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Don’t believe gold bears

The British news magazine called The Economist has been around since the mid-1800s. Early on, it had a relatively free enterprise outlook. In recent decades, however, it has generally tilted to the mainstream of the political spectrum.  Still, I find it valuable.

Bearish gold investors are overlooking the value of gold.

Bearish gold investors are overlooking the value of gold in today’s market.

I have been a subscriber for decades because of its global coverage mostly ignored by American media. I also appreciate its occasional reports on a financial issue long before the American media cares to inform their audience. Having said that, however, that does not mean that I don’t take issue with several stories every year.

In the May 2 issue is an article title “Gold Prices Buried.” You can read it at http://www.economist.com/news/finance-and-economics/21650189-russia-buying-gold-few-others-are-buried. The coverage contains a bit of accurate information, but leaves out substantial data that would contradict the bias of the article. It also misrepresents key factors in the supply and demand for gold.

The article starts off with a generally true statement when it says “Uncertainty is supposed to lift the gold price.” The paragraph continues by pointing out that there is significant financial turmoil in the world today which should lead people to expect higher prices. Then the article points out that the current price of gold has fallen from its peak of more than $1,900 to around $1,200 today.

Next, the report includes a quote from a blog by Harry Dent asking why prices are not higher today. This article does not explain that Dent has been a super bear on gold for the past few years, where he has told his followers that the price of gold should have long since fallen to $600.

One of the huge errors in the piece comes next when it says, “The biggest pressure on the gold price comes from the expectation that interest rates in America will rise later this year.” In my judgment, U.S. interest rates are far down the list of influences on the price of gold. The largest factors are the tremendous demand for physical gold coming from China and India (which the author sort of mentions, but down plays). This demand is so strong that, by itself, it is absorbing around 100 percent of global newly mined supplies of gold. Against that demand is the massive selling of paper contracts of promises to deliver gold in the future, which I argue (on the basis of substantial documentation) is ultimately directed by the U.S. government.

Other major effects on the price of gold come from the closing of mines that cannot profitably operate at current price levels, the severe contraction in new exploration for gold mine development, the increasing volume traded on the Shanghai Gold Exchange (where contracts are fulfilled by delivery of the physical metal), the increasingly precarious value of the U.S. dollar, and the rise of China’s economy. The only one of these points sort of mentioned in this particular article is that gold mining companies may soon have to cut back operations if the price does not soon rise (actually curtailment of operations has been occurring for the past two years).

To give you a true idea of the state of the gold mining industry, consider the demand for the services of geologists.  When a potential mine site has been discovered, a geologist needs to confirm the existence of economically recoverable reserves to justify financing the costs of developing an actual mine. Up until about three years ago, geologists were in such strong demand that mining companies often had to wait one to two years before a competent geologist would be available to do the necessary testing and report.  Things are much different today. When I spoke at the Silver Summit in Spokane, Wash., last October, two geologists approached me to give me their card and ask if I had any leads on potential jobs.

The article tries to claim that gold has lost favor with investors, who supposedly now are allocating billions or trillions of dollars in purchasing Bitcoins and works of art. Give me a break. In recent years, the London Bullion Market Association reported annual average daily gold trading volume as high $45 billion. The Bitcoin and art markets aren’t even detectable blips in comparison.

The story concludes with a statement that Russia is a notable exception to declining demand as its gold reserves have tripled in quantity over the last decade. While this is positive for the gold market, the quantities involved are dwarfed by increased demand from China and India.

The Economist promotes itself as a trusted source of information. It is somewhat successful at that goal. It is supposedly a place where investors can go for unbiased information to help them in making their financial decisions. This article in the May 2 issue could have been commissioned by the U.S. government to further its efforts to suppress gold (and silver) prices. By misstatements and omissions, it does not provide good service to its audience. However, what behavior would you expect from the general public when they only hear this inaccurate side of the gold market?

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner.  He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).  

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One Response to Don’t believe gold bears

  1. VKurtB says:

    As an ardent numismatist and ANA National Volunteer who also is a formally trained Keynesian economist, there is one thing I can assure readers without fear of contradiction – if The Economisrt and Patrick Heller are at odds, it is Patrick who is badly misinformed at wrong, not The Economist. But that’s no surprise. For me, Patrick falls into that field of comparison with broken clocks. They’re right twice a day and Patrick can’t get close to that mark.

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