GOLD ANALYSIS

Gold is not a commodity but the strongest currency of all

You can't value gold as a typical metal commodity - even the financial elite are beginning to recognise that its price moves more as a stable currency than as a normal commodity.

LONDON (Mineweb) - 

While gold bugs have long been aware that gold is, and always has been, a monetary metal many others in the investment community have, in the past, continued to feel otherwise and valued it accordingly as just another commodity. But this perception is changing as recent events, and price movements, have emphasised that the gold price moves are currently being dictated more by global economic and political factors than by normal commodity economics of supply and demand. Even renowned investment guru, Denis Gartman, who has a huge following in the U.S. and elsewhere, has recently come out and said, in a CNBC interview "Gold is just another currency....It is doing well in other currency terms...I am not a gold bug. I don't think the world is coming to an end, but I think everyone needs to own some gold."

Recent developments, though, have clearly emphasised gold's monetary role, with perhaps the most significant being the turnaround in Central Bank policies. These banks have become important buyers of the yellow metal over the past two years. The ongoing debate about classifying gold as a banking tier 1 asset is also an indicator of the financial elite's perhaps reluctant re-acceptance of gold as a monetary metal - or indeed as the ultimate in reserve currencies.

There is little doubt that the upwards trajectory of the gold price over the past 11 years has less to do with traditional supply/demand economics.  It rather represents a parallel decline in the value of global currencies as Central Banks around the world effectively devalue them against the gold ‘constant' through monetary easing policies - the basic problem with unbacked fiat currencies coupled with Ben Bernanke's quoted ‘printing press technology'!  As long as the U.S Fed and European, Japanese and other central banks continue with monetary easing, gold's path will likely remain higher, although not without the occasional sharp correction.  

It has been doubts about the likely longevity of the Fed's open-ended easing programme, in the light of the latest U.S. job figures, which showed a fall in official unemployment below 8%, which were seen, by many commentators as the reason behind much of Friday's $20+ fallback in dollar gold prices and the continuing weakness in early trade today.

However, a closer analysis of the labour figures shows that all may not be as it seems at first glance with the ‘rise' in employment being largely due to big increases in part-time and government employment - the latter immediately ahead of the Presidential election which, relevant or not, creates some doubts about the motives behind an increase from this source.  

Unofficial figures, such as respected economist, John Williams' extremely well regarded ShadowStats, show a hugely higher unemployment rate.  Indeed, Williams notes that the U.S. Bureau of Land Management's own broader U6 definition puts U.S unemployment at 14.7% and his own ShadowStats assessment is 22.8%.  Similarly, he reckons government inflation figures are hugely out of touch with reality at 1.7% while ShadowStats figures put it at over 9% which does seem to reflect household experience rather more accurately.  (Williams reckons that the quality of government reporting has deteriorated sharply in the past couple of decades. Reporting problems have included methodological changes to economic reporting that have pushed headline economic and inflation results out of the realm of real-world or common experience.)

Friday's and this morning's gold price dip did put a stop to what was beginning to look like an inexorable drive back towards the $1,800 gold price level last seen in late summer 2011. How temporary this reversal proves remains to be seen, but the gold bulls are nervous that the fall may have largely been due to a take-down by the big short position holders using the latest official employment figures as a lever and that there could be further falls back to around the $1750 level or lower, before the correction ends and the price consolidates again.

But overall, the gold price continues to move driven by political and economic factors rather than by traditional supply/demand fundamentals. The statistically-biased gold analysts will tell you that fundamentals remain the key, but it's not the traditional commodity fundamentals driven by industrial usage (including jewellery) versus mine and scrap supply which are driving the gold price.  The biggest demand factor nowadays is the ‘investment demand' which the statisticians assume to be that which balances the supply/demand books - and this is dependent almost entirely on the perception of gold as both a monetary asset and as financial security in a time of global economic turmoil.  The more people continue to have a lack of confidence in the future purchasing power of their own currencies, the longer gold will continue to rise regardless of the occasional blips in the upwards pattern along the way.