Thinker, Trader, Holder. Why?

By Grant Williams

August 18, 2014











“A desk is a dangerous place from which to view the world.”





“By repetition, each lie becomes an irreversible fact upon which other lies are constructed.”





“Look... we’re getting to be old men, and we’ve spent our lives looking for the weaknesses in one another’s systems. I can see through Eastern values just as you can see through our Western ones. Both of us, I am sure, have experienced ad nauseam the technical satisfactions of this wretched war....”




“People like you should be stopped, Mr. Woodrow,” she mused aloud, with a puzzled shake of her wise head. “You think you’re solving the world’s problems, but actually you’re the problem.”


Sometimes, just sometimes, you need to stop for a second, take a step back, and reconsider the simplest pieces of any puzzle.

Smiley.psd


David John Moore Cornwall was a real-life spy. A spook. An agent. He worked for Britain’s MI5 and, later, MI6 intelligence services.

Whilst there, Cornwall began a little hobby that, in today’s world, would be unthinkable for a serving intelligence officer: writing novels about the secret world in which he lived and worked.

He chose a nom de plume with a certain je ne sais quoi: John le Carré. The hero of le Carré’s first two novels, Call for the Dead and A Murder of Quality, was George Smiley, a somewhat ordinary spy who grew up in a middle class family and attended an antiquated Oxford college of no real distinction but who, apparently, had “the cunning of Satan and the conscience of a virgin.”

Smiley was everything other spies of the timefictional ones, at leastweren’t:

Warsaw%20Pact%20Logo.psd

(Wikipedia): The spy novel writing of John le Carré stands in contrast to the physical action and moral certainty of the James Bond thriller established by Ian Fleming in the mid 1950s; the le Carré Cold War features unheroic political functionaries aware of the moral ambiguity of their work, and engaged in psychological more than physical drama. They experience little of the violence typically encountered in action thrillers, and have very little recourse to gadgets. Much of the conflict is internal, rather than external and visible.

Unlike the moral certainty of Fleming’s British Secret Service adventures, le Carré’s Circus spy stories are morally complex. They emphasise the fallibility of Western democracy and of the secret services protecting it, often implying the possibility of East-West moral equivalence...

In 1979, the BBC adapted what is perhaps le Carré’s most famous novel for television, casting the great Alec Guinness as Smiley in a seven-part miniseries that changed the face of television.

The series, Tinker, Tailor, Soldier, Spy, was a smash hit in a time before box sets and gratuitous action scenes; and despite its measured, almost glacial pace, millions tuned in each week to watch le Carré’s masterpiece of cross and double-cross unfold before their eyes.
The fictional Smiley operated during the very real Cold War between NATO and signatories to the Warsaw Treaty Organization of Friendship, Cooperation, and Mutual Assistance. (Those communist countries LOVED a good, long title. We in the West called it the Warsaw Pact, and it essentially included the Soviet Union, Bulgaria, Czechoslovakia, Yugoslavia, East Germany, Hungary, and Poland. You know, all the powerhouses.)

Looking back on it now, the Cold War was more Ali vs. Cooperman than Batman vs. Superman; but at the time, the world lived in fear of a cataclysmic resolution to the conflict. It seems like a lifetime ago; but those years between 1946 and 1991, when communism finally gave up the ghost, were fraught with fears over a rogue USSR.

Throughout the entire episode, the price of gold — the ultimate barometer of fearperformed as one would have expected it to once Richard Nixon removed the shackles on August 15, 1971, of course.


2395.png 


Fear of conflagrations along the borders of the Soviet Union led to consistent buying of gold year after year and decade after decade. Yes, there were flare-ups, during which gold saw large spikes; but as “immediatedangers eased, so did the priceexactly as one would expect.

To be fair, it wasn’t all about “those darn Russkies.” No. The gold price was certainly helped higher by an irritating inflation problem (as you can clearly see from the chart on the previous page). Once Nixon closed that damn window, gold wasted no time in playing catch-up and responding to inflationary pressure as well as to perceived Cold War threats; but either way, once the downward pressure of a fixed price was removed, gold exploded higherrising 82% in the first 12 months and 419% in the space of 4 years.

