Something very strange is going on in the gold market, and it’s happening right here in London.
According to the World Gold Council, a massive 797 tons of gold left London and headed for Switzerland in the first half of this year. To put that into perspective, that’s nearly ten times the 72 tons exported during the whole of last year!
Australian bank Macquarie says that bullion is draining out of London’s exchange-traded funds (ETFs), heading to Switzerland where it’s melted down into more manageable coins and smaller bars, before heading off to Asia.
That is remarkable. And to my mind, this is the sort of activity that signals the bottom of the latest southbound swing in gold. Large-scale changes of ownership often occur at market extremes. And it’s now worth considering what you should do about your gold holdings. I’ll tell you what I’m doing today.
Who’s dumping all this stuff?
I can almost hear the collective sigh of relief from the gold community. After a bruising two-year bear market, there has been some welcome respite recently as gold recovered from sub $1,200 to about $1,350. And that’s not to mention the miners: up over a third from June’s bottom.
OK – that’s good news for some, but the problem is, many won’t have participated in the recovery. Like I say, over 700 tons have been shipped out of London over the first half of this year. Again, to put that into perspective, Gordon Brown’s much berated gold sales between 1999 and 2002 amounted to just under 400 tons.
So, what we’ve witnessed is a massive outflow of private gold wealth, and remember, that’s just during the first half of this year!
Ultimately, the nature of gold ownership is changing. Jewellery demand in Asia is up 40% over the year. More staggeringly, gold bar and bullion demand is up 78%!
And now that the ownership of this gold has changed, I don’t think it’ll come back; at least, not in our lifetime.
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Market bottoms often signal a change
Financial prices fluctuate all the time; and over time, specific sectors move from over-valued to under-valued. And what happens at the extremes is interesting as the market tops and bottoms, it marks periods of deep despair, or irrational exuberance.
It’s almost as if you can’t have a top, or a bottom unless one load of investors throw in the towel, while another load picks up the pieces. Like I say, it’s about a change of ownership.
Take the dotcom episode. As we all know, the late ’90s saw a rush into technology stocks. Dotcom founders sold stakes of their businesses worth billions. By 2000, the change of ownership was at its height. The public piled in like never before. Then whoosh… it all collapsed.
The next big public spectacle was, of course, sub-prime. Again, the story was much the same. But what’s really fascinating is to see what recently happened as the US residential property market bottomed.
You see, before the great crisis, only about 20% of homes were bought for cash (ie, without mortgage). That is to say, the vast majority of purchases were by the lumpen masses, and many at the top of the market.
But as the market bottomed, it’s swung the other way. According to research by Goldman Sachs, 60% of housing is now purchased for cash. That’s a whopping change.
Basically, rich investors looking to diversify savings are scrambling around for bricks and mortar. On top of that, financial investors are increasing exposure through traded investments such as Reits (real-estate investment trusts). These publicly quoted funds buy portfolios of houses and rent them out, creating a dividend stream for investors.
Again, the market bottom witnessed a large-scale change in the category and sophistication of investor.
Sophisticated investors buy bullion
Talk of a great gold exodus from West to East has been ongoing for years now. At some point one has to wonder exactly how much gold is left in the West to satisfy this insatiable demand. I mean, the Indians have been importing so much, that it was exacerbating the fall of the rupee, leading the government to impose import restrictions. Now that’s a desperate move! Meanwhile, in China, the crowds are going mad for the stuff. They recognise a bargain!
The gold market is a very secretive place. Often, we don’t get to find out who’s holding what until way after the market has turned. At the moment, it’s a case of joining up the dots and trying to work it out. But then again, figures like over 700 tons disappearing in just six months doesn’t leave much room for doubt. Ownership is changing. Which leads us to consider one of two things.
Has this whole 13-year run of relatively inflated gold prices marked a market top as ownership changed from shrewd Westerners selling to the Eastern numpties? If so, we should expect gold to keep slip-sliding away.
Or, are we still in a gold bull-run, where the recent two-year pullback merely increased the rate of transfer from a dumb West to a shrewd East?
I strongly suspect the latter. And I think the intensity of the change of ownership marked a cyclical bottom for gold. My money’s on the East. Only time will tell whether I’m right. But I’m certainly looking to top up my gold investments.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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