Outlook for Gold; Savings and Gold Confiscation – Reuters Q&A Interview

Today’s AM fix was USD 1,548.00, EUR 1,186.30 and GBP 1,008.60 per ounce. 
Yesterday’s AM fix was USD 1,555.75, EUR 1,189.59 and GBP 1,012.20 per ounce.

Gold rose $2.50 or 0.16% yesterday to $1,561.00/oz and silver climbed to $27.84 and finished +0.07%.


Cross Currency Table – (Bloomberg)

Gold is down by 2.2% in dollar terms for the week after denied reports regarding Cyprus being forced by the EU and ECB to sell meagre gold reserves contributed to already weak sentiment.

The fact that gold sales limitations are stipulated by the ECB Gold Agreement (CBGA) was ignored by some less informed analysts. This and events in Cyprus shows how the ECB values gold and will not allow gold reserves to flow out of the EU.

The mooted Cyrus gold sale was tiny when compared to the scale of demand from large central banks such as the Bank of Russia and continuing store of value demand globally.

Continuing strong bullion demand from India, China, Asia and creditor nation central banks are positive factors that should put a floor under the market and contribute to higher prices in the coming months.

The interview took place on Tuesday, April 9th in the popular Thomson Reuters Global Markets Forum with Kirsten Donovan Deputy EMEA Editor of Thomson Reuters and was well attended by bullion industry participants, hedge funds, institutions and banks.

Kirsten Donovan, thomsonreuters.com – And as promised, GoldCore director Mark O’Byrne is here with us now, welcome Mark.

Mark O’Byrne, GoldCore.com– Good morning Kirsten and thanks for having me on.

Kirsten Donovan – Let’s start with the big question again; gold has had a bit of a rough ride of late, what’s your outlook from here, back up, or lower still?

Mark O’Byrne – Short term weakness seems possible as the short term trend is lower and sentiment is as bad as we have seen it in 10 years. However, we remain bullish in the medium and long term due to the global macro, systemic, geopolitical and monetary situation.

On the macro side, while recent economic data has been fairly good we believe that there is a real risk of recessions and double dip recessions in most industrial nations due to the very poor fiscal situation of most nations.

There has been negative data emanating from the Eurozone, UK and Japan recently and we believe that the poor jobs number in the U.S. Friday was not an aberration but rather shows that the "recovery " in the U.S. is somewhat exaggerated.

John – So a flight to safety once we get a reversal in stock markets?

Mark O’Byrne – Owen,  hard to know re flight to safety as gold is correlated with equities in short term but in medium to long term gold is inversely correlated to equities and bonds and therefore reversals should support gold in long term. This is why gold remains an NB DVSCN(diversification).


Gold in USD, Daily – (Bloomberg)

Nikolai – Hello Mark, do u see any other asset that could behave like a safe haven gold in future? And do you think that gold has reached its peak?

Mark O’Byrne – Vladmir, no crystal ball. Do not believe reached peak yet. Since 2003 have said that will reach inflation adjusted record high of 1980 at $2,400/oz and stand by that but people should buy gold as DVSN rather than speculative punt.

Jane – Hello Mark! What can you tell us about how demand for gold bars was affected by the recent financial crisis in Cyprus? Did GoldCore see much fresh buying on the back of that?

Mark O’Byrne – There have been no major additional flows into gold yet. We believe the confiscation of deposits was a watershed moment and will lead to increased demand for gold from nervous depositors across the Eurozone in the coming months.

Jane – Interesting that it doesn’t seem to have had more of an impact, considering what a boost European physical gold demand got in 2011. Why do you think it didn’t cause more buying?

Mark O’Byrne – So much uncertainty about it and think taking people a while to fully understand it and understand the ramifications of it.

The notion that this was only about Cyprus is erroneous and "bail ins" look to be EU policy as Ollie Rehn said Friday. In future when EZ banks are at risk – deposits of over €100,000 may be confiscated. This is a dangerous policy and could lead to capital flight out of already vulnerable EZ nations.

The confiscation shows again the importance of having an allocation to safe haven gold and to own physical gold and not be an unsecured creditor of a bank or brokerage.

John – Mark what are your thoughts on the QE around the world and the impact on the gold price longer term?

Mark O’Byrne – QE and ultra-loose monetary policies by central banks internationally or the printing and electronic creation of a tsunami of currencies and the debasement of currencies is bullish for gold in the long term.

Conversely it is the primary risk to gold too. Were central banks to return to positive real interest rates then gold’s bull market would end. However, see that is being unlikely, indeed impossible in the short and indeed medium term. Current loose monetary policies are set to stay for at least another year or 2 and potentially longer.

Simon – Why does everyone believe that gold is a safe store of wealth and immune to confiscation? The US did it – what would stop it from happening again?

