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Selling in Paper Market Attracts Physical Gold Buyers

by Peter A. Grant

Jan 25, AM
(from USAGOLD.com) --

Gold remains under pressure ahead of the weekend, as rosier expectations about the economy diminish the appeal of gold as a safe-haven asset. Upticks in flash manufacturing PMI, LEI and the Ifo business climate index are all suggestive of an improving economy, but headwinds still abound.

Just today, it was reported that new home sales plunged 7.3% in December, well below market expectations. With the latest data confirming that this has been the slowest recovery from a recession ever, it seems the latest euphoria might be a little overrated.

And then there is the monstrous $16.48 trillion debt overhang, that threatens to crush any nascent recovery before it has a chance to build any momentum.

Congress chose to punt on the debt this week, suspending the debt ceiling until May. As you can see from the above capture, we've already breached the statutory debt ceiling by more than $54 billion. This game of kick the can has become all to common place, as it's just far too easy to forestall real and meaningful fiscal reforms until some as yet undetermined date in the future.

In the meantime, the Fed will be obliged to persist with their über-accommodative policy stance, for the worst thing than can happen to a country whose debt is greater than their GDP is to have interest rates go up. Any notion that the Fed is going to start removing stimulus because the economy is suddenly showing a heartbeat is unfounded. The Fed has been quite adamant of late; even an improving economy is not going to warrant tighter policy.

Of course the Fed is not alone. Pretty much every major central bank is engaged in zero or near-zero interest rate policy and other forms of accommodations. Most notably this week, the BoJ succumbed to intense political pressure from the new political leader of Japan, doubling their inflation target to 2% and pledging what amounts to unlimited asset purchases as a means to attain that goal.

Even The Bank of Canada backtracked on their recent tighter policy bias, saying this week that a rate hike is "less imminent" due largely to benign inflation and indications that the economy is slowing. That was confirmed in part today by a weaker than expected December CPI print of -0.6%.

Shaun Osborne, chief currency strategist at Toronto-Dominion Bank was quoted in a Bloomberg article as saying, “Given that we’re an inflation- targeting central bank, there’s very little reason to be looking to push rates up. It kind of suggests, as they indicated, low for longer is the trend.”

Indeed, inflation targeting is all the rage these days, but in trying to push prices higher domestically, the major central banks are simultaneously trying to devalue their currencies to push the price of their exports lower on the global market. This is the essence of a currency war, where each country attempts to devalue their fiat currency relative to the others in beggar-thy-neighbor fashion.

Not surprisingly, competitive currency devaluation has been a hot topic this week at the World Economic Forum in Davos, spawning a large number of news stories on the subject. The intensifying threat of a global currency war has actually heightened interest in physical gold as it is truly the only international currency that can't be devalued by printing more.

In fact, most of the selling in gold has been attributed to paper representations of gold such as ETFs and ETPs. Physical interest on the other hand "is still very sound," according to one analyst in a Bloomberg piece this morning.

We’ve seen this play out many many times over the years: Selling in the paper market is met by strong physical interest. These lower prices are a gift from the paper market to those of you who prefer the real thing. Accept it.

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Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

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Selling in Paper Market Attracts Physical Gold Buyers