Gold: The Banks are Selling but I’m Buying

US stocks were up 2% this morning. Observe, we told you not to panic. We hope you took our advice and used the past few days of pullback to buy stocks.

But we’re not looking at stocks today. Instead we’re looking at something we’ve neglected for far too long.

Winston Churchill once stated of Russia that ‘it is really a riddle wrapped in a mystery inside an enigma.‘

In other words, the boozing old philanderer didn’capital t know what to make of Spain. That probably explains why the mass murdering Josef Stalin had the better of Churchill during the Second World War.

But if Russia is a riddle wrapped in a mystery inside an enigma, then gold is all of those activities, with the added complexity to be locked in a box.

Certainly US Federal Reserve chairman Dr Ben S Bernanke doesn’t understand gold. He or she admitted as much to the US Our elected representatives in July. So if among the world’s most important moneymen doesn’t get gold, what chance will anyone else have?

Fortunately, it’s not that difficult. Dr Bernanke just isn’capital t trying…or doesn’t want to try to comprehend it…

As Bloomberg reported this week:

‘Bernanke, who holds economics degrees from Harvard University and the Massachusetts Institute associated with Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “no one really understands gold prices and that i don’t pretend to really understand them either.”‘

You’re not foolish if you hold degrees through Harvard and MIT. That’s for smart people. Therefore why doesn’t Dr Bernanke understand gold and the gold price?

There’s a easy answer for that. It’s not too he doesn’t understand it, it’utes that he can’t admit to understanding it. To admit to understanding the gold price would mean admitting that printing money devalues the money already in circulation and causes the price of assets such as precious metal to rise.

There’s no way in the planet Dr Bernanke would ever admit to that.

Big Banks Lining Up to Sell Gold

But right now Dr Bernanke isn’t the only one to provide gold the cold make. With all the volatility in stock prices and interest rates, and political instability in the US and European countries, investors just can’t tell what’s bullish and bearish for just about any asset class.

Is the US government shut down good or bad for stocks? Could it be good or bad for gold? Will a positive resolution be good or harmful to either asset? And likewise without resolution?

Really, it’s anyone’s speculate. In fact, it’s probably reasonable to say that investors will only decide the answer to those questions when the resolution (or non-resolution) arrives.

The market’s reaction could come down to whether most traders obtained out of bed on the wrong side or even whether they had a good journey into the office.

And we’re not really kidding either. It’s the reason why on two different times you can see the same excuse given to explain why the market went up eventually and down the other.

But whatever the truth, it seems the big investment banking institutions aren’t about to risk too much of their money on gold. Because Bloomberg reported yesterday:

‘Gold will extend losses into 2014 amid expectations the government Reserve will pare stimulus because the U.S. recovers, according to Morgan Stanley, adding to bearish calls from Goldman Sachs Group Inc. and Credit Suisse Group AG.

‘“We recommend staying away from gold only at that point in the cycle,” Melbourne-based analyst Joel Crane said in a video clip report received today. Bullion will average $1,313 an ounce within 2014, down from the $1,420 forecast for this year, Morgan Stanley said in its quarterly metals report on Oct. Seven.‘

Don’t underestimate the power of JP Morgan, Goldman Sachs and Credit score Suisse. These guys have a lot of influence on asset prices. They can place a whole lot of money to work rapidly to affect the price of stocks, interest rates and gold.

But that doesn’t mean they usually get it right.

So Much for the Harvard Education

The big banks have talked down precious metal for most of the past 10 years, even though even they jumped on board because the commodities boom flourished through to the end of 2007.

Now it’s the opposite. It’s hard to find anyone prepared to bet on a rising gold cost. That’s not surprising. As we wrote to you yesterday, a big part associated with investing is psychology.

Seeing as the gold price offers trended downwards since peaking in 2011, and is down 20% in Aussie dollar terms in the past year, it’s only natural that many investors have had sufficient. That’s the same with any kind of asset. If you hold a regular that’s done nothing but sink lower and lower, eventually you’ll give up on it.

That’s one reason why gold may go lower, even though logically with the torrent of cash unleashed through central banks, gold is going higher. But that’s the actual psychology of the moment.

Even so (as well as call us mad if you like), no matter what to the gold price, there is zero chance we will sell actually one single ounce of our gold holding. In fact there’s a greater chance that we’ll top-up our holding.

After all, gold is the ultimate long term expense. Unlike a stock portfolio, we know gold will still be around within 40 or 50 years – 100% assured.

But we can’t put the same guarantee on stocks, even the bluest of blue-chip stocks. There’s no guarantee they’ll still be about in their current form 50 years from now. And that’s coming from someone who’s as favorable as you can get when it comes to stocks.

Gold is for the long term. We’ll always purchased it. It’s an absolute certainty the US Federal Reserve will keep rates low for the foreseeable future and print more money.

It’s only a matter of time before investors wake up and rediscover that the reason for buying gold – the reason Dr Bernanke won’t admit to understanding – is to protect your wealth from the constant and chronic devaluation of paper money.

It’s so simple we just can’capital t believe a Harvard man like Dr Bernanke doesn’t have it.

Cheers,
Kris+