There are a couple of interesting points to make about the action of the gold price during those darkest of postwar days (points I’ve made before, but will expand upon this week).

Let’s begin with Asia.

During the 1980s and 1990s, Asian central bank reserves (particularly gold reserves) were nothing to write home about.

Thanks to the IMF and the World Bank, we can see exactly what they were:



2410.png 


As you can see, the huge run-up in the gold price during the 1970s occurred against a highly inflationary backdrop and the ongoing Cold War; but, crucially, WITHOUT THE PARTICIPATION OF ASIAN CENTRAL BANKS. (The IFCpart of the World BankclassifiesEast Asia & The Pacific” as China, Indonesia, Japan, Laos, Mongolia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, as well as the Pacific Islands).



2425.png 


If we switch our focus to those same countries’ total reserves, however, a completely different story emerges. From the mid-1990s onwards, total currency reserves soared from $300 billion in 1994 to $5.8 trillion by the end of 2013.

That relentless climb has given Asian nations two things they didn’t have the last time we saw gold being chased higher by the terror of surging inflation and the spectre of a large-scale conflict between opposing blocs: extraordinary purchasing power and the need to diversify their massive holdings of US dollars.

If we throw India into the picture (India is classified as part of South Asia by the IFC/World Bank, along with Bangladesh, Bhutan, the Maldives, Nepal, and Sri Lankacountries we will leave out of this discussion for now), we can see a microcosm of that build-up in purchasing power laid out very clearly indeed:


2437.png 


Indian reserves doubled between 2008 and 2009, and by 2012 they had tripled to almost $300 billion.

Why is India so important on its own? Well, for one very good reason:



2450.png 


Yes, as anybody who follows the space knows only too well, Indians love their physical gold; and, unlike their counterparts in the West, when they have money to save, they have no hang-ups about swapping cash for hard yellow lumps of metal. Until February of this year, they were the largest buyers of gold in the world. By a long, long way. Now, however, the Chinese have overtaken them:

(WSJ): Gold’s wild ride has shaken investors. But in China, buyers just keep stepping up to the plate.

Chinese demand for gold bars, coins and jewelry soared by 32% to record levels in 2013, even as the price of gold slumped 28%.

The surge in buying saw China overtake India as the world’s top consumer of physical gold, importing 1,066 metric tons of the metal to India’s 975 metric tons in 2013, according to new data from the World Gold Council. (A metric ton is equal to 2,204.6 pounds.)

When prices drop, there’ll always be buyers,” said Jiang Shu, senior gold analyst at Industrial Bank in Shanghai.

In India, consumption increased by 13% but further growth was curbed by import restrictions aimed at narrowing the country’s current-account deficit. The council estimates around 200 metric tons was smuggled into the country.

China’s lead over India as the world’s top importer is likely to be sustained, said Marcus Grubb, the council’s managing director of investment strategy.

China is 10 years behind India in terms of deregulation and growth of demand,” Mr. Grubb said. Given last year was such a strong year, it will be hard to equal that again in 2014, [but] the stock of gold in China is less than half of that in India, so we think there’s plenty more room to grow.”

But — and I’ve talked about this before it’s the metal they want to own. Period. Not futures. Metal.

Oh... and not ETFs, either.

In 1966, the Central Fund of Canada listed the world’s first exchange-tradeable gold product (a closed-end fund) on the Toronto Stock Exchange, which amended its articles of incorporation in 1983 to allow investors to “directlyown gold and silver bullion through an ETP; but the first gold-backed ETF began trading in Australia in March, 2003. A decade on, there was an estimated $132 billion invested in gold ETPs around the globe, with notional holdings of well over 2,500 tonnes.

