Gold is “Insurance” When Banks Fail: Farber

Release Date: 
Friday, July 31, 2015

Gold and Silver Prices
Gold held onto gains from earlier in the week to close higher driven by foreign currency weakness and renewed views the Federal Reserve may delay the long anticipated interest rate hike.

“Gold futures marched higher on Friday as the dollar lost ground to foreign currencies, burnishing the metal’s allure to foreign buyers… A report released Friday showed U.S. wage increases remain moribund and fanned hopes that the Fed officials could delay raising interest rates till the very end of 2015, giving gold prices a lift. While the U.S. central bank is widely expected to raise rates this year, investors have been debating whether the move will come in September or December.” (“Gold Prices Rise on Weak Dollar, Fed Delay Hopes,” WSJ, 7/31/15.)

Gold finished the week down $4.30, closing at $1,096.20. Silver prices closed the week at $14.89, up $0.05.

Gold is “Insurance” When Banks Fail: Farber
Marc Faber, editor and publisher of “The Gloom, Boom and Doom,” told attendees at the annual Financial Analysts Seminar that he believes gold is critical insurance against a banking system failure.

“Marc Faber railed against central bank intervention around the globe and said he likes cash now because it ‘gives you flexibility to buy assets’ when bubbles pop…

“Falling interest rates driven by central bank intervention have not improved economic conditions, he said. Instead, median household income in the U.S. has fallen, income inequality has exploded and the working and middle classes are struggling in terms of real wages, he added…

“And of course, given his bearish stance, Mr. Faber recommended holding gold in a portfolio — his recommended allocation is 25%. ‘Gold is insurance if the banking system fails,” he said. “As an investor I’d like to own something outside the banking system, and that includes real estate, art and gold.’” (“Faber likes cash, says real estate and emerging markets equities to outperform,” Pensions&Investments, 7/23/15.)

Gold is a “Must Have”: Societe Generale Economist
Economist and Societe Generale Global Strategist Albert Edwards told investors that gold is necessary for the coming economic crash.

“Societe Generale's Albert Edwards is a bit of a bear, to put it mildly. One asset he absolutely loves, all the time, is gold. So you might think he'd be a little down, given the precious metal's recent tumble in value. But Edwards is sticking firmly to his guns in his latest email— gold is a great investment for the coming crash (it's always just around the corner)…

“’Many clients ask me about gold. I still like gold despite it being sucked into the general commodity malaise. As Marc Faber said at our January conference, if he could short central banks directly he would do so, but gold is the next best thing… I have not one scintilla of doubt that the western central banks have set us up for an even bigger version of the 2008 Great Financial Crisis/Recession - but this time rock bottom interest rates and large fiscal deficits will mean only one thing; QE will be stepped up to such a pace that you will hear the roar of the printing presses from Mars. Gold is a must-have holding in that world.’” (“Albert Edwards: Gold is a ‘must-have’,” Business Insider, 7/30/15.)

WGC- Gold’s Unique Demand Drivers
In its July Market Commentary, the World Gold Council discussed gold’s unique gold drivers which investors should consider when diversifying their portfolios.

  • Gold is different from commodities. Its demand drivers are diverse and it has low correlations with commodities and other assets classes.
  • China’s gold demand remains in good health. Demand may have eased since the highs of 2013, but its growth trend is intact. Q1 2015 was the fourth best quarter on record and the People’s Bank of China has increased its gold reserves by 57% since 2009.
  • Headwinds such as the strong dollar and an expectation of US rate rises are probably overstated. It would be surprising if expectations of a US rate rise were not already factored into the gold price. And despite the US dollar index rising by 12.5% in 2014, the US dollar gold price was flat…

“Gold is unique in the diversity of its demand drivers. Gold is used in: electronics and cutting-edge technology; in jewellery, as a luxury good and of cultural and symbolic value; and as money and an insurance asset. These drivers of demand respond differently to different economic conditions. Heightened systemic risk typically boosts gold’s role as an insurance asset. Economic growth boosts jewellery demand. This makes if far more than a simple commodity. Gold demand in many key countries, including China, is not directly related to industrial consumption which drives demand for other commodities…

“The investment case for gold remains intact... Crucially, the long-term investment case for gold is not based on short-term price movements. Gold plays a more important role in a portfolio. Its low correlation with many other … makes it a good investment to diversify a portfolio… Although vitally important for investors, it is often overlooked by many commentators. And our analysis shows that this holds true even in periods when the dollar strengthens.” (“Market Commentary,” WGC, 7/23/15.)

Gold Is About Value: Bloomberg
Bloomberg discussed asset manager Tim Price’s commitment to gold as a valuable portfolio diversifier.

“The price of gold has fallen by almost half since it reached nearly $2,000 per ounce four years ago -- that was a six fold increase from 1999. In the past year alone, the precious metal has dropped more than 15 percent. But there's good reason that Tim Price, who owns the yellow stuff on behalf of the clients at PFP Asset Management in London, couldn't care less…

“Here's how Price at PFP explains his affinity with gold: ‘We ourselves regard gold as a monetary metal, an alternative currency and a store of value – over a period perhaps best described as ‘the medium term.’ It is not an investment but a conscious decision to refrain from investing. Gold, in other words, is the part of the portfolio that isn’t “in the market,” so to speak.’

“In an investment world where asset prices have more to do with central bank manipulations than the underlying economy, gold has a role to play. Its movements may be unpredictable, but at least its value appears to move freely depending on the whims of its buyers and sellers, rather than on the interventions of policy makers…

“For gold, the worst might not be over…But to someone who appreciates the role that gold bullion, bars and coins can play in an investment portfolio, that shouldn't matter.” (“True Gold Bugs Care About Value, Not Price,” Bloomberg, 7/29/15.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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