the amount of paper that’s being created every minute of the day.

What I’m seeing is the (government issued) paper is not satisfying the holders in terms of the estimated future buying power that you would expect to have in something we call ‘money.’  That’s why, at the margin, you are going to continue to see a bid for gold.

That’s what you are seeing with the Chinese numbers, and less well reported, that’s what you are seeing with central banks.  Certainly that’s what I’m seeing when I talk to big pools of money.  But gold has a way of throwing curve balls, getting people discouraged and exhausting the most steadfast bull.  I think we are in one of those periods where that is the case. 

Yet if you take a step back, the setup is terrific.  Who knows when the ignition takes place?  I don’t, but I do know that what I see is a dispirited market.  If we look back to where we were in May, the metals are higher, so are the shares.  The valuations haven’t improved a lot but they (the shares) are still higher.

I like that kind of discouragement in terms of a condition for forming a base for the next move up and I think that’s what we are doing.”