Again, back in the 1970s there was no market for gold proxies like ETFs. There was therefore less demand overall, because owning gold meant... well... owning gold. And physical ownership added one other important dynamic: selling gold wasn’t something you did just because the price fell a percent or two.

That behaviour has hardly applied during corrections in the recent bull market in gold:



2466.png 


As you can see, in 2013, outflows from the gold-backed–ETF universe were greater than the cumulative inflows from the previous three years. That simply couldn’t have happened in the last big gold bull market.

Selling gold (or something representing itself to be as good as gold), just like buying it, has become too damn easy. But if we go back to that piece from the Wall Street Journal that discusses China’s taking over the top rung on the ladder of gold-buying nations, one key sentence stands out:

When prices drop, there’ll always be buyers,” said Jiang Shu, senior gold analyst at Industrial Bank in Shanghai.

That’s very much the view of Asian investors and analysts. The lower the price, the greater the demand; and that fact was most certainly in evidence in 2012’s rout. Their opinion is based on an understanding of gold’s place in the hearts and minds of people on this side of the globean understanding that is lost on many of their Western peers, who have more of a trading bias.

But here’s where things get a little hard to reconcile.

On one side of the gold ledger we have massively increased investment demand, which admittedly is somewhat flighty, as a lot of it is due to traders moving in and out of gold in order to make a buck or two

But, as the massive increase in gold held by ETFs demonstrates, such trading is most definitely an addition to the demand side of the equation. On the demand side of the ledger we also have hugely increased currency reserves at the central banks of nations with a solid disposition towards owning physical gold nations that, when the price goes down, buy it hand over fist.

On the supply side things get even more interesting.

In its just-released Gold Demand Trendsreport for Q2 2014, the World Gold Council had the following to say about supply:

(WGC): During the second quarter, 98.2 additional tonnes of gold were supplied to the market compared with Q2 2013. This 10% increase was almost solely due to growth in mine supply; recycling was little changed. Year-to-date, supply is up 5% as the impact of fresh hedging and mine production growth outweighed an 8% decline in recycling activity.

Mine production increased by 4% for a second consecutive quarter, although 2014 is likely to be the peak. Producers have, over recent quarters, implemented a range of operational measures to manage costs and improve efficiency. This trend continued through Q2, but we expect this impact to tail off throughout the remainder of 2014 as the scope for producers to implement further measures recedes.

Mine production over the year-to-date has benefited significantly from positive base effects in the supply pipeline. A number of new operations came on stream over the past year or two, notably in Canada and the Dominican Republic. Incremental growth generated by the ramp up in production at these projects has had a considerable impact on total supply. However, as these operations mature, year-on-year growth will decelerate as the base periods drop out of the comparison, further exaggerating the slowdown in supply in the second half of the year.

So record supply, but still a miserly increase YoY of just 4%, which is expected to be the peak as the rate of increase reverts to its more customary 2.5% in the coming years and recycled gold (i.e. melted-down jewelry, etc.) continues to decline.


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But there’s one more vital piece of this puzzle that we need to throw into the mix before we try to reach any conclusions. And that, of course, is the actions of our old friends the central banks.

Take a look at the chart below:


2500.png 


Notice anything strange?

After the London Gold Pool collapsed in March 1968 and the metal was finally allowed to find its own market price (stop sniggering at the back), central banks slowly built up their reserves again before beginning to sell.

And continuing to sell.

From the end of Q2 1974, central banks sold gold bullion into the market remorselessly as the price soared. They represented by far the biggest supply to the market during this time; and while it makes sense to steadily sell something into a rising market, in times of escalating tensions the normal response is to buy and hoard gold. Selling it? Well, that would just help depress the price, surely?

One has to wonder what price gold might have reached had the central banks not been so magnanimous as to reduce their holdings during that period.

Anyway, reduce them they did right up until the fall of communism and the end of the Cold War.

Then once the Cold War was over they sold even harder.

With no further threat from those darn commies, central banks were finally able to sell could step up the pace at which they sold their gold. Between December 1991 and September 1999, central bank gold holdings fell 6% — or roughly 68 million ounces that’s roughly 1,900 tonnes.