Mark O’Byrne – Simon, the financial academic literature has shown that gold is both a hedging instrument and a safe haven. Numerous academic studies have proved gold’s importance in investment and pension portfolios – for both enhancing returns but more importantly reducing risk.

The importance of owning gold in a properly diversified portfolio has been shown in studies and academic papers by Mercer Consulting, Bruno and Chincarini, Scherer, Baur and McDermott, Lucey, Ciner and Gurdgiev and by the asset allocation specialist, Ibbotson.

Regarding confiscation…We have long acknowledged the risk of confiscation of gold. Today very few people own physical gold in the western world – less than 1% – whereas in 1933, gold was money as every dollar was backed by gold and one ounce of gold was $20. It made economic sense for the US government to order the confiscation of people’s gold in the Depression. Today, little would be benefitted by confiscating or ordering people to hand in gold.

However…There is a risk that desperate governments could confiscate large pools of stored gold especially in banks. Thus, an insolvent government or a government faced with the collapse of a large bank might be very tempted to confiscate or expropriate gold stored in that bank.


XAU/EUR Currency, Daily – (Bloomberg)

Simon – What you say may be true gold may be a store of wealth but it is not practical as in transactional terms – also gold needs in a free economy not a managed or one that is leaning / headed to socialism nor a welfare state…

Mark O’Byrne – Simon, gold is a store of wealth … recent and modern history also shows that clearly. Japanese people who own gold today are realising gold’s importance as a diversification and a hedge against currency devaluation.

The yen has fallen sharply versus gold again overnight and is down some 7% YTD.

Kirsten Donovan – What about the central banks bringing their gold home, is that an indication of a lack of trust?

Mark O’Byrne – Yes Kirsten – it shows a lack of trust in the monetary system and heightened risk aversion.

This highlights the importance of owning allocated gold in a safe depository in a safer country – we offer bullion accounts in the Perth Mint of Western Australia (AAA) and Via Mat in Zurich.

Deepak – Mark, I am from India where people are obsessed with gold…and that is even severely affecting India’s current account deficit. But people have made very steady returns on gold in the past 15 years compared to most other asset classes. What do you the govt can do to reduce this infatuation?


XAU/GDP, Daily – (Bloomberg)

Mark O’Byrne – Indian people will be seen as wise in time … much wiser than those who do not own any gold whatsoever. The India government needs to manage the economy better and rein in inflation and make the rupee a store of value that people will trust.

Deepak – Agree with you Mark. Anecdotally, last week’s gold correction has seen a rush into Indian jewellery shops. So trust Indian imports to hold up gold prices for some time!

Mark O’Byrne – I accept that it is a problem from the C/A point of view but gold is the messenger and should not be shot. Rather a healthy economy and more efficient capital markets and safer banks will gradually lead to Indian people reducing allocations to gold and trusting the rupee and other financial assets.

Kirsten Donovan – Mark, we’ve kept you longer than planned – one last from me if I may: What are your forecasts for physical demand this year? Are you expecting it to pick up?

Mark O’Byrne – We try as much as possible to stay out of the prediction game as is not knowable. Could fall marginally, could rise marginally. Last year’s fall was actually healthy as the rate of increase in global demand was not sustainable and risked sending prices even higher than they had gone – risking a bubble.

Think that central bank demand will continue, as Soros said overnight, and potentially they will increase given the huge scale of FX reserves out there and the Chinese having over $3 trillion in FX reserves alone.

Also think that Chinese demand will continue to rise. The unrealised important fact is that the people of China were banned from owning gold bullion by Chairman Mao in 1950. This prohibition continued until 2003 and it means that the per capita consumption of over 1.3 billion people is rising from a very small base.

Simon – Mark, I understand your stance that gold is a store of wealth – and as gold collapsed from $800 to $260 1980 / 1999 I’m sure everyone that held their wealth in gold took comfort in the studies.

Mark O’Byrne – Simon, U have just engaged in data mining. Why pick 1980 to 1999 rather than 1971 to 1980 or 2000 to today? Better to look at 1971 to today to get proper data to aid research and understanding and gold since 1971 has outperformed most stock indices internationally and is even close to matching returns in the S&P 500.

People from all over the world who had euro deposits in banks in Cyprus have realised gold’s importance as a diversification and a hedge against counter party and systemic risk.

Simon – Mark, a store of wealth is a store of wealth – clearly gold is subject to the same market forces as equities or currencies – and subject to violent losses in value.

Mark O’Byrne – Global diversification and an allocation to gold (5% to 10%) remains fundamentally important for savers and investors internationally and will protect from inflation and currency devaluation in the coming years.

Kirsten Donovan – Mark, we should probably let you go………….with a big thank you for staying so long and taking members’ questions.

Mark O’Byrne – Absolute pleasure Kirsten. Thanks for having me on.

NEWS
Gold losses seen limited on Cyprus bullion sale plan – Chicago Tribune

Mark O'Byrne

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