By Kevin Brekke, Editor Casey Research Switzerland
With gold making new nominal highs almost daily of late, it is important to again review why you own gold. Our tireless editors here at Casey Research have been doing just that for years, accurately mapping out where the course of policies that today’s monetary and fiscal authorities are pursuing will lead. And like the proverbial “nose on your face,” it is no surprise that gold is laying siege to the next hundred-dollar price handle as US$1,300 looks ready to enter the rear-view mirror.
I use the war metaphor not by caprice but by design. What we as investors are battling is a war against our wealth being waged by the axis of debt-based paper money zealots – central banks and the welfare statists.
Yet, the theatre of conflict has multiple fronts and shifting alliances. This week’s skirmish had the dollar in retreat, and gold planting the flag, after comments from the Federal Reserve suggesting that it is prepared to do whatever is necessary to prevent deflationary threats and economic weakness from taking hold, including additional stimulus via money printing. Another trillion dollars of policy action is not out of the question.
It seems obvious that “the great debasement” has commenced and the world’s paper currencies will undergo a series of strategic devaluations or be hammered by international currency speculators.
However, money will always seek sanctuary in a currency considered “strong” as measured by the issuing government’s history of managing its affairs. So it is fitting that, in the context of the war metaphor, the Swiss franc, from arguably the world’s most neutral state, should emerge as one of a handful of go-to currencies. And the result has put gold on the deep-discount rack, as shown in the chart.
Gold in Swiss francs is off 11.7% from its June high, closing yesterday at SF1,284.71. Gold is also off its highs in Australian dollars, yen, pounds, euros, and South African rands. Investors that followed our long-standing advice and diversified into non-dollar-denominated assets, including foreign currencies, could now be buying physical gold at a marked-down price. And we think that arbitraging currency distortions will continue to be a good speculation.
Let’s declare an armistice with the war analogy and move on to another interesting side effect of the franc’s rise. The trade report for August was released by Switzerland’s Federal Customs Administration (EZV) and showed a y-o-y rise in imports of 23.6%.
Where did this growth take place? Jewelry and gold.
The strength of the currency has spurred a strong burst of gold importing by fabricators and wholesalers. For the month, jewelry imports rose by SF760 million, meeting strong demand.
The largest component of the increased import figure was for gold ornament/scrap sourced in Vietnam. Gold scrap imports rose from SF26 million in August 2009 to SF603 million in August 2010. The combination of a high gold price and a strong franc, together with relaxed government restrictions on exporting gold, has enticed the Vietnamese to sell their trinkets, and the Swiss are eager buyers.
Scrap gold adds to the world’s supply of the metal, but its volume is volatile and unpredictable. As the gold bull market continues higher, it will further tempt sellers to unload items they see as easy money.
But at some point the mind-set of the general public will shift, and expectations of gold always going up will cause scrap sales to decline as potential sellers wait for better prices. As this behavior manifests, it will constrain the available gold supply that is already in decline.
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