Then, on September 26, 1999, Österreichische Nationalbank (Austria), Banca d’Italia (Italy), Banque de France (duh), Banco de Portugal (easy), Schweizerische Nationalbank (Switzerland), Banque Nationale de Belgique (Belgium), Banque Centrale du Luxembourg (no clues), Deutsche Bundesbank (remember them?), Banco de España (that’d be Spain), Bank of England (...), Suomen Pankki (tough one... clue: sharks have them), De Nederlandsche Bank (Holland and the Netherlands are the same country, apparently), Central Bank of Ireland, Sveriges Riksbank (clue: flat-pack furniture), and the European Central Bank all signed the Washington Agreement on Gold.

This agreement created a cartel of central banks that controlled the majority of the gold marketlimitedgold sales to 400 tonnes a year amongst the signatories and was intended (so they said) to “ease pressure” on the gold market after Gordon Brown’s ridiculously suspicious or, at best, childishly naive brilliantly conceived announcement of upcoming sales of the Bank of England’s gold, which pushed the price to generational lows.

In fairness, you have to admire the scheme:

First, get one of your number do something so stupid that most people would believe it could only be an idiotic mistake. Check.

Second, get a bunch of your number together to sign an agreement that wouldlimitsales of gold so as to make it look as though you were concerned about a falling price. Check.

Third, enshrine in that document an annual limit far above the normal pace of sales. Check.

Fourth, sell hell for leather. Check.



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(The above chart represents ALL reported central bank activitynot just that of the signatories to the Washington Agreements, which explains the periods where sales exceeded the agreed limit.)

Call me old-fashioned if you will, but I don’t see too many years prior to the signing of the first Washington Agreement when those kindly central banks’limitinggold sales to 400 tonnes would have made a difference, do you? They sure picked up the pace once it was signed, though...

Then, in 2009, after the GFC had scared the world half to death (Remember that? When the world was going to end and equity markets halved in a matter of a few months? No? Google it.), central banks — the largest source of supply to the marketperformed a graceless volte-face and began buying. En masse.

Notably, the major Western central banks didn’t take part in the buying spree, as they already had a sizeable percentage of their reserves in gold. No. The buyers were the Eastern and Middle Eastern central banks countries like, oh, Turkey for instance, which, in December 2011 made a rather stunning announcement:

(WSJ): Turkey lifted its gold reserves by a hefty 1.328 million troy ounces, or 30%, last month as central banks around the world maintained their positions as net buyers of the precious metal.

According to data from the International Monetary Fund, the Turkish central bank increased its gold reserves to 5.758 million ounces in November, from 4.429 million ounces the month prior. This followed a rise of 697,000 ounces in October, the latest IMF figures show....

Prior to the purchases, Turkey had the 30th-largest official holding of gold in the world, at around 7% of its foreign reserves, according to the World Gold Council, an industry body. It is now likely to have the 22nd-largest official holdings following the additions.

Turkey’s 5.758 million ounces equates to about 163 tonnes.

That was December 2011.

See if you can spot something interesting in this table (which comes to you courtesy of the World Gold Council, and all numbers are as of March 2014):


Rank
Country/Organization
Gold Holdings (tonnes)
Gold’s Share of Reserves
1
United States
8,133.5
72%
2
Germany
3,384.2
68%
3
IMF
2,814.0
N.A.
4
Italy
2,451.8
67%
5
France
2,435.4
66%
6
Russia
1,094.0
9%
7
China
1,054.1
1%
8
Switzerland
1,040
8%
9
Japan
765.2
2%
10
Netherlands
612.5
54%
11
India
557.7
8%
12
Turkey
512.9
16%
13
ECB
503.2
26.3%
14
Taiwan
423.6
4%
15
Portugal
382.5
84%
16
Venezuela
367.6
71%
17
Saudi Arabia
322.9
2%
18
United Kingdom
310.3
12%
19
Lebanon
286.8
24%
20
Spain
281.6
25%


Since that “hefty30% increase in its gold reserves waaaaay back in December 2011, Turkey has increased them again — by (what’s a good word for 10x? Hefty?) 314% — which has taken its gold reserve to a not-so-whopping 16% of total reserves.

