As the French strikes took hold a few weeks back, we watched as locals rushed to the nearest filling stations – determined to stockpile petrol in the belief they were about to be cut off.
People were at the filling stations with cars, jerry cans, bottles; anything they could get hold of to carry some fuel. For days the politicians and oil companies had been promising that there were was enough petrol to go around. But nobody listened.
It didn’t take long for the fuel to run out. Bags appeared over the pumps announcing ‘hors service’. And a few hoarding locals had created a supply problem where there wasn’t one before.
Now, it struck me over the weekend that something similar is happening in the gold market. Only this situation is set to carry on for a long, long time.
I want to look at the gold market from a ‘hoarding’ perspective. Maybe it can explain why the market keeps on hitting new highs – and why it may keep doing so right up till 2015.
What’s bringing on the gold hoarding
Sceptics are hoarding gold, not because of supply issues – like the French fuel hiccup – and not because they feel they need gold for their daily existence. This is fuelled by a fear for the monetary system – fear for all that carefully-saved financial wealth. And historically, the best way to insure against financial meltdown is to get hold of some gold.
But there’s a problem.
The gold market is pretty liquid and trades practically every hour of the day, but in reality it’s a small market. Only about 160,000 tonnes have ever been mined. This may sound like a lot, but to put it into perspective, it’s no more than a large cube with 20-metre sides. Bear in mind that’s everything: the jewellery adorning the beautiful people; the stockpiles in Central and commercial banks; every Arabian gold tap; and all the gold coins squirrelled away by us cranks.
Suddenly, it doesn’t sound like so much. So when savers start to hoard, the price moves up pretty quickly. In fact, it keeps moving up until people decide the dangers have passed.
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The developing world is lapping it up
The International Monetary Fund (IMF) had about 400 tonnes of gold in early 2009. But it has been selling down its stash. It’s using gold to buy the paper cash that Eastern banks don’t want anymore. And this has been working fine, as long as the IMF wants cash to ‘bail out’ certain feckless nations.
But now it’s only got about 40 tonnes left. And if it carries on selling at the same pace, it’ll be out of stock by the end of the year.
Let’s not forget: this is no industrial metal. It’s not something that’s required for developing markets to develop. This is a matter of Eastern central banks hoarding.
And they aren’t the only ones. From the hedge fund managers like John Paulson (who made billions shorting sub-prime) and George Soros, to the likes of you (are you in yet?) and me, this is a story of building secret stash-piles.
So of all of us that have been buying, who’s going to step up and start selling once the IMF stops feeding the market? When will the fear over our paper currencies dissipate and bring out all those Krugerrands and gold sovereigns tucked away under the floorboards?
From a ‘hoarding’ perspective, serious selling won’t start until the threats to the financial system have abated. And according to Goldman Sachs, quantitative easing (QE) will continue until 2015. This builds the case for a long bull run.
As the gold market is seen as a global flight to the safety, it’s little wonder that the sceptical hoarders are getting stuck in first. Like petrol in France recently, there simply won’t be enough of the stuff to go round – as is usually the case, you should try to ignore what our esteemed leaders tell you.
Where to next?
If Goldman’s is right (and on this I reckon it’s bang on), then we could be talking about years of disruption in the money markets as central bankers carry on fixing, fiddling and meddling.
The central banks that have been selling gold look like they’re nearly done. The hoarders that got in early are sitting pretty. Now we could start seeing the ‘masses’ head into the market as they see the QE dam start to crack up.
I’ll be surprised if this bull market finishes any time soon. This is a long game.
If you’re looking to play gold, you’ve got several choices. From gold miners to exchange traded funds (ETFs) (funds traded on the stock market) and spread betting, there’s no shortage of routes into the gold market.
For my ideas on spread-betting gold, see: How to play the next phase of gold’s bull market .
• This article was first published on 8 November in the free investment email The Right side. Sign up to The Right Side here.
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