Wednesday, 28 December 2011

Gold: should I believe the parameters set by the experts?

This afternoon I could have bought back all my gold shares for less than I sold them on 16 December, including costs. 

Back then I sold my 28 ETF Securities Physical Gold ETFs (London Stock Exchange ticker  PHAU) for £2,821 plus the cost of trading (£11.95) which meant I got £2,809.75. I could have bought them all back for £2,794.59 - saving myself £15 or around 0.5%.

This was after the price of gold in US dollars fell nearly 3% today although it was down just 0.75% in pounds sterling (Google Chart) The ETFs - PHAU AND PHGP - seem to have had a choppier time than the spot price that could just be a technical difference between Google Finance and BullionVault's spot price chart (although spot price is not an exact science).

Physical gold ETF performance on the London Stock Exchange:

The spot price (over six hours) from BullionVault:

Meanwhile the dollar index from Bloomberg rose today

And the pound fell more than 1% against the dollar (Google Chart).

What happened today? 

I haven't spent a great deal of time trying to work this out. Apparently the movers of the gold price included an Italian bond sale that went well and less gold and silver buying in India and China (according to this from BullionVault which includes details of what's going on in the Indian market). This report from The Street mentions all of these - claiming the successful bond sales lessened the chances of more money printing in Europe as an explanation for gold's performance. 

But this piece in the FT suggested that the auction was pretty much ignored as investors worried more about banks using the European Central Bank lending facility and another Italian bond auction due tomorrow (Thursday). Compare this to before Christmas when a successful Spanish bond sale moved gold prices (Forbes on effect on stock markets, Reuters on Spanish bond sale effect on gold) Both suggested that good news for Spanish debt sale was good for gold. 

What do I believe now?

What is the story I am acting on now? It isn't a story I made up myself it came from the guys who prompted me to sell - some of them listed at the end of this article about selling my ETFs - and, as far as I can tell it goes like this: the fear around the eurozone crisis will grow and the situation will unfold like a slow motion car crash. Whatever the outcome the build-up will be a loss of confidence in the euro and the eurozone.

This will accelerate the flight to safety that we are already seeing to the US dollar. The rising dollar will force down the price of gold.

At the same time investors have seen that gold now moves up and down pretty much in line with other riskier assets like shares and commodities. Both of these factors help people like me believe that if the financial system takes another big hit gold will fall along with everything else before it recovers.

As far as I can tell this is the story I am being told and it is the reason why I sold my gold shares. The fact that I have sold all my gold suggests that I think I understand their argument and believe it and, therefore,  I am confident that I know what I am protecting myself from. 


Investors like me depend on commentators who have been staring at the controls of the financial system for a couple of decades. I can't work out if their view is too narrow, a bit like relying on the geologists who tracked the Japanese tsunami to predict that it would turn into a nuclear crisis? 

The course of events appear very neatly foretold and the actions required of people like me are not complicated. 

Essentially the investment plan for gold investors who believe this story is to hold very little gold up to the point of disaster... a eurozone crisis... and not to buy until gold has suffered the worst of sure to occur losses but before the next catalyst for buying... like a fall in the value of the dollar, QE.

But all of this excludes not only other interpretations of what may be going on in the financial system but also significant events beyond these boundaries. How can leftfield events and possibilities be left out, such as the US government taking the advice of people like Don Coxe who says it should buy gold for $2000 and sell for $2,200 with the aim of capping its price?

I have swallowed the parameters set by gold experts which may not be such a big problem but I don't think I had realised that before. I had accepted their goal posts as the only ones. 

May be I should remember that I own gold for protection, not specualtion, but does that mean I should buy back some more now? And does my holding of BlackRock Gold and General count at all?

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