OK... so same table, different way of looking at it:


WEST
EAST
Country
Gold Holdings
(tonnes)
Gold’s Share
of Reserves
Country
Gold Holdings
(tonnes)
Gold’s Share
of Reserves
United States
8,133.5
72%
Russia
1,094.0
9%
Germany
3,384.2
68%
China
1,054.1
1%
Italy
2,451.8
67%
Japan
765.2
2%
France
2,435.4
66%
India
557.7
8%
Switzerland
1,040
8%
Turkey
512.9
16%
Netherlands
612.5
54%
Taiwan
423.6
4%
ECB
503.2
26.3%

Portugal
382.5
84%
UK
310.3
12%
Spain
281.6
25%


Eastern central banks have been rapidly accumulating gold in order to diversify their reserves away from the US dollar (and, for that matter, the euro); and while we’ve already seen India’s hunger for the yellow metal, amongst that group nobody has been a more consistent buyer than everybody’s favourite nemesisRussia:



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Since 2006, the Central Bank of Russia has made net monthly sales of gold on only four occasions and has stood pat on 12 others. Every other month has seen an increase in their gold holdings.

Who said Russians were unpredictable and inconsistent?

Away from the East, another juggernaut has been making some moves of its own in the gold market the last couple of years, as this story from back in early 2013 demonstrates:

(Centralbanking.com): The Central Bank of Brazil added 14.7 tonnes of gold to its reserves in November, the latest in a series of purchases that has seen its gold holdings increase by 90% since September.

It now possesses 67.2 tonnes of gold, according to the latest World Gold Council (WGC) figures, an increase of 31.9 tonnes in the three-month period. At today’s London am fix that equates to $1.7 billion worth of additional gold.

Gold now comprises 1% of Brazil’s international reserves. The purchases over the last three months represent the central bank’s first significant gold trades in a decade. Brazil’s holdings have remained steady since it shed over three quarters of its gold between 1999 and 2001.


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Interesting chart. I think it’s safe to file that one under “policy change,” don’t you?

Somebody asked the WGC what they thought about Brazil’s sudden splurge in the gold market:

(CentralBanking.com): Marcus Grubb, the managing director of Investment at the WGC, attributes the purchase to the central bank diversifying away from its dollar holdings.

“I was surprised with the timing of the purchase, but not the logic behind the move. I think it mirrors what some of the other central banks in countries with surpluses and large reserves have been doing,” he said.

“The issue with those countries — in Asia and Latin America — they all now find themselves over-dependent on the dollar and the euro, and assets denominated in those currencies. They want to diversify their reserve assets away from them.”

Hmmm... then somebody asked the Brazilian Central Bank for their take on things:

A Central Bank of Brazil spokesperson was unwilling to comment on the motivation behind the gold purchases.

Of course.

Now here’s the kicker: that huge increase takes Brazil’s gold as a percentage of their total foreign reserves to (drumroll, please)... 0.8%.

So, we see some strong buying of gold on the part of Brazil, Russia, and India; but, of course, in the end any discussion on central bank gold buying has to come back to China.



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As you can see, the BRIC countries have all significantly increased gold as a percentage of their reserves in recent years — with Russia’s being the most consistent of the four — but after almost five years of deafening silence we can only hazard a guess at what the PBoC is doing.

Why only guess? Well, because the Chinese don’t want us to know what they’re doing; and handily for them, the rest of the world is willing to play along, as an expert recently pointed out in the International Business Times:

(IBT): “There’s a concerted effort to diversify to some extent away from the U.S. bond market, U.S. dollars, and buy hard assets like gold, China being the leader,” [Scott] Carter [CEO of LearCapital] told IBTimes.

