Gold - The Real Mana or Glittering Mirage

I didn't intend on writing anything today. But the force of events has made it necessary.

Today gold soared. SPDR Gold Trust GLD was up 2.44% on twice normal volume. The closed-end gold funds CEF and GTU both up over 3%. Gold stocks like GG and the GDX etf both up over 9%. Wow

Over the past few weeks both GTU and CEF have gone slightly down during NY trading hours, only to recover most of the decline  or show gains in the last half hour in market sessions. < For disclosure sake Guido does own both GTU and CEF They are both selling at a premium above net asset value. This article  is neither an endorsement or recommendation to purchase these or any other common stocks or assets mentioned in this article. As always on this site, you're on your own mate. >

What's happening?

Well according to one news source "fund buying", meaning I suppose mutual funds etc. A Financial Times of London ft.com  article suggests traders seeking safety. In her usual trenchant research, Morning Zhou at marketwatch.com  points out that seasonally September and  Autumn are a time when gold prices usually move up due to demand in Asia, particularly India and in later months China, for weddings, jewelry, etc.. However she then mentions this demand has gone down over the last several years while "investment" demand has not only picked up the slack but increased the total demand.

The Financial Times article confirms this, reporting latest gold imports to India have declined materially.

In Guido's opinion, the price of gold is not going up due to consumption demand, but  mostly because of  "traders".

But why do they want the stuff? After all, Warren Buffett has said owning something they dig out of the ground, only to put it back into the ground < vaults > makes no sense. Ah yes, Warren. It certainly makes no sense. But these are nonsensical times.

Much conventional opinion holds that gold is being bought because smart investors think inflation will pick up, maybe even to hyper levels. I've discussed this with a previous article on this site titled  "The Great Divide". In that article, I gave my guess why I think the main reason for gold buying by the smart money is because of  anticipation of a currency crisis.

Another reason for gold buying might be the widely known "secret" that we will have a bank holiday in September and a complete realignment of currencies with a new dollar. Guido puts scant credence in this guess. Usually when some dramatic political / economic event occurs, not everyone knows about it. It's like the rumor in the late 1930s about an army coup in the Soviet Union. Everyone in the power establishment heard about it. Even some KGB officer in remote Spain. Really, if everyone else knew, were the Soviet generals that naive to think Stalin hadn't already heard. Soon the Great Purge bloodbath began and these generals disappeared in the mists of history. Which is another way of saying their last words before dying were - "Don't shoot comrades".

However, a few days ago in a semi public discussion on the internet, two money managers had a talk about why gold may go up big time. Their reason, a revaluation of the Chinese currency, the Yuan.

One of these individuals has called Guido "my good friend, that's smart". Well Guido emailed him with the question pointing out that a revaluation of the Yuan would cause large losses for the trillions of dollars in US Treasuries the Chinese government  owns. His mystical reply was "Growing Pains" . <  Which sounds like he's been reading too much of The Tao > He also seemed to imply later that he was buying gold today, whether the gold stocks, bullion, etc., he did not elaborate.

Well, based on my limited contact with Chinese business people from China, Guido is a trifle sceptical. One time in a business meeting with a Chinese family, I had pointed out to them certain tax ramifications of their transactions. They went back and forth chatting excitedly about this in Chinese, and did not appear to be in tranquil harmony. Fortunately for Guido a westernized family member showed up. After talking to me, she understood and explained to them what was going on. A quite heated discussion  ensued. Then she suddenly stood and threw up her arms  in the universal expression of "I give up", and left the room. Silence ensued for some minutes. Then they all quietly agreed with me.

What am I getting at? Simple. I find it hard to believe the Chinese government would cavalierly take such losses by suddenly revaluing the Yuan. I am sure there have been some heated  discussions about this at Zhongnanhai.  Perhaps in revaluing, it is the idea of a short term loss, for a larger long term gain. There are many bright, farsighted  individuals in the Chinese government and Communist Party who might be thinking this way. Just look at the recent economic policy decisions  for confirmation.

However, I just can't see them politically doing this. Just remember someone there made the decision to buy all those T bonds. Who  are they going to blame for such losses < or once again "Don't shoot comrades". > Also China has indicated they will purchase the first IMF issue of SDR bonds. I forget how much this is, or even if it might be the entire amount. Isn't this a better way to get rid of those T Bonds and not even have a loss. Trade them for IMF SDR  bonds.

Just remember China's policy so far regarding Yuan revaluation has been slow and steady.

"Sitting quietly, doing nothing, spring comes and the grass grows by itself" - Zen koan.