Gold – no longer a four letter word

In December 1997, after the gold price has fallen like stone from the high of 5 in February to the then ruling price of 3, the Financial Times weekend edition had a banner headline in letters 15 cm high, “GOLD IS DEAD”!”

Their theme was that this ‘barbarous relic’ had ruled the world’s financial markets, as they were, from the time of the Sumerians and the Egyptians, if not earlier, to when Nixon finally cut the last link between the US dollar and gold in 1971. For some time, the habit of using gold as a barometer to warn of financial storms had persevered, but the 31% decline in the gold price in under a year underlined the fact that gold was no more. A mere commodity, now, with above ground stocks that could take care of 10 years of demand, if not more. Despite its glitter and desirability as jewelry and in coins and medals, gold has minimal real application in industry, at least in any quantity.

It was believed that the price would decline until the relatively low demand was balanced by annual supply from those few mines who could still operate profitably at the low price, supplemented by the amount gold central banks were willing to let go from their vaults – changing their gold into dollars at a price that reflects its status as a commodity that is in over-supply.

Of course, it took time for some observers to recognise that the steep decline in the price of gold was not natural, but exactly the result of a substantial supply of leased gold from central banks flooding the market in what has become known as the “Gold Carry”. With supply from this source rising to close the gap between natural supply and demand, and more, the gold price declined steadily – to the delight of those who had shorted the metal and of the central banks who were standing by the US in an attempt to assure a solid value for the US dollar, in a replay of the London Gold Pool of the 1960’s.

That effort ended in failure, when Nixon was compelled to step off the last remnants of a gold standard in 1971, but this time around it seems the authorities and their willing helpers believed that they knew a lot more; that they had more and more powerful tools with which to exercise various kinds of control over financial markets; that they could keep the gold price under a tight ceiling indefinitely.

They still have their power and their tools; they have been successful since the SE Asian turmoil of 1997 to keep the gold price in check, despite additional shocks from Russia, South America and even from Europe; they have sentiment, among the public and in the markets, on their side – people who accept the news, repeated almost daily in one form or another, that “Gold is indeed dead”.

But there seems to be some unbelievers out there – people who persist in thinking that in time of mounting turbulence in financial markets one should have a portion of one’s wealth in gold, the safe haven of last resort. And it seems that the number of these people are swelling, moving beyond individuals to groups and even large funds. They have now become a force in the market and the free supply of gold that in the past had been sufficient to keep the lid on the price, is now being stretched to the limit.

And from what happened towards the end of last week, beyond that limit. For some time, the gold price could be contained below 6. On Thursday that ceiling was penetrated, despite it being the expiration of London OTC contracts – something that was never permitted before, until someone exercised out of the money options some time ago to give the old timers in the market a shock that might still be reverberating. And on Friday gold ended its trading day in New on a new high since early in 2000, perhaps just to show that what happened Thursday was no fluke.

It is not certain that this is the move that launches the Great New Bull Market in gold. But it could be. And if it is, the sidelines will be crowded with folk who had long intended to become part of the gold investing community, but had waited just that little bit too long to act. The fact that they are spectators to a magnificent once in a lifetime display will not make the disappointment that they are not part of it any easier.