So far, so good, Mr. Carter...

“With China, they want to obtain enough gold to back their currency,” he continued.

I’m with you, buddy. All the way...

In a decade, China could have 6,000 to 8,000 tons of gold backing the Chinese yuan, which could be a “game-changer” in global markets in terms of reserve and dominant currencies, he said.

Ah... and you were doing SO well.

Mr. Carter kind of half got the point, in that China’s having 6,000 to 8,000 tonnes and backing its currency with it would be a gamechanger; but, like so many others, he bases his assumptions on playing along with the Chinese reluctance to disclose the true amount of gold held in the vaults of the PBoC.

If you really want to understand what the reality might very well be, then from time to time you need to take a little leap of imagination when considering the activities of the Chinese Central Bank and open your mind to possibilities that the mainstream just refuses to entertain.

Nobody — and I mean nobody does that better than my friend Koos Jansen.

Koos watches gold data more closely than just about anybody else in the world (Nick Laird, if you’re reading this, you’ve still got Southern Hemisphere bragging rights, my friend); and, crucially, he is one of the few who is happy to ignore what he’s told by officials and do the math himself.

Now, when it comes to gold and China, that takes an incredible amount of hard work. However, when he does that work, the numbers Koos comes up with are quite extraordinary and — for my moneylikely to be far more accurate than anything coming out of the PBoC.

In a post that ANYBODY who has even a passing interest in gold should read, Koos diligently established that the Chinese had probably been a net importer since the 1990s. From there, he painstakingly joined the dots:

(Koos Jansen): [W]e don’t know how much of the gold China domestically mined prior to [the 1990s] has been exported, but after, lets say, 1995 all domestic mining did not leave the mainland. My best estimate of how much gold was being held among the Chinese population in 1995 is 2500 tonnes, according to Albert Cheng from the World Gold Council (page 55). Starting from that year I will try to make a conservative estimate on how much gold the Chinese have been accumulating.

According to the PBOC their official reserves in 1995 accounted for 394 tonnes, Chinese mines produced 108 tonnes that year; our starting point is 3002 tonnes (2500 + 394 + 108) in 1995. Subsequently I added yearly domestic mining, cumulative, as the Chinese didn’t net export any gold since that year. In 2001 The PBOC announced their official reserves had increased to 500 tonnes and in 2003 they announced having 600 tonnes. Because the gold market wasn’t fully liberalized in those years, I have subtracted these gains from cumulative domestic mining. Just to be on the conservative side, also because I have zero trade data from 1995-2001.

The official subsequent update to 1054 tonnes by the PBOC was in 2009, when the gold market was fully liberalized. This gain I didn’t subtract from cumulative domestic mining, as I believe this was imported monetary gold. The increase in PBOC holdings from here on is pure guessing, though I feel comfortable raising their holdings to 3500 tonnes in 2013.

Import I have calculated using Hong Kong net exports to the mainland (my data begins in 2001), net gold imports numbers disclosed by Chinese gold reports (2007-2011) and analysing SGE withdrawals (2007-2013), using the equation:

mine + scrap + import = SGE withdrawals

import = SGE withdrawals — scrap — mine

The end result is [the chart below].

The chart ... I think is conservative as it excludes hidden demand on which I have no hard numbers (yet):

- Mainland tourist buying jewelry in Hong Kong and storing it locally or bringing it home.

- Potential gold smuggling via tunnels from Hong Kong into the mainland.

- Undeclared gold import by affluent Chinese circumventing all authorities (customs, SGE).

Taking this into account, it’s safe to say there is now more than 14,000 metric tonnes of gold in China mainland. Divided by 1.3 billion people that’s 10.7 grams of gold per capita.

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(Please note that I have updated this chart to include Koos’ latest numbers, as the original ones in the article didn’t yet include the numbers for 2014.)

If you care about gold and you’re not following Koos, then you should be. You can do so at his website by clicking HERE or on Twitter by clicking @KoosJansen.

