By Bill Cara –
Although U.S. markets are closed for Thanksgiving, gold and currency trading continues elsewhere. This morning in London, which together with Toronto and New York, is the centre of world trade and finance in gold, the price of gold set a new 16-year price record of US$451.70, up +$3.10 on the day. The price will go higher, much higher, mostly for the point I will make in this article: Gold is not American.
Yesterday I explained exactly what gold bullion should mean to you, now that this particular asset class has increased liquidity through the new ETF that trades on the NYSE under the ticker symbol GLD.
Gold has always had a degree of liquidity through bullion ETFs that traded in Canada, U.K. and Australia for instance. But now that there is a bullion-backed security registered for trading by Americans, this liquidity has improved enormously.
To make my point, I wrote yesterday: “Because the short-term charts show an obvious inverse relationship between gold and the USD, everybody and their families and friends are saying/writing that gold trades like a currency. This is partly true, and my point is that maybe 90 percent of investors are going to be trapped by that belief. The fact is that gold also trades on occasion like the commodity it is. You see, like any metal there is a supply and a demand. The demand is largely related to demand for jewellery, which rises and falls depending largely on the supply of money that exists in the economy relative to the demand for it. Excessive amounts of money tends to go toward luxuries, like high-priced homes and autos and jewellery.”
Today I will explain my remark, because this point is soon going to be understood by everybody in the world, and I want TW Networkers to understand it first.
To wit: Now that there is liquidity, Gold bullion is going to be regarded primarily as a form of unallocated cash, whether that cash is U.S. Dollars, Chinese yuan, Thai baht, British pounds or whatever. Gold is not American.
GLD on the NYSE is just one form of securitization of gold bullion. Gold coins is another. Gold certificates from banks like Bank of Nova Scotia (Scotiabank) is another. Physical gold bars is another. And gold bullion ETF’s that are registered for trading in other countries, like U.K., Canada and Australia, is yet another. And, there are others.
So, with respect to gold securitization, there is no shortage of tradeable instruments in the world. But, because Americans have long dominated capital markets, and gold has been denominated in U.S. Dollars, and the trade-weighted USD has fallen to record lows, it has become a fact that the timely introduction in the U.S. of the NYSE-listed GLD ETF has become a focus point for investors, and their interest and actions of the past week have improved liquidity enormously.
In my view, trading in GLD will soon increase exponentially, and securitized gold instruments will soon replace short-term U.S. Treasury Bills as the asset class of choice for global capital owners who have unallocated cash.
When you or I have excess cash on hand, it means we are not interested in either investing or spending it, and that cash usually sits earning no, or next to no, financial return.
That mostly happens during periods of extreme greed or fear.
At other times, which are the times when international trade and currency markets are well balanced, we exercise our need to spend or invest (i.e., allocate) the cash.
Topics such as macroeconomics, currencies, and gold are exceedingly complex, so for today I want to keep the discussion to a single point, and hope you take away a message that thousands, probably hundreds of thousands, of so-called experts, do not yet understand:
Gold is simply a form of unallocated cash, which regardless of where we live and work, is a fact of life.
During extreme times, at the opposite ends of the fear and greed spectrum, like we have today, there is an excess of unallocated cash.
Typically that cash has been temporarily placed – not for an investment return, but for protection – in U.S. T-bills; however, T-bill holders have suffered a ~20 percent capital loss in the past month, and a ~33 percent capital loss in the past two months. That is not a measure of protection.
So, global investors in my view will henceforth switch increasingly to securitized gold instruments for their asset choice of holding unallocated cash.
Given that today, there is a vast amount of cash floating in the world, and a known imbalance in international trade and currency, the capital markets have reached the flash point, with the introduction of the GLD ETF, which will drive gold prices much, much higher, until capital market investors are satisfied that the macro factors are once again in balance.
Given that the U.S. Treasury has relied increasingly upon the action of foreign investors, including central bankers, of placing unallocated cash in U.S. government debt instruments, there is a strong likelihood that this cash will now go to gold.
That will mean that interest rates will soon soar. TW Networkers are urged to take action now. For months I have been warning that interest rates, and not oil prices, are the biggest concern for wealth owners. I have been urging you to avoid any investment in debt, mortgaged real estate, high-debt burdened companies, financial companies that make their profits from managing the spread between customer loan rates and money costs (because when rates rise, costs rise faster than the customers roll over their debts, etc), and so forth.
For those new readers of the Trader Wizard, you are now advised.
Source: Trader Wizard Perspective