The Big Con in Gold?

Today’s Markets and Money will convey the financial wisdom of 63-year old Yujiro Yamashita and in doing so, we’ll ask whether the big gold price move was deliberate.

Earlier this week, the 63-year old went to Tokyo’s high-end Ginza district to buy gold for the first time in twenty years, according to Reuters. He was attracted by the bargain prices.

Yamashita told Reuters that he bought two gold coins for about US$5,000, using money from the sale of a property. ‘Bank deposits generate virtually zero interest,’ he said. ‘Stock prices have jumped like crazy but there are concerns about the risk of war (from North Korea). So I try to buy gold when I can.’ Yesterday was a good day for it.

Buyers in China and India joined Yamashita and his contrarian friends in Tokyo. As our colleague Alex Cowie has pointed out all month, India and China are the two largest markets. Maybe the cashed-up middle class of the world’s two largest emerging economies is exhibiting signs of enormous collective stupidity. Or maybe they know a thing or two about preserving value in paper money regimes.

‘My daughter is getting married next month,’ said 57-year old Abdul Subhan. ‘We came to buy as soon as we heard that prices have fallen. We had to buy gold anyway. Now we have advanced our shopping because gold has become cheaper.’ The movement of gold from the vaults of Central Banks in the West to the wedding dowries of the East continues.

But then, maybe gold’s big correction was just another Big Con. Major investment banks put out lower price forecasts on gold days before the big fall. There were rumours of a big naked short position in the futures market. In theory, it would be an easy enough thing to drive the price down with a big sell order and then cover your short for a big profit after the move.

Aside from a tidy financial profit, the important effect is that institutions can now buy gold at a much cheaper price. Will they? Who knows? But if the central bank of Cyprus is selling its gold, someone has to buy it, right?

Investors shouldn’t be worried that the Cyprus precedent means that some of Europe’s 11,000 tonnes of official gold reserves could be unloaded on the market as part of future bank recapitalisations or austerity programs. They should be asking who’s on the other side of the transaction. If Europe is selling, who’s buying?

Dan Denning
for Markets and Money

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From the Archives…

China’s Credit Boom Krakatoa
12-04-13 – Greg Canavan

The Market Is High
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Gold vs Bitcoin
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Is Cyprus More Important Than You Think?
9-04-13 – Satyajit Das

Our Largest Asian Trading Partners Are in Trouble: China and Japan
8-04-13 – Greg Canavan

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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