Now, stop for a second and just imagine what would happen if the world-at-large didn’t wait to have numbers like Koos’ officially confirmed but instead made the kinds of thoroughly vetted assumptions that Koos does after sifting diligently through the data.

Back in the day, it used to be called research.

If the PBoC’s holding 6,000 to 8,000 tonnes would be a gamechanger,” what effect does would their holding nearly 15,000 tonnes have, I wonder?

I wonder.

Before we finish this week’s somewhat lengthy missive (though, in fairness, there has been a lot of real estate devoted to charts), there are a couple more points worth pondering.

Firstly, we need to take a look at what the central banks as a group have done in the face of panic in recent years. When we do, we see that they may not always have things quite as securely under control” as their minutes and press conferenceslittered with explanations of how everything is “meeting expectations” — would have you believe.

The chart below is a close-up of the period from January 2009 to July 2014:


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Seems to me that, when 2008 came out of the clear blue sky and blindsided every central banker in the world (the situation was contained,” I believe they said...), they panicked just like everybody else; and when they did, where did they run? Yup. To gold.

When QE1 ended and equity markets fell out of bed once again, guess what? Yup. Another sudden panicky-looking dash into the ultimate safe-haven asset — our old friend gold.

In fairness to this group of geniuses, they at least got the joke after that and bought steadily for almost three years, though, as we’ve seen, some of them bought harder than others.

Now we stand on the brink of another possible war between NATO and Russia as tensions over Ukraine ratchet ever higher.

We’ve already seen the effect the last threat had on gold, so how do things stack up this time around?

Well, funnily enough, for once this time really is different; and the New Cold War is, as you can see from the chart below, apparently not even remotely troubling. In fact, gold is trading below where it was when the Russians first dipped their toes in Ukraine to test the water:


2668.png 


Curious.

So when it comes to gold, there are the thinkers, like Koos; there are the traders, like the millions day-trading GLD for a penny here and there; and then there are the holders.

The question for all of them is the same: why?

Traders of gold don’t want anything to do with physical gold. They are happy trading pieces of paperscrapping amongst each other for pennies (and in some cases making a lot of them), but the “gold” they buy and sell could just as easily be Microsoft shares or an ETF that tracks lumber. It’s all about the price not the ownership.

Many investors who claim to “owngold as an insurance policy do so through the ownership of ETFs such as GLD. That’s just not the same as owning metal, I’m afraid. Doing that, you’re simply one of the traders. You’re NOT a holder.

Individuals (and institutions) who buy physical gold and hold it, unencumbered, outside the banking system are true holders. They aren’t about to alter their position in any meaningful way just because the price moves a few percent against them (or, for that matter, for them). They own gold as an insurance policy, and until the reason for owning it is proven wrong, they hold onto it.

That just leaves the central banks.

One could make the case that, given their consistent selling over a 40-year period, they are anything but holders. One could also say that, given the sudden about-face they made in 2009, they are nothing but traders (though trading far bigger trendlines than most).

But the simple truth is that, just like the investing public, they too are splitthough not into traders and holders but rather, it would seem, into holders and buyers.

Ask yourself these four questions:

The last time the world faced a meaningful threat of a large-scale conflict between East and West, the gold price soared. This time it hasn’t moved. Why?

With gold consistently pouring into Eastern Central Bank vaults in exchange for dollars, what happens if there is another sudden panic of some sort and investors (including central banks) suddenly decide to stampede into gold en masse like they did in 2009?

Why are the most rapacious buyers of physical gold a group of countries that last time we saw an exponential rise in the gold price had no meaningful currency reserves but that now amongst them own a staggering 46% of total global reserves?

If you had the power to create money out of thin air as, for example, the PBoC can, can you think of a reason why you might want to convert as much of it into gold as you possibly could?

Just like George Smiley, if you can come up with plausible answers to these questions, you might just be able to figure out the ending to a tale of intrigue that has captivated millions around the globe.

I know how I think the story ends.