What Should Investors in Gold & Silver Do Now?

Source: Julian Phillips, GoldForecaster 12/04/2009

A Change of Market - Understanding Fundamentals


We have talked about a complete change of tone and shape in the market place in the last few weeks that has altered the future of gold. It has taken 10 years for this to happen, but it is here at last.

Conditions When Gold Last Peaked

When gold was floated off from the Dollar and the U.S. refused to exchange U.S. Dollars for gold, gold was considered to be money, still. The message didn’t sink in to the public for some years. The gold price rose from $42.35 to $850 in a series of neat moves. But all Central Banks had subscribed to the U.S. inspired change in the monetary scene before it hit $100. No, they didn’t accept the Special Drawing Right of the I.M.F., but they did accept the Dollar as the sole global reserve currency when it became apparent that this was the only currency they could use to buy oil with.

First the U.S. sold gold, then the I.M.F. both sales failing to discourage investors, but the campaign was then changed to accelerated sales of gold from producers to overwhelm keen buyers, which it did successfully [through a scheme to lend producers gold ahead of new production of gold, with which they repaid the loan. Quite a time before the gold priced peaked at $850 investors became wary of buying gold shares, letting the bullion price run by itself, to the peak. Gold shares and bullion were considered very acceptable institutional investments by all ahead of this change.
Gold itself gradually went off investor’s screens and into the shadows as a barbarous relic. It took years before the world accepted the fact that central bankers, including European ones, were against gold and were following policies that undermined the gold price. Even gold shares were treated with disdain. For the next 15 years gold from around 1985 gold was sidelined.

Conditions Now

The negative perception and undercurrent of potential central bank sales militated against a rise in the gold price. This situation lasted right up until 1999 and the announcement of the “Washington Agreement." Oddly enough this was an Agreement to sell gold by European Bankers [they had not done this before] but turned the gold price around to the positive side. At the time the gold price was at $275. From there it slowly rose. What changed the scene?
It was the statement that gold was a valued reserve asset in the eyes of central banks and that the sales were limited to specific quantities. This immediately removed the perception that gold sales would continue until all central bank held gold would be sold into the ‘open market’. Supply could then be measured accurately.
It was clear that demand could now overcome supply eventually. Producers slowly realized that the days of falling gold price were over and they were vulnerable to losses, [through the scheme that accelerated gold production] if gold prices rose above the proceeds they hoped to achieve over years from their previously hedged positions. They started buying gold to cover their exposures.
But just as the market took a very long time to realize gold prices were going to go down, again the market has taken nearly 10 years to realize that gold was coming back onto investor’s screens. With the three central bank gold agreements still in front of us, the common perception still remains that central bank’s are sellers. It has taken most of this year for the market to accept that central banks have stopped selling and are now net buyers.
Institutional acceptance from central banks through Sovereign Wealth funds through the many types of funds down to individuals, is now gold’s path into the future. The implications of this for the gold price are enormous. These changes must form the foundation of our approach to gold from now on, with all other factors affecting gold subordinated to this. Right now Asia is leading the way in this appreciation.