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Many people seem to want physical gold, in hand [ClearOnMoney]
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Many people seem to want physical gold, in hand

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Commentary

Many people seem to want physical gold, in hand

20 Nov 2009 by Jim Fickett.

aureus_with_trajan.jpg

Gold is interesting partly because it is so emotional. When economists point out the theoretical advantages of fiat currencies, or investors disparage gold for producing no return, they are ignoring something deep in the human psyche that comes from old and prevalent associations in literature and language – consider Olympic gold medals, Midas, golden anniversaries, pirate treasure, the Ark of the Covenant, and Jason and the golden fleece. Whatever the arguments for or against investing, a big part of the market psychology will always be about associations that go back millennia, and make most people feel that gold represents real wealth.

Despite the convenience and low transaction costs of gold ETFs, retail demand for physical gold has been very high all year – The US mint has had delays in delivery at least since Feb and their website now says “Production of United States Mint American Eagle Gold Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Gold Bullion Coins. Currently, all available 22-karat gold blanks are being allocated to the American Eagle Gold Bullion Coin Program, as the United States Mint is required by Public Law 99-185 to produce these coins 'in quantities sufficient to meet public demand'”.

Recent gold news was mostly about the purchase by the central bank of India, which added confirmation to the trend of governments diversifying out of dollars. But the most interesting recent comment was from John Dizard in the Financial Times of 7 Nov. He suggests that the trend toward physical possession is long-running, that it has to do with a general distrust of government interference, and that the most important recent news may have been the new tax on foreigners wishing to invest in Brazil.

From Dizard, Pointers suggest higher gold price in longer term (subscription required):

Andy Smith, a gold strategist with Bache Commodities in London, says it is not the buyers of the odd Krugerrand who are beginning to take over the buy side of the market. “It's the representatives of the Mas and Pas. The bullion bankers are being trained more on the retirement funds in the middle of nowhere and less on the hedge funds.”

This means more of the rising base of buyer interest is in the metal, rather than derivatives. Many of them apparently prefer to have their gold in vaults near where they are, Mr Smith's “middle of nowhere”, rather than in LME or COMEX warehouse receipts.

One indication of this, as he says, is the rising proportion of refiners and transport firms going to gold conferences. For example, the proportion of jewellers attending the London Bullion Market Association annual meeting has fallen from 16 per cent in 2000 to 6 per cent in 2008, while the proportion of transporters, refiners, security firms, and others involved in physical bullion movement has increased from 11 per cent to 18 per cent. …

This gradual change in investor preference is about an inchoate fear of one government or another getting between the investor and his money. …

Inflation is only one way that private assets are devalued and at some level more investors understand this.

Overall, this is very positive for gold investment. Traders holding futures contracts or ETF shares can exit the market and depress the price in milliseconds. But people who are buying American Eagles or Krugerrands and putting them in safe deposit boxes are much less likely to exit the market without warning. This means more solidity to the bull run and more time to think about an exit near the top.

The consumer price index was updated this week, and so the Historical gold price reference page is also updated. Gold is, of course, even further above its long-term average, but the conclusions have not significantly changed.

(Photo credit Mark Fickett. The coin was minted in Rome in about AD 112 and shows the emperor Trajan. The coin now resides in the Getty Villa in Malibu, CA. Click for larger image.)